7 April 2017
It is difficult to get excited about pensions. Planning for an investment that you will not see until retirement is not high on everyone’s priority list. It is usually a decision to be put off for another day, but for our farming clients we often see first-hand the merits of long term financial planning; whether it is a pension or an alternative investment. If a mother and father can retire from the family farm with the financial support of pension income, then it generally leads to a smooth succession and happy retirement.
In stark contrast where there has been no provision for retirement the farming business is often the main source of income in retirement. This reliance on the farm for income can put a financial strain on the business. The older generation may feel a need to continue working and contributing longer than they may wish or are physically able. A frustration can unfold in the younger generation who feel they are unable to take over the farming business without the involvement of their parents and financial drain.
The increase in land price may provide the comfort of a retirement nest egg. Capital growth is fine if you intend to cash in at some stage. If the intention is to pass the farm down to the next generation then the price of land is of little use. The income return from farming is very low, perhaps averaging 2% of capital value. Relying on income from farming as a way to support retirement is not great financial planning.
The key message in planning for retirement is to start early. This can make your pension scheme contributions affordable and provides a longer period for the investment to grow. It is estimated that 25% of children born this year will live to over 100. As life expectancy grows the retirement ‘pot’ needs to be larger - which is another reason to start contributing and investing early.
There are tax advantages when contributing to a pension scheme. Tax relief is given on personal contributions to a pension scheme. For a basic rate tax payer the cost of investing £100 is £80 and for a 40% taxpayer the cost of investing £100 is only £60. Whilst invested in a pension scheme, your contributions grow free of tax. Most people are now able to access their pension savings from age 55 (57 from 2018) and there are three key ways to do this:
- buy an annuity, which guarantees a fixed income for life;
- take 25% of your pension savings tax free and/or drawdown an income each year; and
- take all of your pension savings in cash (liable for tax).
Recent changes in legislation have made it possible to pass your pension fund on death without losing the fund or suffering high rates of tax. Regardless of the tax advantages I do believe that more farming businesses should consider how they finance the retirement of the family. The investment options are more varied and complex than they were 30 or 40 years ago, but the principal of long-term investment is unchanged.
You could always adopt an alternative strategy to investment planning - a high risk strategy is to rely on a lottery win. One Aberdeenshire farmer was asked what he would do if he won the lottery; after a pause to consider the options he replied “just keep farming until I had none left.”
If you have any questions about financial planning, please don’t hesitate to contact me or your local UHY agriculture expert.
