Recently, on our podcast, A Dab of Investment, we tackled quite an interesting topic – career change. Many people tend to switch careers at least once in their lifetime, and this change could either be simply changing jobs or starting your own limited company. 

But how do you safeguard against potential financial disasters that could arise from this big move?

In this blog, we’ll explore the key factors to help you safeguard your finances when starting a limited company. 

But first, let’s examine the basic step to consider when making any form of career change: a financial safety net.

Building a financial safety net

Whether you’re just switching jobs or starting your own company, having a financial safety net is a good place to start. You want to be sitting on at least a few months’ worth of income. 

This is because even though you may feel sufficiently prepared for what lies ahead, things don’t always go to plan. For instance, you could join a new company that goes under straightaway or find out that your new job isn’t what you thought it would be. 

In scenarios like this, having a safety net can help you wade through the storm and tide you over for the next few months.

Starting a limited company

Further considerations emerge when you’re starting a limited company. In our experience as independent financial advisers, people often start these companies to offer consulting services and may charge clients a daily rate. When the money rolls into the company’s account, you pay corporation tax, and subsequently, you can then pay yourself via dividends. 

Typically, if you earn less than £50,000 per year through your limited company, you might end up paying less in taxes compared to what you would pay if you were a regular employee. This sounds like an attractive benefit. However, there are a few factors to bear in mind.

The company must be financially viable

It’s highly important to note that the limited company is its own living, breathing entity. This means that you have to water it and keep it sufficiently nourished in order to facilitate its growth.

Rather than it existing solely for your needs, it has to be financially viable – making enough money to sustain itself. In some cases, it might be helpful for the company to have some sort of consistent, guaranteed income. This could be a specific service you offer that brings in a steady amount of money each month.

Another way to keep the company stable is by avoiding paying yourself a huge salary at the start. Instead, rely on personal savings to cover your living expenses, as this will help you keep as much money as possible within the company to help it grow. As the business becomes more profitable, you can start increasing your own income.

Overall, the nourishment of the company – making sure it has a reliable income and is stable – is key to protecting yourself both financially and personally.

Should you sell your assets to invest in your company?

It’s not uncommon for people to want to invest in their companies. However, as with everything else, it’s advisable to look at the bigger picture. How promising is the business opportunity? 

You don’t want to start throwing money at a company that will likely not see any realistic returns for a long while. In most cases, it’s advisable to start off the business with as little money as possible and leave the investing for when profits begin to roll in.

Pension contributions

Making pension contributions through a limited company is a highly efficient way to save towards your retirement. However, it’s best to hold off until your company is on solid financial ground.

This is largely because, unlike a personal ISA, which you can access when you hit a rough patch, pension funds are generally untouchable until you reach the age of 55. This means that if you’re 40 and your business hits a rough patch, that pension money won’t be accessible for at least another 15 to 17 years, leaving you in a financial bind.

Essentially, putting your money away in pensions needs to occur only after the company has achieved a reliable income stream and, perhaps, a safety net for less profitable times.

In a nutshell

When contemplating a significant career change, especially the leap from being an employee to starting your own business, smart “disaster planning” is the way forward. 

For instance, if you’re starting your own company with a significant initial investment, know that these investments might be lost and prepare accordingly. It’s also worth noting that it’s not a loss you want to bear if that money is borrowed. 

Another layer of this “safety net” is income protection or critical illness insurance. If life throws a curveball like serious illness your way, these safeguards can be a financial lifesaver, helping you work through the rough patch.

I hope this blog has given you a few ideas on how to protect your financial future when making a big career change. If you have any thoughts or questions, feel free to get in touch by emailing alex@applewoodindependent.co.uk.

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.

If you’re approaching retirement, you’ll likely have been planning towards it for years. You’re probably thinking that once you hit your chosen retirement age, you’ll have a stable income, typically through a pension plan or an annuity.

However, the world has changed in the last few years. The old assumptions and plans for retirement may no longer be as reliable or as straightforward as they once were. As a result, there’s now a need to reevaluate what retirement looks like today, particularly from a risk perspective.

