Retirement is a compulsory cessation of service of an employee on attainment of a certain age, by the employer. A business person, in particular a small business person is self-employed and the concept of such a business person retiring from business is relatively a new concept – at least in India. After all, the concept of retirement was conceived by the employers for the employees, not for themselves.
Retirement of a small business person is his exiting from business voluntarily, unlike the retirement of an employed person. It is an exit to pursue an avocation and not an exit caused by becoming insolvent or being declared bankrupt; nor is it the result of collapse or closure of business caused by changing market trends, or customer preferences, or product obsolescence. Also, the business person retiring does not necessarily mean winding up of the business.
In the twentieth century, retirement often led to mental depression for they felt no more economically and socially relevant. Though anticipated, the change in work and daily routine schedule was so abrupt and imposed. Even today those who are financially dependent on their occupation for a living abhor the thought and when retired feel unfairly cast out and abandoned. This being the case why should a profitably self-employed or small business person plan for retirement? It looks weird, is it not? I will address these towards the end under the heading ‘The Psychological Aspects’ of this article after addressing the ‘Financial Security’, followed by the ‘Legal Requirements’.
A plan is typically a step-by-step proposal showing the use of time and resources towards an objective, here happy retirement. The irony is there is nothing definitive about plan or happiness. Like Humpty Dumpty in Alice in Wonderland said , “When I use a word, it means just what I choose it to mean – neither more nor less”, each should be clear about what they mean about ‘happy retirement’ and structure their plan accordingly.
Small business person
A small business person for the purpose of this article is a proprietor or managing director of a private limited company having the lion’s share with one or two more shareholders – more likely family members – who are roped in for setting up the company but cannot play an active part in business; and where the authorized capital is less than say, one crore. Please do not mix up this definition with legal understanding of business structures and the definitions in the Acts like the MSMED Act, 2006.
Scope this article
The Scope of this article is purely suggestive or indicative and limited to a small business person as defined above. It is overarching and not detailed in nature as each must figure out the details on their own based on their SWWOPT* analysis (*Strengths, Weaknesses, Wants, Opportunities, Problems and Threats).
When it comes to developing the retirement structure, it is not to be narrowly construed and constructed on logical analysis alone but also factor in certain social norms and psychological considerations.
There are three factors to be considered to structure the retirement and evolve a plan, they are, psychological, financial, and legal. The approach is not linear, but a web weaved with these three elements. In planning keep in mind that the process is not unidirectional or straight forward, there would be a lot of to-and-froing between the three aspects to cross-check and correct, as well as sidestepping when confronted with insurmountable obstacles. This is mainly for two reasons, namely:
- The planning is not like a construction project plan where a good amount of specific and vital information is available, a retirement plan is based on assumptions and may be even wishful thinking.
- The psychological factors that play a pivotal role in the plan to serve the intended purpose are not amenable to ascertainment; one has to figure out to the best of one’s ability.
For the aforesaid reasons, this article will be a weave of question and answers, hypothecations, to and froing to capture and present the essence of how to “structure” and go about retirement plans.
Why do you want to retire?
Answer this question honestly to yourself, think and probe yourself.
Is it because you do not find thrill in what you are doing anymore, and it has become routine? Is it that you find it difficult to continue because of competition? Is it that you are not able to pursue hobbies you always wanted to? Is it because you are not happy, or your family is upset that you are not giving it enough and quality time? Is it because you feel enough is enough, so you wish to put your feet up and relax? Or is it a combination of all these – frustration?
The fact is we do what we love to do – not what we like to do – and always prioritize and find time to do them; no matter what stories we tell ourselves and others, as to why we are not able to do what we like to do. And sometimes, after telling the story enough times we begin believing it ourselves and act on it, only to discover our folly long after we had a chance to retreat. When you are tired you want to let go and rest, but a working mind and hands seek rest only to press forward more thoroughly into work, not to shed work and enjoy.
Talk to your spouse, children, friends about your taking a retirement, sound them, weigh their inputs in reaching a decision, for they are not only your well-wishers but also stakeholders. Once, you decide to retire for genuine and well-considered reasons and not as an escape from something, the next question would be:
How much time do you need to plan a retirement?
To carefully plan and retire, a business person needs five to seven years. Definitely more than an employed person needs if he wants to retire early. There are several reasons for it, like:
- Planning financial security after retirement, from ground zero.
- Testing, tweaking and tuning the financial plans by having a dry run.
- Planning rehabilitation or giving an opportunity for the employees to migrate to new employment. This is important if you do not want to breach the moral contract obligation and earn avoidable life-long animosity from those who trusted you and can help at a future date if need be.
- Fulfilling legal requirements and properly closing or winding up the business.
- Carrying out enabling acts and putting things in place what you decided to do after retirement, for a seamless and hiccup-free transition.
