There are almost five million SME owners in the UK and when it comes to their plans for retirement, there’s a need for a reality check and some proper planning advice relating to pensions, business funding and their future.

This is one of the main findings of our report published this week with The Forum of Private Business: Pensions and Small Business – Ticking Time Bomb or Hidden Treasure? Based on research conducted by The Forum across its members and YouGov, it reveals that business owners see three main options for their exit strategy or retirement plans:

1. Pension funds substantial enough to outlive them (but 45% of respondents fear they will actually outlive their funds).
2. Owning a business that is not only saleable, but can be sold at exactly the right time and for the right amount to meet their retirement needs (yet the majority suggest their business still needs funding to get there)
3. Work until they drop (42% of business owners expect to retire after 70 or have no intention of retiring at all), but at exactly the right time to avoid having to meet their own care needs and those of their families, while presumably leaving a viable inheritance.

Let’s face it, none of these plans are particularly robust. But, as our report shows, this is the way many business owners are thinking. One worrying statistic showed that more than half (57%) of Forum members expect a pension pot of less than £500,000 to fund their retirement, even though this would currently only pay out an annuity of around £25,000 per year from age 65.

The reality is that SME owners need comprehensive, well-informed advice about how they can join the dots between their business, their pension and a comfortable retirement.

Pension Freedom was introduced with the aim of putting individuals back in control and, for business owners, this could mean using their pension to back their own businesses instead of borrowing from third parties – with the associated contingent cost and security implications. Yet only 25% of owners who told YouGov their businesses needed funding would currently consider using their pension to fund it.

So, before it’s too late, I believe the Financial Planning and advisory community needs to step up and help out. They can start by providing their business clients with some serious cashflow modelling. Forget former Pension Minster Steve Webb’s Lamborghini aspirations – simply help them look at their spending on daily living, holidays, hobbies, etc. Consider what they have in pensions, savings and potential business assets and the shortfalls between wish and reality will quickly become evident.

Next, if your clients really expect to sell their business to fund their retirement plan (as is the case for 59% of Forum members), then they need proper metrics instead of the boss’ standard finger-in-the-air or “I wouldn’t sell it for less than…” approach. Modelling will help set both sale value and timing against what is actually needed for retirement.

There are also a rapidly growing number of UK ‘Olderpreneurs’ – self-employed business owners aged 50+. Paying peer-to-peer or asset finance companies’ circa 12% loan interest seems like bad planning if there is an alternative which could drive a return directly into owners’ pensions, improve their retirement prospects and make their business more saleable.

Pension-led funding joins all of those dots, particularly for successful business owners. While pension contribution relief has been dramatically reduced, interest on a pension-led loan is classed as an investment, which furthers investment growth.

Sadly, there are still some unregulated ‘scammers’ out there taking advantage of SIPPS and SSAS’; but scrupulous, well-informed advisers are helping clients make the most of those schemes to fund their businesses effectively.

To me, it’s all in the planning.

Anthony Carty is Group Financial Planning & Business Development Director at Clifton Asset Management 

For a copy of the “Pensions and Small Business – Ticking Time Bomb or Hidden Treasure”? report, visit http://guides.pensionledfunding.com/pensions-and-small-business