When your business is going well and is profitable, you might choose to reinvest most of your profits in order to continue to expand. While this can undoubtedly help your business grow, it can also lead to a situation where the majority of your wealth is concentrated in the business itself.
In some cases, this may also mean that many of your longer-term goals are heavily reliant on releasing the wealth tied up in your business through a future sale.
A business sale can be a significant source of wealth, but it can’t be fully controlled or guaranteed and depends on multiple factors.
A more effective long-term approach could be to build both your business and personal wealth simultaneously. This can give you greater flexibility, independence, and confidence when working towards important life milestones, such as retirement or supporting your family.
However, achieving this can be easier said than done, which is why it’s important to work with an independent financial planner to ensure you get the balance right.
Read on to discover five ways you can build personal wealth alongside your business.
Many business owners spend years building a valuable company but far less time building wealth outside it. The two should go hand in hand.
1, Build your pension and retirement fund outside of your business
Many business owners plan to rely on the eventual sale of their business as their main source of funding for their retirement.
However, while the proceeds from a sale may form part of your plan, it’s a good idea not to rely on them too heavily or treat a sale as your only strategy.
Business valuations can fluctuate depending on market conditions, timing, and wider economic factors. Even a well-performing business might take longer to sell than you might expect or may not achieve your desired valuation.
So, a key step in building your personal wealth alongside your business is to ensure you have a separate retirement fund.
One of the most effective ways to do this is to make pension contributions directly from your limited company. This enables you to extract money from your business and build your long-term personal wealth, as it comes with both business and personal tax benefits.
By building your pension wealth outside of your business, you help ensure your retirement isn’t overly reliant on a future sale, while also boosting your long-term security and tax efficiency.
2, Create a tax-efficient remuneration strategy
Developing a tax-efficient strategy of paying yourself from your company is a key part of separating your personal and business finances.
Rather than focusing purely on short-term tax efficiency, the aim should be to gradually move profits into your personal wealth in a way that supports both your business and personal needs.
As you read earlier, pension contributions can be a highly tax-efficient way of doing this, but you can’t access that money until you reach the normal minimum pension age (55, rising to 57 by 2028).
So, you’ll likely need to create a remuneration strategy that combines a minimum salary with dividends, which can be more tax-efficient than taking the same amount entirely as salary. Then, you can use pension contributions to fund your retirement goals.
You can also use ISAs to help build tax-efficient wealth that remains accessible throughout your working life.
The most appropriate blend of these income sources will depend on your income levels, tax position, and goals.
An independent financial planner can work with you and your accountant to help ensure your extraction strategies are both tax-efficient and aligned with your wider financial planning goals.
3, Don’t overlook protection
As your business grows, it can be easy to focus on expansion and development, which may mean you overlook certain risks.
Without appropriate protection in place, even a successful business can come under significant strain during a personal crisis, and you could be forced to withdraw money from the business as a safety net.
So, it’s important to have a protection plan to ensure that both you and the business remain financially secure if something unexpected were to happen.
This might include protection against illness, injury, or death, and it can help protect your personal income and wealth, as well as the business.
You may also be able to arrange life cover through your company using a Relevant Life Plan, which can often be more tax-efficient than paying for cover personally.
Having the right cover in place helps ensure that unexpected events don’t derail your long-term plans.
4, Invest outside the business
Your business may well represent a substantial proportion of your wealth. Holding investments elsewhere can help ensure your future isn’t dependent on the performance or eventual sale of a single asset.
Diversifying can also improve your ability to withstand volatility, offsetting losses with gains from other holdings, and opening you up to wider growth opportunities.
To diversify your wealth and investments, you might want to explore:
- Stocks and Shares ISAs
- Investment portfolios
- Investing in different asset classes, such as property.
The aim is not to replace investment in your business, but to complement it. External investments can provide balance and help improve your financial independence over time.
5, Know your number
When running a business, it makes sense to focus on key targets such as revenue, profit, and valuation. Before deciding how much to reinvest in the business, it’s important to understand how much personal wealth you’ll ultimately need to achieve your goals.
A key question to consider is: how much is “enough”? In financial planning, this is sometimes known as defining your “number”, and it essentially means determining the amount you need to live on your own terms without worrying about money.
This includes knowing the level of wealth you’ll need to support your lifestyle, long-term goals, and retirement plans.
Knowing your number allows you to understand exactly what your hard work is in service of over the long term.
Without this, it can be easy to continue building a business indefinitely without ever converting success into personal financial freedom.
Get in touch
An Amber River financial planner can help build a plan that balances your business and personal wealth, while ensuring both remain in service of your unique long-term goals.
To set up an initial appointment with an Amber River financial planner, call 0800 915 0000, or alternatively, use our contact form here.
This is important:
We’ve written this article purely for general educational purposes. It’s not investment advice, or an invitation or inducement for you to invest your money. The information in the article can go out of date over time too – thanks to law and tax rule changes.
Your situation will be unique to you, and that’s why you should always seek personalised advice from a qualified financial adviser before taking any action.
