I speak to hundreds of farmers about retirement planning every year, and their wishes are almost always the same: By the time they are nearing 60 they want to hand over running the of the business to their sons and daughters and take a back-seat role.
Even a couple of decades ago, the income from a good number of family farms would stretch to keeping two or even three generations. And a reasonably well-funded pension plan would be the icing on the cake for a comfortable retirement.
For all but a handful of farms this scenario is a non-starter today. The impact of reduced prices and subsidies means that good-sized farms are struggling to support one generation of the family, let alone two. As a result, I am increasingly seeing farmers having to work through their sixties and into their seventies because they can’t afford to retire. And the knock-on effect is that the younger generation is unable to take over, and – equally importantly – source funds to expand or diversify the business.
In these circumstances, a decent pension fund can make the difference between a farm staying in the family or being sold by enabling the older generation to reduce drawings, but maintain a reasonable standard of living.
So why doesn’t every farmer have a well funded pension to look forward to? These are the common reasons raised by farmers – and my replies:
The young person
I’ve only just started working – I don’t need to think about pensions for years.
For those at the start of their careers, the feeling is that pensions are for old people and that they have years to get round to a pension. But, long-term pension planning is about giving your funds time to grow, and putting off making a start shortens the time available for that growth.
Those with a young family
I’ve got bank loans to repay and a young family to keep
Starting contributions early means they can begin at a modest level, so that very soon you will not notice the money has gone, and have that all important time for growth.
I won’t be able to get at my money if I need it
While access is lost, there is a value in the fact that funds invested in a pension are exempt from Inheritance Tax (IHT), whereas cash balances remaining in business accounts threaten IHT and Capital Gains Tax reliefs. You can also leave a pension to your next of kin after your death.
If the stock market crashes I’ll end up with peanuts
Pensions are a long-term investment, and over the long-term stock market investment has tended to outperform the alternatives.
My business is my pension
Farming’s fortunes over the last decade demonstrate how risky it is to put all your financial eggs in one basket. Diversification of asset class spreads risk and builds a balanced portfolio.
Early planning can help ease the financial burden on younger family members. Read Tom’s story for tips on how you can improve the handover from one generation to the next
- The Pension Service offers general advice on pension planning
- Business Link offers advice for the self-employed
- Read ore about nurturing your farm business to greater profits