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Pensioner business start-ups

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Funding a start up from your pension pot

Bored with retirement or looking for ways to boost your retirement income? After all a £200,000 pension pot might sound a lot of money, but you would be doing well to turn it into a £10,000 a year pension. And that’s not going to fund the pensioner life style you had before you stopped working. Have you thought of using your pension to launch a business start-up?

Back in 2015 the insurance company AXA Wealth carried out a survey and found that over half a million people in the over 55 age bracket were thinking about starting a business.  The new pension freedoms offered a ready source of finance, and if successful a better income than investing in an annuity.

Over the last couple of years many people of pensionable age have taken the opportunity of using part of their pension pot to launch a business.  Over £11 billion pounds have been withdrawn from pension funds since the rules were changed – and it is estimated that over a billion of that has been used for bank-rolling a new business launch.

The new rules allow you to draw up to 25% of your pension pot free of tax – go over 25% and you could be hit by additional tax up to 40%. Indeed the Treasury has been pulling in over a billion pounds a year from pension fund withdrawals, money which should have stayed in the pockets of savers.

There are other risks in launching a new business. Across the board 90% of new business ventures survive for more than one year, but after 5 years only half of those will still be going. Most run out of cash, so if a business fails and it’s been financed from your pension pot, that money is lost and you’re worse off than when you started.

Unfortunately there is a real shortage of advisory services to assist over-50s thinking of launching a new business. Prime, the Prince’s Initiative for Mature Enterprise, was set up by the Prince of Wales specifically to help the over-50s become self-employed, but was wound up in 2015 when funding ran out.

Angel investor Rob Shreeve  and himself a “silver entrepreneur” has announced plans to launch an on-line platform next year for over-55s looking to start their own business. The project “What’s next for you” is schedued to launch in the first quarter 2018.

Older entrepreneurs have more business experience, and will already have networks and contacts in place to help get the ball rolling. Also they tend to be more cautious, both in assessing new opportunities and testing the water before making the final plunge.

The Institute of Directors has been lobbying hard for the Treasury to permit an additional 10% of a pension pot to be withdrawn free of tax to finance a business start- up.  But so far the Treasury is still sitting on the fence.

Even so, tax incentives have been offered many times in the past to encourage new business funding. In too many cases this has led to poor investment decisions and too much money chasing too few good prospects.  As with all matters financial, caution has to be the watch word. Even more so when there is less time to make good any damage done.

Disclaimer

The contents of this article are for reference purposes only and do not constitute financial or legal advice. Independent financial or legal advice should be sought in relation to any specific matter. You undertake to rely on any articles published on our website entirely at your own risk, and without recourse to us.

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