Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

This is a challenge that affects so many small business owners as they approach retirement age. The business is often built around them and their expertise and when they retire, the business often ceases as there is no one to continue it.  It is important that they create a succession plan.

There is a solution but for it to work, you need at least one employee who can run the business with the minimum level of involvement from you.  As this person knows how to do the work and knows your customers, it is also a threat to the business as he or she could set up shop in competition with you or be poached by a competitor.

 It is important, therefore, that you create the right structures to keep the employee with you.  You need to make it attractive for him or her to stay with the company after you retire.  A solution that I use with my clients in a similar position to you is to do the following:

• Have the company valued

Have your business valued by an independent professional.   You may be surprised to find that your business is worth a lot more than you think it is.  Remember, this business has been sustaining your lifestyle for many years, so it is an income generator. 

• Decide what percentage of the business you want your employee to own

If you want to keep receiving an income from the business, you should probably keep some shares.  You need to put a structure in place for the employee to be in a position to buy that percentage of the business that you would like him or her to own.

• Take out a preferred compensation scheme

I have written about this before in some detail  (https://www.dailymaverick.co.za/opinionista/2022-05-31-the-financial-wellness-coach-reap-the-tax-benefits-of-a-carefully-constructed-succession-plan/) 

Briefly, the way it works, is that you draw up an agreement with your potential successor whereby you increase your successor’s salary and have him or her pay the premiums on an investment policy which is ceded to the company.  Once the investment policy matures (usually after 5 years), they are obliged to use the proceeds of this investment to buy shares in the company.

The number of shares they get will be based on the value of the investment and the value of the company at the time of purchase.  You will now be in a position where you get a trusted employee to have a vested interest in the long-term success of the company.  You are also able to extract a cash lump sum from your small business. 

If you still have a share of the business, you would receive ongoing dividends.  You can also structure an agreement where you provide consulting services to the business. This is a nice way of reducing your involvement with the business and receiving an ongoing income from it.