Top Independent Financial Adviser Laurence Sanderson talks us through the business protection options
Laurence Sanderson, an Independent Financial Adviser (IFA) with THP’s partners Sterling & Law, has nearly 20 years’ experience in the financial services industry. Now one of the UK’s few specialists in Auto Enrolment, he’s seen plenty of businesses fail over the years because they did not have adequate business protection in place. We asked him what practical steps businesses could take to protect themselves from unforeseen problems.
LAURENCE, WHY DO BUSINESSES NEED PROTECTION?
LAURENCE: It’s an unfortunate fact, but about 90% of businesses don’t have adequate business protection in place. That’s fine while there aren’t problems but without proper cover you can suffer severely if you lose key personnel, risk your relationships with your suppliers and your bank, damage your reputation and lose key markets or sources of new customers.
The other thing that business owners need to do is to make sure their own financial future is protected by adequate retirement and Inheritance Tax planning. Without these protections you can find yourself working long after you hoped to retire.
CAN YOU TALK US THROUGH THE REASONS WHY BUSINESSES NEED PROTECTION?
LAURENCE: Of course. If you run a business, you need to protect it against the loss of key people, loan defaults and the death or illness of directors. If a key employee dies or becomes ill, your company could stop trading, fall into debt or the key players could lose control. The way to protect your business against financial loss is by taking out a combination of Keyman Insurance, Business Loan Protection Insurance and Share Purchase Protection.
CAN YOU SUMMARISE HOW EACH OF THOSE INSURANCES WORK?
LAURENCE: They’re quite straightforward really. Keyman Insurance helps ensure the financial stability of your business if an individual suddenly falls ill or departs. This is usually taken out to insure against the departure of Managing Directors or CEOs, Finance directors, exceptional salesmen and other vital employees.
Business Loan Protection covers the repayments on your business loans and prevents the guarantor’s family from being forced to pay them in the event of their death or critical illness. It’s a flexible form of insurance and can be taken out to cover a variety of company borrowings, including overdrafts, loans and mortgages on company property.
The third kind of insurance, Director Share Purchase, allows company directors to buy back the shares of any other director who dies or becomes incapacitated – keeping those shares within the company and preventing them from falling into the hands of family members or other third parties who might not have the skills to run the business, or have the company’s best interests at heart. In order to protect each director’s shares, a “cross option agreement” is created, stipulating that – if a major shareholder dies – the remaining shareholders will be able to purchase his or her shares in the business. Shareholder insurance is then taken out on the lives of each director in order to cover the cost of the remaining shareholders acquiring the deceased’s shares. Each insurance policy is then assigned to a trust, allowing each director to make the other directors beneficiaries of the policy in the event of a claim, easing the transition and ensuring their shares stay within the company.
THOSE STEPS SOUND VERY SENSIBLE. BUT WHAT ABOUT PROTECTING YOUR PERSONAL FINANCES?
LAURENCE: Yes, that’s just as important. There’s little point protecting your business if you can’t enjoy the benefits of it after retirement.
Your first step is to consider all the pensions and savings options open to you and talk them over with an IFA. There are many different products out there, ranging from occupational and stakeholder pensions to ISAs, property investment and stocks and shares. As a rule of thumb, stakeholder and personal pensions are good for people who don’t want their pension attached to their job or be responsible for administering the pension themselves. Self -Invested Personal Pensions (SIPPS) are best for people who want control over how their pension is invested. Small Self Administered Schemes (SSASs) are usually a better option for business owners, directors and key members of staff – they give members greater flexibility and control over how the money is invested, and can be used to buy certain assets or secure loans.
THOSE PROVIDE YOU WITH A RETIREMENT INCOME. BUT WHAT ABOUT PROTECTING YOUR MONEY FROM THE TAXMAN?
LAURENCE: That’s where Inheritance Tax planning comes in. If you were to die in the current financial year, everything you own above the value of £325,000 becomes liable for Inheritance Tax at 40%. However, you can get round this in a number of ways.
Firstly, you can transfer your assets to your spouse or civil partner. By doing this before your death, your partner can benefit from your ‘nil rate’ allowance – effectively doubling their own allowance when they die.
Secondly, you can place your wealth in a trust until a specific time or event in the future – and this can be after you have died. A trust allows you to control how your money is invested and how often (and to whom) profits are paid out.
Alternatively, you can gift your property to your heirs and, assuming you die over seven years later, there will be no tax due. However, if you die within seven years then the value of the gift is added back to your estate and Inheritance Tax becomes due on it.
A fourth option is to take out whole-of-life-insurance to pay your IHT bill. However, you have to keep paying the premiums, regardless of how long you live.
Finally, business retirement relief allows you to pass on more of your business without paying Inheritance Tax. This relief can be between 50% and 100% depending on what you pass on to your heirs.
WITH SO MANY OPTIONS OPEN TO PEOPLE, WHAT’S THE BEST WAY TO MAKE SURE THEY’VE GOT THE RIGHT BUSINESS AND PERSONAL WEALTH PROTECTION IN PLACE?
LAURENCE: Anyone who is concerned should contact THP, who will arrange an appointment with me. As an Independent Financial Adviser, I’d be happy to advise any THP client who is worried that they may not have the right cover in place.
Would you like a no-obligation chat with Laurence on personal or business protection? Call THP free on 0800 6520 025 today.
About Laurence Sanderson
Laurence has worked in the financial services industry since 1996 and joined Sterling & Law Group as an Independent Financial Adviser in October 2013. Laurence is based in Brentwood where he has lived for over 37 years.
Having worked in the financial services industry for over 24 years Laurence can offer you a wealth of experience. Laurence specialises in pensions, pension transfers and retirement planning which is becoming an ever more complex area of advice, but also covers investing and personal protection.