Counting down to retirement?
Published: Tuesday, 17 May 2022
Start planning several years in advance to keep costs and risks manageable.
Accountants – counting down to retirement
You set up your accounting business, worked long, hard hours over many years building it up – blood, sweat and tears! The end is in sight, now to enjoy the fruits of your labour – time to turn off the computer, turn out the office lights and go on a well deserved holiday…… BUT hold on a minute! Unfortunately, your firm’s liability does not end with your retirement.
It is important to plan for your retirement a few years in advance to enable you to prepare your business for the change.
Here are a few things you'll need to think about:
Good Risk Management
It goes without saying that all businesses should have good risk management procedures in place from day one. This helps to lessen the risk of any claims or notifications being made against you by your clients.
Coming up to retirement, checking that risk management procedures have been followed and files are in order will help to avoid any nasty surprises. Any claims made against you will inevitably affect your cost of your insurance policy.
If you are retiring and closing your business, you will need to consider Run-off (or past liability) insurance. If there has been a recent claim or claim made during retirement then unfortunately you will find yourself paying a higher premium than you might have planned for or expected.
Professional indemnity insurance operates on a claims made basis, meaning that a live policy needs to be in force at the time a claim is made. Once you have ceased trading a Run-off policy will provide protection against claims brought against you by a former client. It is important to factor in the cost of Run-off insurance when you are planning to retire. Depending on your regulator's requirements, you may need to hold 2 years to 6 years cover after retirement. Complying with your profession's rules doesn't guarantee complete protection. Legal limitation means that you could receive a claim after 6 years and you should seek advice on your personal circumstances.
Most insurers will only quote annually and therefore it is important that you have the funds in place when it comes to paying your run-off renewal premium. Typically the first year of run-off is quoted at a similar premium to that of the prior years renewal. In the subsequent years, insurer may choose to maintain this premium for each run-off renewal or they may chose to provide a slight discount each year as the risk diminishes over time. This is, of course, subject to no claims or notification being made in the meantime.
Most Accountants will either be regulated by the ACCA or ICAEW. The Run-off requirements for both these regulators differs with the ACCA requiring a minimum of 6 years and the ICAEW a minimum of 2 years, with a recommendation of 6 years. This 6 years requirement/recommendation comes from the limitation period set out in the Limitation Act 1980.
More information on run off cover and the statutory limitation period can be found in this article: Thinking of closing or selling your practice?
N.B. Solicitors professional indemnity insurance to protect against future claims after a firm has closed involves an upfront premium payable in a single lump sum. This article about run-off insurance for solicitors on our sister site, www.solicitorspii.com, gives more information including how solicitors could reduce their run-off premium by careful practice management.
Account Executive, Ntegrity