So, the big question is: are there truly any low-risk income options for retirees? 

In this blog, we’ll take a look at some of the options available to retirees, evaluating the risk involved, and how you can put your best foot forward to make the best decisions for your retirement. 

Flexible access pensions

In the past, many people relied on pensions that gave them a fixed, guaranteed income when they retired, often through annuities. However, since 2015, these guaranteed annuity rates have become less common.

Now, with the modern “private schemes,” you’re typically using flexible access as a route to access your money. This means you can choose how much money to take out from your retirement savings each year. 

For example, if you have £100,000 in your pension, you might decide to take out £3,000 or £4,000 a year. If your investments perform well and make between £5,000 to £10,000 a year, your overall pension pot stays the same size or even grows while you still get some income.

But what does this look like from a risk perspective?

It involves a fair bit of risk as your money remains invested in the market, and could go up or down. You’re also not getting a fixed, guaranteed income. But on the upside, you have more flexibility, and you can potentially benefit from market gains.

In terms of death benefits, if you pass away before age 75, the majority of your pension money can be paid out to your beneficiaries tax-free. After the age of 75, it becomes taxable.

Should you reduce your risk as you approach retirement?

There’s always been an assumption that, as you approach retirement, you start reducing investment risk to protect your savings. But that’s not the case anymore. 

What we’ve found with most of our clients is that they’re unlikely to reduce their risk – based on personal choices and preferences.  Even as they retire, most people will continue to take the same level of risk because the funds will be invested for the rest of their lives. 

So, if you’re planning to live until 85 or longer and you want your money to keep growing, this often involves taking on some level of risk, similar to what you might have done before retiring. 

Are annuities worth it?

Annuities haven’t really been a topic of conversation since pension freedoms were introduced in 2015. 

One reason they became less popular is that they offer lower returns – just a couple of per cent per year. Additionally, when you die, most of the money in the annuity typically disappears; it doesn’t go to your spouse or children.

For example, you can get a “very focused” annuity – with no escalation or spouse’s benefits – and this gives you a six per cent return. This sounds pretty attractive as a guaranteed or “secured” income. However, the catch is that this type of annuity offers no benefits for your spouse or guarantees for income growth over time. So, if you die, none of that money goes to your family.

If you want an annuity that will provide some income to your spouse after your death with guaranteed income for five to ten years, the return drops to around three per cent.

Essentially, while annuities are worth considering as they offer secured income, losing the death benefits you’d typically get from flexible access is a huge sacrifice. 

Investment risks: looking at the wider picture

2022 was a tough year for nearly all types of investments, except for UK equities (the FTSE 100). Even the relatively “safe” investments were not spared.

For example, high-risk sectors like American technology and biotech experienced significant losses of 20-50 per cent. On the other hand, very low-risk investments like government gilts also performed poorly. With interest rates going up and the government needing to borrow a lot more money, the long-term gilt market lost 30-50 per cent over the year.

So, if you invested in high-risk areas, you lost a lot of money, but even if you played it safe with low-risk investments, you still lost.

The value of a good independent financial adviser

The old rules about what’s “safe” and what’s “risky” are changing. So, if you do want to be a low-risk investor, it’s crucial to understand what “low-risk” actually means in today’s environment. 

Is it something that has been stable for a long time, or is it an asset that’s cheap, represents good value, and is therefore less likely to lose money? The devil is always in the details when it comes to investments! 

As always, an independent financial adviser remains the gold standard as they can help you navigate the investment landscape and adjust your portfolio to reflect the new realities. 

Good advisers have the research, knowledge, and experience to make “big calls” about your investment strategy, which can result in better performance for your portfolio and help you move towards a fulfilling retirement.

If you’d like to find out more about the risk perspectives to consider as you approach retirement, check out our podcast, A Dab Of Investment.

And if you’d welcome more of our expertise and experience to help you plan towards retirement, please email me at alex@applewoodindependent.co.uk.

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.