And, if in 2020, COVID-19 has taught us one thing it is that anything can happen and there is always unexpected and unpredictable; do you want to have Plan B, just in case?
Keeping the above in mind let us see how to go about this.
Planning for Financial Security
In the past, the silver lining to government job retirement was lifelong pension, often coupled with healthcare benefits. Whether government or private employment, a lump sum payment at the time of retiring as gratuity and the provident fund which the prudent invested to reap a regular monthly income. A small business person has no such safety nets, while paradoxically under law he may be providing some to his employees.
So, after making sure and deciding to retire – (refer “Why do you want to retire?” supra), the next step is planning for ‘financial security’. When planning for finances post-retirement, take inflation into account, it rises faster than you think. So, build in a factor of safety, it does not hurt to err on the positive side.
Unlike in the west, there are no retirement financial plans or products in India for self-employed and small business persons. They are to opt some pension plans which are primarily designed for employees. These pension plans are mostly variants of term deposits and insurance policies than exclusively designed pension plans. And of course, none designed for a business person. Let us see a few of these conventional plans for adoption by a business person alongside a nonconventional approach.
The conventional plans are all about saving and investing to reap an income at a future date, with or without some risk coverage – as insurance.
Impediments and how to cross or go around
For a small business person, it is hard to save because:
- Business requires investment (plough back of profits), not saving.
- Till business stabilizes money is to be borrowed, and profits are required to pay off debts.
- Certain amount of credit sales is fait accompli in business particularly small businesses, resulting in NPAs (non-performing assets), and bad debts that erode profits.
- The income is seasonal and not a given, planned saving is difficult.
Add to this the tendency to procrastinate and think that things will fall in place somehow – a kind of denial. The main requisites to plan and to put it into practice are knowledge, commonsense, hard work, discipline, and stick-to-itiveness. Plus, you should have the ability to know what you can plan, and what you cannot, and the wisdom to discern between the two – remember the serenity prayer written by the American theologian Reinhold Niebuhr!
So, once your business is stabilized and is on the upswing, start squirreling away some money regularly into your pension fund or retirement plan whatever you would like to call it. And, if you decide against retiring at a later date, you can put that money to any use you wish to, but if you don’t follow the discipline and drill and delay you are at a disadvantage by so much time, that is hard to buy back.
If you are in a rented accommodation, pick up a house where you wish to settle down in your retirement. If you already own a place but the loan is not fully paid, clear it off. Own accommodation works out better than a rented one in retirement. For one it would not shrink your available income like a rented one, for others you are sure you will not be evicted sometime in future, which normally would be at a most inopportune moment – the essence of Murphy’s Law.
Some of the retirement plans offered by institutions
Financial Plans are all some kind of pension plans, which require you to save a certain amount over a period prior to retirement, and at the time of retirement you start getting a fixed monthly or quarterly amount as pension. It is primarily interested in the accrued principal. Some plans have the facility to withdraw the principal amount in part against identified necessities. The rest of it is passed on to the legal representatives on demise of the account holder. The only exception is PPF, it is more a secure saving scheme with good interest rate and tax benefits. It allows withdrawal of the amount after five years into it, in amounts that will help in meeting one-off major expenses. So, it is mentioned first before other dedicated pension schemes.
Public Provident Fund (PPF)
The advantage of PPF is it gets the best interest rate. Anyone can contribute to it, but legally one can hold only one PPF account, at any given time. There is a limitation on the minimum amount being deposited, and the number of deposits per month is restricted to one. Also, the total amount that can be deposited into this account in a financial year is capped. This is suited for a small business person for the flexibility it affords in amounts and the number of deposits that can be made.
Life Insurance Corporation of India (LIC) offers:
- LIC Jeevan Akshay 6 Plan. It is an immediate annuity plan, the pension starts immediately after buying the plan, and can be bought by paying a lump sum amount in a single premium. This can be considered just before retirement just in case a little extra is needed to what is already planned.
- LIC Jeevan Nidhi Plan. The accumulated amount to the account is used to generate and pay a pension to the policyholder based on his/her survival past the policy term.
Private Insurance Company Plans:
- Bajaj Allianz – Pension Guarantee Plan. It is a plan that assures a guaranteed and regular pension post-retirement for the duration of the holder’s lifetime, with a range of immediate annuities to choose from.
- Max Life Guaranteed Lifetime Income Plan. It is a traditional annuity plan that guarantees the policyholder a regular stream of income after retirement.
Plans provided by Banks:
- SBI Saral Pension Plan. This is a plan that offers protection to the policyholder from market fluctuations and volatility. It is an individual, participating, non-linked, traditional pension plan.
- HDFC Life – Click2Retire Plan. Designed to help with post-retirement requirements, it is an online Unit Linked Plan that offers market-linked returns with minimal charges.
