For business owners, retirement planning starts at 50

Article published in PME Magazine, September 24, 2018, by Edouard Bolleter

In the coming years, we expect the number of businesses being handed down to continue to rise, in West Switzerland. Business owners nearing retirement are bursting with questions about their imminent future. What should they do with their company?

In most cases, it’s about their pension assets or retirement. Before they stop working or hand over their business, there are a number of options open to them. Depending on what they choose, they can then start to plan their retirement. Some questions will need to be resolved first, notably tax, legal and succession related issues.

So, we asked two specialists from Lombard Odier to give us some pension planning tips for business owners.

Frédéric Praz, Executive Vice President, Private Clients, in Geneva, and Samuel Meylan, Head of Legal and Tax Advice for Swiss clients at Lombard Odier Patrimonia, answered some questions.

They kicked off by describing the current situation.

“Three factors relating to business succession are converging this year, and it’s a particularly busy period for it. The first factor is the concept of the ‘baby boomers’: thousands of SMEs will change hands in Switzerland in the next few years. This will have a considerable impact on the local economy. Secondly, the financial markets and negative interest rates are jeopardising anticipated returns on pension assets. As returns are below their historical average, they may dent company valuations. All these trends have consequences for financial planning. This means that, in our role as bankers, we need to take a global approach to business owners’ assets, including tax-efficient management. One tool to achieve this is pension planning – the third factor. This topic seems complex and is often the subject of heated debate, but it is crucial. As bankers, it is our responsibility to clearly explain the issues involved to business owners and self-employed people.”
 

How do they go about analysing a specific case?

“In general, we encounter two aspects: the company and its activities; and personal or business-related property. Our central focus is on the concept of pension planning, which must protect assets, and in this in turn, influences tax liability. All business owners want to know the best and most efficient way to allocate their assets, in order to obtain the best return after tax. Bankers are there to lend their expertise. The handover of an SME is an extremely important period for a business owner, because their business is the result of a lifetime’s work. What’s specific about our approach is that we offer comprehensive solutions that take into account of all the factors relating to the client’s family, assets and business.

The new Tax Proposal 17

Lombard Odier’s specialists not only identify the objectives of their clients, they offer a personalised approach where possible.

“We help people find solutions to finance a sale or help with the timing, for example. We pose many questions such as will the business owner remain active in the SME or withdraw completely? That’s the criteria we need to plan for. We advise clients to discuss these specific subjects with their family and friends in advance, so that there aren’t any nasty surprises. First and foremost, we are private bankers, but we have the skills and know-how to support clients in all areas and to set up solutions, thanks, in particular, to our partnerships with pension foundations. If the questions are more specific, we call on our specialists, such as tax experts.”

And what new legislation needs to be taken into account?

“There are major changes linked to Tax Proposal 17¹.  These laws will significantly change the way in which companies choose to be structured. “Self-employed individuals are taxed at a rate of 45%, compared with 14% for companies, in the future. Self-employment could, in fact, disappear for tax reasons. The pension situation is changing too. In particular, there are discussions about changing reserved shares of estates”, explain Frédéric Praz and Samuel Meylan.

The two specialists offered some advice for business owners so they can plan for a financially comfortable retirement:

1. Don’t miss the boat: reallocate capital to investments with the greatest potential for after tax returns. One of the main performance drivers, the Pillar 2 pensions solution², has often been underestimated in the run-up to retirement³ and one asset class – real estate – is often overinvested.
2. Draw up a global roadmap: set your main objectives (lifestyle, family, private assets, business assets, financing) and determine the best strategy to achieve these in conjunction with a specialist banker.
3. Set yourself a new benchmark: for financial assets, find a banker who can deliver improved performance after tax and fees, by using innovative financial solutions. Remember that gross performance is not a reliable indicator of management quality: only net performance counts (after tax and fees).
4. Do not restrict yourself to one brand or style. Instead put your trust in expertise: talk to a banker so that you can obtain an overview of the issues (family, pensions, business, loans, tax consequences...), listen to advice and implement appropriate and customised management solutions.

¹ The tax reform of companies planned by the Federal Council).
² For instance: ‘bel-étage’ extra-mandatory or 1e top-up plans.
³ Pillar 2 pension assets - in particular 1e.