Entrepreneurs: uncover the potential of pension planning

Entrepreneurs often underestimate the opportunities provided by pension provision. Wealth, taxation, protecting loved ones, staff retention... The list is long.

Private assets, company assets and pension assets. These are usually the three components that make up an entrepreneur’s wealth. Entrepreneurs often invest heavily in their companies – business development is typically one of their main concerns. As a result, entrepreneurs tend to see their personal wealth as an extension of the value of their company.

This way of thinking risks overlooking how a well-designed pension provision strategy can add value to an entrepreneur’s estate. It is an oversight that can prove very costly upon retirement, or when the business is sold.

To ensure you do not discover this only when it’s too late, at Lombard Odier, our recommendation is to give thought to pension provision before you turn fifty, in order to take advantage of all opportunities pensions provide.

The advantages of pension provision for entrepreneurs

While the focus of this article is on entrepreneurs, it is important to bear in mind that pension provision considerations are also important for independent professionals such as doctors, lawyers or notaries, who may be less likely to explore their pension options as they are not subject to mandatory occupational pension provision. For this, Lombard Odier offers some advantageous Bel Etage solutions.

Why do entrepreneurs underestimate the advantages of pension provision? Often this stems from a reluctance by company owners to pay themselves a supplementary salary, so as to avoid paying more tax than is payable on a dividend.

There are times when this strategy might be appropriate, such as to build a buffer should the company get into difficulty. Nevertheless, this approach comes with downsides. Entrepreneurs who don’t pay themselves a supplementary salary can’t develop sufficient pension fund buy-in potential and are not eligible for tax relief. These contribution years buy-ins, in addition to being a way to build up retirement capital, are fully deductible from taxable income. For example, in Geneva, the transfer of CHF one million into a pension fund generates total savings of CHF 450,000 in tax.

There is a further problem. The accumulation of dividends leads to the creation of surplus liquidity, which is often not needed for running the company. This surplus cash can negatively impact the valuation of the company when it is sold.

Instead, our advice is to use this liquidity to buy into a pension fund, using this pension provision mechanism to transform the assets into the entrepreneur’s private wealth, which can be used upon retirement. This is where efficient tax management pays off. Here we refer to the transfer of the company’s net assets at a tax cost of around 10%.

Protection of loved ones and customised management

This mechanism, known as ‘Bel Etage’, can be extended to a company’s employees and can constitute a useful means of retaining staff, particularly senior managers.

Pension provisions also offer another advantage, providing coverage in the event of disability or death, thus protecting against risk for the entrepreneur’s loved ones and the company.

At Lombard Odier, we believe that entrepreneurs should be active players in their supplementary pension provision. Supported by our investment experts, entrepreneurs can benefit from customised management and choose a strategy in line with their objectives, their time horizon and their risk profile.