For business owners, reinvesting profits in the business rather than making (employer) pension contributions has often been seen as an attractive option:

• self-investment may be the only readily available source of business finance;
• if the business is a company, profits on the investment are taxed at corporation tax rates, which are lower than the higher rate of income tax;
• IHT relief at 100% usually applies to personal businesses;
• entrepreneurs’ relief means that tax on any business-related capital gains is at an effective rate of 10%, provided the lifetime limit of £10,000,000 (2018/19) is not exceeded; and.
• business owners often feel more confident about investing in their own business rather than in other assets.

The downsides of this approach are:

• lack of diversification: both current earnings and future retirement income will depend on the business;
• the date of retirement may not coincide with a good time to sell the business; and
• there may well be better investment opportunities.

The pension flexibilities, plus the ability to pass funds down through the generations, may result in more business owners deciding to invest more into their pensions.

However, this does depend to a large extent on affordability since the choice may still be to invest profits back into the business if this is the only readily available source of business finance.