There are many more such plans offered to choose from in the market by insurance companies, banks, chit fund companies, Nidhis, etc. One needs to carefully choose what suits one’s needs best. It may not be a bad idea to try a combination of one or two plans, instead of keeping all eggs in one basket.
As Colin Powell the four-star general of America said, “dig up all the information you can, then go with your instincts”.
A Word of Caution
No matter which plan(s) you invest in, read carefully between the lines and the small print. Let me give an example.
One Dr. Kapoor a retired senior citizen aged 72 years invested Rs.50,000/- (Rupees Fifty Thousand only), in SBI Life for five years. On surviving the period, he was paid Rs.248/- (Rupees Two Hundred Forty-eight Only). It is a fact, refer to:
Dr. Virendra Pal Kapoor Vs. Union of India & Ors.
[Writ Petition No. 8879 (M/B) of 2013 decided on May 29, 2014 by High Court of Judicature at Allahabad Lucknow Bench]
This happened because the proposal form instead of a clear declaration had couched in the appended text a statement that where more than 125% is opted, monthly deductions would be made for the surviving period. Ultimately, Dr. Kapoor got justice from the court against his above-mentioned Writ Petition. Moral, “Never neglect small details, always check small things” – Colin Powell.
A small business person has many similarities with that of an employee through their primary needs are different. Let me explain, the primary need of an employee is financial security in that they look for some promise of monthly income, while that of a small business person is freedom, independence. Both are risk-averse, both work hard to earn (in the process of creating wealth for others), their earning is proportional to the time and level of knowledge or skill they put in. In other words, both invest themselves and their time, knowledge and skill to earn money. Both suffer in different ways from the derivative of Parkinson’s law that “expenditures rise to meet income”.
So, a small business person should create assets while in business that work for him/her when they retire. Like, they can acquire real estate in commercial and residential areas whose rentals provide an income in tune with market conditions, and whose value appreciates according to market conditions.
Other types of assets that can build wealth are:
- Equity Mutual Funds,
- Investing in stocks,
- Infrastructure bonds,
- Gold bonds or funds, etc.
It may not be out of place here to suggest picking ideas from the book ‘Cash Flow Quadrants’ by Robert T Kiyosaki. It provides good insights into how to create assets that work for you to live the life you want – check it out.
As you plan your post-retirement finances, take care of your legal obligations and requirements too.
For ethical and legal reasons, you need to complete and comply with certain things.
Clear All Financial Debts and Close All Legal Cases
Make sure you clear all enforceable debts you owe, to avoid running around tribunals and courts post-retirement. Banks and creditors are most likely to go legal to recover their debts, the moment you retire from a business without clearing their debts.
Cheque Bouncing and NI Act, 1881
Did you issue any cheques that are not presented? Reconcile your bank account and properly call back and cancel unutilized cheques. It is a practice by small business persons to issue cheques in advance to ensure priority in supply. Further, it is the practice of wholesalers who regularly supply, and principals of dealers to insist on taking signed blank cheques for future supplies. The provisions of the Negotiable Instruments Act, 1881 (the NI Act) are stringent*. Make sure that no signed blank cheques are floating around**.
*[Section 138 of the NI Act provides that the person who has drawn a cheque that gets dishonoured shall be deemed to have committed an offence and shall, without prejudice to any provisions of this Act, be punished with imprisonment up to two years, or with fine which may extend to twice the amount of the cheque or both, subject to conditions. It is a non-bailable offence. Continuing, section 139 of the NI Act is a presumption in favour of the holder of the cheque, read with Section 118 of the NI Act – presumptions as to negotiable instruments.
In legal parlance, it is a ‘shall’ presumption (Section 4 of the Evidence Act, 1872) and not a ‘may’ presumption. Accordingly, the court shall presume, unless the contrary is proved, that the drawer of a bounced cheque (satisfying provisions of S.138 of the NI Act), is responsible for the discharge in whole or in part, of any debt or other liability to the holder of the cheque. Therefore, the burden of proof is on the drawer.]
**[In the case of M/s Kalamani Tex Vs. P. Balasubramanian (Criminal Appeal No. 123 of 2021); the Supreme Court observed that even a blank cheque leaf would attract presumption under S.139 of the NI Act when signatures are admitted by the accused. The three-judge bench observed that ‘reverse onus’ clauses under Sections 118 and 139 of the NI Act become operative once the signature(s) on the cheque is established as that of the accused. While the presumptions under Sections 118 and 139 are rebuttable in nature, the defence raised must meet the standard of “preponderance of probability” and not a mere possibility, as observed by the bench. So, beware! Make sure that no signed blank cheques are floating around.]
A word about Promissory Notes
Did you sign any promissory notes? Clear them; if you do not want litigation. Make sure that they are older than three years or it is more than three years since you made a partial payment, if any. It does not mean the debt does not exist, it just means that since the three-year limitation is crossed it is not legally enforceable, I am talking of legality not of ethics.
