Income planning for retirement
DEPENDING on which figures you believe, the average age for a UK farmer is somewhere between 59 and 62. In contrast, the retirement age for most people in the UK is currently 66.
Many people continue working beyond retirement age, however this does emphasise the fact that farmers across the whole of the UK need to give serious thought as to what the future has in store for them.
Succession planning is a key area but crucially, we also need to protect the generation looking to retire.
Farmers and their profession are intrinsically linked. For most people, retirement means reaching an age and they stop working. That is rarely the case in the agricultural sector, as most farmers will continue to provide support and assistance with the dayto-day management, even if they are not physically out in the fields each day.
You could probably fill a book of all the things to consider when looking at winding down, but near the top of any list must be income.
So, what are your options?
The partnership
FOR many farmers, their main income will come from being a partner in a farming partnership.
A decision needs to be reached on when you are retiring from the partnership, or will you simply be taking a step back from the hands-on work.
If the decision is a complete retirement, then the situation is straightforward, you will receive no income going forward and must plan accordingly. If you are just stepping back, will you be staying on as a partner in a reduced role, or something more akin to becoming an employee/contractor.
Remaining as partner gives by far the most flexibility in terms of tax planning, however you need to be careful how this is structured and it is crucial that you take the opportunity to consider the terms of the partnership agreement (or put a written agreement in place) to ensure that they meet with your expectations of both how the partnership does, and should operate in practice. As part of your succession plan, the advice is oen to transfer some or all of your capital interest to the next generation. This is separate from any rights in relation to income, however, if you have transferred your capital share, you arguably loose a significant amount of influence over the partnership.
If a dispute arises in the future, your capital interest could be the only leverage you have in the decisionmaking process and it is not unusual for written partnership agreements to have provisions which mean decision making is weighted dependent on the capital share of partners.
It is also common to see provisions to remove partners in certain circumstances. If you are dependent on your income from the partnership and need to remain involved, it is worth thinking twice about advancing inheritance.
Becoming an employee or a contractor may be more secure, however this arrangement is far more rigid. This both in terms of the work that you are obliged to carry out, and in you will lose the ability to apportion income in the most tax-eective way as you would with the advice of your accountant if you were a partner. You would also be answerable to the remaining partners. Sometimes this is too much of an adjustment aer years of being your own boss.
So if you are looking to move away from the partnership entirely, where will your income come from? In practice, it could be from a number of sources, but most likely the main source will be from pensions.
Pensions
PENSIONS can take a number of forms, but can be a useful tool to provide you with an income in later life which is not in any way dependent on the farming enterprise.
The UK State Pension is one of the lowest in Europe and whilst many people are able to live on this, it is not sucient for them to sustain the lifestyle that they want.
Beyond the state pension however, there are a number of options to consider and you need to take specialist advice on which type of product best suits you and your circumstances and this should be taken in conjunction with a full financial review.
Many people like the flexibility of paying excess income in to a savings account for a rainy day. However, as paying in to a pension attracts income tax relief, you should be considering whether paying in to a pension is more suitable and tax ecient than simply transferring any additional income in to savings. The drawback with this is that once funds are in the pension, there are rules on their withdrawal.
Similar to savings however, a pension has the potential to grow over time and, depending on your risk appetite, that growth could be significant over time.
It is never too late, nor too early, for looking at setting up a pension. If you are at the earlier stage of your farming career, starting to routinely pay small, regular amounts in to a pension now, or setting up a SelfInvested Private Pension, can leave you significantly better o in the future
without having much of an impact on your current lifestyle.
If you are at the stage where you are now thinking about retirement, then it is not too late. You can pay up to £60,000 per year in to a pension. Many people do not reach that level, however if you are at the stage where you have fewer demands on your income, this could give you the opportunity to cut your income tax bill, and set you up for the future.
Ultimately, you have options, but there is no one size fits all, so we need to identify what works best for you. At the end of the day, it is your retirement, you’ve earned it.