Life after dairying
Plan ahead so that you can retire from dairy farming on your own terms
Published 25/11/2015 | 02:30
The most difficult decision for all top sports persons is making the decision to retire. Since the recent rugby world cup New Zealand captain Richie McCaw has announced his retirement, getting out at the top of his sport after a glittering career - the perfect retirement plan.
Many dairy farmers have no such plan and worse again there is no team manager to relegate them to the subs bench if they decide to 'play on'. Imagine if McCaw played on for another four years with the All Blacks - would this be good for the team?
It would neither be good for the team nor the man and the same is true for a dairy farm business and its owner/manager dairy farmer - there is a time when it is right to retire.
My definition of retirement is 'work at what you enjoy doing in life today and stay doing it until you die or decide to change career'.
There is no rose tinted half-baked dreams of 'I'll travel the world when I reach 60 years of age' or 'I'll take up gardening when I reach pension age' in this definition of retirement.
This may sound like a contradiction to planning your retirement like McCaw but it's not.
He is starting a new career as a helicopter pilot, so he is not really retiring.
So then how do you retire from dairy farming?
There are two very distinct types of retirement from dairy farming: (a) with a successor and (b) without a successor. These are best discussed with two real life examples:
Retiring with a successor
Pat and Mary run a very successful dairy farm, they love their cows but they need to plan the handing over of the reins to their son Donal who is getting married next year.
Pat and Mary are both 64 years of age they farm 220 acres (160ac owned), milk 175 cows and rear 45 replacement heifers. Donal is 33 years of age and he and his wife are building a house on the farm.
Donal's two sisters are married and live away from the farm, they have received no inheritance to date.
Donal is very committed to the farm and has plans for the business, Pat and Mary are happy for Donal to take over the business and continue what they have built in their lifetime.
Yet they are uneasy about the retirement process and have lots of unanswered questions (a) how are they going to fund their lifestyle? (b) should they transfer all the land to Donal? (c) what should they do for their daughters? and (d) what happens if Donal's marriage does not work out?
There are three milestones which trigger the transfer of most Irish farm businesses (a) before the son or daughter is 35 years of age for stamp duty exemption (b) on marriage of the successor or (c) on death.
Some parents bury their heads in the sand in Pat and Mary's situation and continue on working without a transfer of assets until they die, this is not a good choice as it would dampen Donal's enthusiasm for the business and it would be very detrimental to the development of the farm business.
Donal is still two years off the stamp duty exemption time limit so they would like to do something now as he is getting married and in case the stamp duty exemption ceases. The problem for Pat and Mary is that they are still two years off the contributory old age pension (COAP) so funding their personal drawings in the meantime is a genuine worry.
The following is good common sense advice in such situations:
Firstly Pat and Mary must ensure they have enough annual income to keep them in the lifestyle to which they have become accustomed (€40,000 per annum) and also that they have some assets they can utilise in the event of an emergency, ie heath costs or nursing home care.
Secondly, they should be conscious of the farm business they have built up and not hinder its future development. Thirdly, they should take care of all their children in an appropriate manner and finally do it in a tax efficient manner.
In the above case Pat and Mary decided to transfer 140ac out of the 160ac and all of the farm business to Donal. They have a personal pension of €10,000 per annum since they turned 60, so Donal will employ them in the farm business and pay €30,000 for the next two years to make up the €40,000 per annum needed until the COAP pension commences at 66, Donal's payment will then revert to €10,000 per annum.
Pat and Mary also retained the farm house which is separate to the farmyard and also an outside 20ac block of land. They are not sure who will inherit this as yet but presently in their will the house will go to one daughter and the 20ac block to their other daughter.
To the outside world nothing much has changed on the ground in this farm business, Pat and Mary are still milking cows and working daily on the farm with Donal but with one big difference, they can ease back whenever they choose knowing they have a secure annual income and enough saleable assets in the event of an unforeseen emergency or event.
The perfect retirement plan.
Retiring without a successor
Tom and Joan are both 64 years of age, the also farm 220ac, milk 175 cows and rear 45 replacement heifers. They have three children all in their 30s and all have very good careers working abroad, none of the children have a farming qualification and have no interest in farming the land. Tom and Joan love milking but not the thought of another spring calving cows.
They have just dried off the cows they went to their farm consultant who came up with the following options:
Employ Labour: Continue as present but employ a fulltime labour unit.
Partnership: Enter a partnership with another dairy farmer.
Lease: Exit farming and lease out the farm.
Sell: Exit farming and sell.
Hobby Farm: Exit dairying and farm on a reduced scale with contract rearing, beef or tillage.
Tom and Joan really don't like having to make this big decision for the future of their farm business which is totally understandable when they have spent a lifetime building up a fine profitable farm business.
Reality really hit home earlier this summer when Tom broke his arm in the yard and could not milk cows for two months.
When discussing the options on the way home in the car from the farm consultants office they immediately ruled out selling the farm saying the next generation could do that after they are gone if they wanted, as they couldn't bear it.
Hobby farming with beef and/or tillage seemed a waste of time and money due to poor profitability levels. Employing additional labour to continue the present system of 175 cows appeared attractive at first but their experience with labour in the summer when Tom broke his arm was not positive, Joan's comment was that 'cows don't talk back and are easier to manage than humans'.
Entering a partnership with another dairy farmer really suited Tom and Joan, they would still be dairy farmers and cows would still be milked on the farm, they had the option to sell or keep their existing cows.
They would have gone for this option if the children were interested in a dairy partnership but they live too far away and have chosen their careers.
The leasing of land on a long term lease was the obvious choice. Selling the cows and replacement stock would release a lot of money and the taxation benefits of a longterm lease was a low risk option.
They decided to lease 170 out of the 220 acres on a 15-year lease with a proportional amount of Basic Payment Scheme Entitlements as they are joint owners they will get €40,000 each tax free income. They decided to retain 50ac near the farm yard to contract rear 45 dairy replacement heifers for Joan's nephew, this will fulfil the farming need.
They are now content as they feel they researched all the available options and have finally made a decision. If you are considering retiring from dairy farming the advice is not to keep going and run the business you have built up into the ground. Examine your options and make an informed decision to exit at your time and on your terms.
Mike Brady is an agriculture consultant and managing director at Brady Group, Cork. Ph: 021-4545120 or email: firstname.lastname@example.org