Consumer Protection Forums and Commissions
Do you have cases pending before consumer forums or commissions? Or yet to be settled by you? Suggest either wait till they are decided by the forum or go for a settlement, but do not retire before they are fully resolved. It does not matter whether the inclusion of your business as a respondent is a misjoinder or that your business is at the end of the respondent’s list. Be cautioned that though the Consumer Protection Act (the Act) provides for time-bound resolution, in many cases it takes much longer than the time frame provided for resolution. I know of two businesses on whom a complaint that was instituted around 2006 is now pending before the state consumer dispute resolution commission on appeal. In addition, know that the Act is interpreted liberally – favouring the consumer. Furthermore, the Consumer Protection Act, 2019 widens the definition of the consumer increasing the probability of a number of cases that can get instituted.
The Insolvency and Bankruptcy Code (IBC), 2016
If you are a private limited company (with one or two family members roped in as mentioned in ‘Introduction and Scope’), or a ‘One Person Company’ under the Companies Act, 2013 then know that you are vulnerable to action under IBC both by institutional and operational (which includes your employees) creditors. The minimum debt amount to initiate proceedings by giving a notice under section 8 of IBC was Rupees One Lakh, which threshold was revised by the Central Government notification on 24th March 2020 to Rupees One Crore. However, there are other civil routes to institute legal suits, and it is strongly suggested and desirable to clear all your debts if you want your retirement to be peaceful.
Further, it is important that you wind up the company under the voluntary windup route as per the provisions of the IBC, if you are not able to sell off your business.
Though elucidating towards the end of the article (of course it is dealt in part under the heading ‘Structure’ supra), considering in-depth and detail the psychological aspects is imperative if the object of retirement is to be met. If not done it would be like the cliché ‘operation successful but the patient died’.
Your decision to retire must be by reflecting on facts and not on reflexes of emotions. Do consult your spouse, children, and friends but look for and trust in facts and numbers and not in opinions. Above all go by your gut after considering all facts and figures then get swayed by emotions, it is your life and your game to start and end with.
Is it possible to mediate the differences between vocation and avocation with a tilt towards the latter, rather than abandonment of one for the other? Think! You can live your deferred dreams by taking a sabbatical instead of quitting the business, remember prolonged indulgence in sweet things leads to ennui – a feeling of listlessness and dissatisfaction arising out of a lack of occupation or excitement.
The retirement of a business person unlike that of an employee is and must be by design with a good reason(s) and not by default.
Summary and conclusion
Retirement of a business person, unlike an employee, is not by default but by design:
- Retirement means a total change of lifestyle; be sure you know why you want to retire.
- Retirement in many cases leads to mental depression. No less true for a successful business person if things don’t pan out as planned.
- Planning for retirement does not ensure it would be like the way you planned, but without a plan, it could be worse.
- Earlier you decide why and when to retire, better you can plan.
- Planning for financial freedom and security is the first step.
- Take care of avoidable litigations that can arise from debts or business-related activities.
- Transfer, windup or close the business properly.
- Be sure that you have the courage of conviction and psychological vitality to retire.
- Whatever may be the detail to which you plan, if the presumptions on which the plans are made fail to hold for what-so-ever reasons, the retirement plans come unhinged. Therefore, plans of this nature should allow for degrees of freedom and flexibility. Rigid planning does not make it better rather, one small variation may make it vulnerable and collapse like a house of cards. Have a fallback, plan B.
Know that a business person’s retirement plan is not a ladder with psychological, financial, and legal aspects as rungs in a pyramid but all these three as strands spun into a climbing rope. The person’s grit, grip, and ability to do rope-climbing is as important as the strength and suitability of the rope spun. Know that rope is not a ladder on which at any rung you can hit ‘pause’ and rest before moving to the next, on a rope either you keep climbing or ease yourself to slide down, longer you hang-in-the-middle greater will be the fall, in business and life i.e., retirement.
Finally, I strongly opine that to give a fillip to schemes like ‘Atma Nirbhar’ the Government of India (GOI) is to come up with a retirement plan(s) specifically designed for the self-employed and small business persons. It enables many talented but hesitant persons to venture and try their hand in business. Just so as to attract Foreign Direct Investment, GOI allows foreign companies to open their offices (namely: Project office, Liaison office, and Branch office) for a limited purpose and time with certain conditions, so too GOI can put certain conditions like a minimum number of years they should run the business gainfully, a minimum number of job opportunities they should create, etc.
This approach not only promotes ‘Atmanirbhar’ (self-sustaining), but also like a short service commission in ‘Defense Forces’, attracts capable persons who do not want to make it a long-term commitment to enter the business. It is good for the country’s GDP, reduces unemployment, with no additional expenditure to the government other than certain incentives to be provided.
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