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New tool helps to plan for retirement and succession

Planning for retirement is one of the biggest barriers to getting succession sorted. ‘Lifetime wealth modelling’ is a new tool Gary Markham, of Land Family Business, is using to help. He explains more.

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Gary Markham
Gary Markham
New tool helps to plan for retirement and succession

Farmers generally do not plan for retirement, and that is a big problem.

There is a fear of the unknown, so people tend to just keep things as they are, hop on the tractor and get on with the day-to-day.

But it is easy for successors to become demotivated if succession is the elephant in the room no-one wants to talk about.

The anxiety of not knowing what is going to happen, whether they are building something for their future, or for their non-farming siblings, can build up.

It also has ripple effects for their ability to plan their finances and invest in their futures.

 

What is wealth modelling?

 

Wealth modelling plots the future finances of individuals, families and businesses, to help them make better decisions about the future.

With the help of an adviser, you input information about your current finances, how you expect this to change, and what you would like it to look like when you retire.

From that, you can see what you need to do now to have the retirement and succession you and your family want.

This could be done with pen and paper but it is impossible to consider all the variables and how they interact.

It is much easier and quicker using computer software, and we have developed a programme especially for this.


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Wealth modelling plots the future finances of individuals, families and businesses
Wealth modelling plots the future finances of individuals, families and businesses

First, we assume an age of death of 100, which most people are not likely to live beyond.

Then we add information about the family business and personal finances, and variables according to what you hope to have and what could happen.

This could include:

  • What level of income you will need and expect during retirement.

  • Farm profits and how this might change depending on externals such as Brexit and reduced farm subsidies.

  • Existing private wealth, including pensions.

  • Rental income from let property.

  • Current farm drawings.

  • Whether you want a successor to come into the business and live off it.

  • What your savings amount to, what you can afford to save before retirement, and how much you will need to save.

  • Your potential Inheritance Tax liability.

  • What level of care you might need and want later.

  • Whether you will want a holiday each year.

 

Using modelling to make decisions One of the biggest challenges is often whether the business can afford to fund more than one family.

A son or daughter successor while single and living at home may be fine, but the business may not be able to fund another family unit and this is when the tension sets in and where the facts need analysing.

The system then runs the information through the model and shows the outcomes and what is affordable.

It is then possible to tweak things to see how different decisions will impact the outcome.

Running the model also highlights key areas for planning, such as pension contributions, savings and tax liabilities.

It is important to go through this process as a family by holding an annual general meeting and making sure every family member understands the situation and what will happen.

Ultimately, when all of the variables are modelled and sensitivity analysis tested, the farming business is more robust financially, with succession discussed and agreed.

Always ask for help from a financial adviser, pensions advisers and accountant.

Modelling a typical farming family

Let us take a typical example of a 283-hectare (700-acre) arable farm with parents (aged 60). Child One is 25 and working and living at home, while Child Two is 27 and lives and works off-farm.

 

The following questions are worrying the parents and are added to the model. ‘What ifs’ are tweaked to produce different outcomes:

  • What happens when Child One wants to marry or has a partner – if they move into one of the cottages the rent will be lost?
  • How can parents help Child Two to provide a deposit to purchase a flat where they work as they do not have sufficient savings?
  • Is it possible to share machinery with a neighbour? Will that release cash and what is the best use of this capital?
  • Should the business fund a rental property which could be left to Child Two. Will this have Inheritance Tax (IHT) liability?

 

Crunching the numbers The lifespan of a further 25 years for the parents was entered into the model and a couple of key questions considered.

 

An independent financial adviser suggested the pension fund was £200,000 – take 25% (£50,000) tax free and consider using:

 

  • £25,000 for Child Two to buy a flat – initially shared ownership to retain an interest in the property until they are happily married
  • £25,000 to convert a building for rental after obtaining planning permission – this income is £15,000 which replaces £10,000 lost from Child One moving into let cottage – so £5,000 better off per annum Joint venture machinery sharing with a neighbour which will release £124/ha (£50/acre) in machinery and structured to have no tax balancing charges.

 

This will release £35,000 capital – the options for this were:

 

  • Investing the money
  • Borrowing £80,000 through the farm in addition to the £35,000 to convert a farm building to a three-bedroomed cottage for rental – yield is 12% over cost and more than covers the borrowing repayments
  • The model proved it was best to borrow and develop the building and leave the cottage in their will to Child two at estimated date of death of 85.
  • Being on the farm and run within the farming business, IHT should be managed.The financial scenarios suggest the remaining pension is left for now and reviewed in three years’ time, meanwhile parents continue to have drawings from the farm while the fund grows. The additional £5,000 per annum

 

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