Your Money and Your Business

4. Investments

4.1 When looking to make investments, consider the accessibility of your money as well as the potential gains.

• Do not put money in long-term investments if you might need quick access should the business run short of cash.

4.2 Corporate investments are not necessarily an important issue for small businesses.

• In a small firm, money put back into the business will always be at risk. What if the business folded and you were out of work without financial back-up?
• You will get greater personal security by taking money out of the business and putting it into investments such as ISAs, pension schemes, and so on. But this, may run contrary to your desire to expand the business.

4.3 The tax framework for pensions is being overhauled, but they continue to offer a tax-efficient, cost-effective way of saving for retirement.

• Pension contributions are generally more tax-efficient the earlier in life they are paid since they have longer to earn returns in a tax-exempt environment. Starting early also spreads the cost over a longer period.
• Current rules allow individuals to base pension payments on earnings from any one of the current or previous five years. So, for example, you could pay yourself a large salary this year and dividends for the next five, but continue to make pension contributions linked to this year's earnings. The NI savings can be significant. Alternatively contributions could be made for five years following retirement. In any case, you can at present pay in £3,600 a year gross regardless of earnings and still get full tax relief.
• Stakeholder pensions offer flexibility with low fixed charges. You can contribute regularly or occasionally to these money-purchase arrangements, and stop and restart payments without penalties. The business can also make contributions, with full tax relief.
• A small self-administered pension scheme (SSAS) or a self-invested personal pension (SIPP) gives you much greater control over your investments. A SSAS is set up by the company, which must make regular contributions, while a SIPP can be established by either an employer or an individual. You can make investments in a wide range of areas and change them as your performance targets - and willingness to accept risk - develop with age.
• Most types of pension scheme allow you to delay buying an annuity beyond retirement up to a maximum age of 75.

4.4 When annuity rates are at low levels, individual savings accounts (ISAs) could give you a similar net income to a pension fund.

• You continue to have access to the entire fund. With a pension, you only obtain control of the tax-free cash lump sum once you have purchased an annuity.
• Funds are only free from income tax and capital gains tax once they are in an ISA - you will pay tax and National Insurance extracting the money from the business.
• You can invest up to £7,000 a year (£14,000 for a married couple or those in a civil partnership) until at least 2010. An ISA can be invested in equities and bonds, and up to £3,000 in cash and £1,000 in life assurance products.

4.5 Enterprise Investment Schemes and Venture Capital Trusts allow you to invest in other small unquoted trading companies.

• They offer a number of tax advantages, but can represent a high-risk investment.