Retirement? What retirement?! Using your pension to start a business

November 21, 2014

Whilst many 50 and 60-somethings are relishing the thought of retirement, others in this age group are becoming increasingly entrepreneurial. Forthcoming changes to pension rules could provide thousands of over-55s with an extra opportunity to fund their new business ventures.

The financial crisis has, in many cases, hit the over-50s harder than their younger counterparts. When faced with redundancy, it is often harder for older workers to find a new role at an equivalent level. Self-employment has increased in the over-50s, partly in response to lack of other viable options, but also because more in this age group are making an active choice that self-employment is the right option for them.

How can a pension help?

Whilst there are a variety of grants and initiatives to support start-ups, those over 55 have another option in the form of their pension. From April 2015, increased freedom around pensions means this age group can choose to either keep their pension invested and draw on it as needed, or even cash in the entire lot. Using money from your pension could be just what’s needed to get a new business off the ground. The best way to fund your venture will depend on the type of business you want to run and the costs associated with it. Options to consider:

1)      Take a lump sum in one go. If you take up to 25% of your pension pot, you can have it tax-free. Keep the rest invested to provide retirement income (when you finally get round to it!), or buy an annuity with the left-over cash.

2)      Take multiple lump sums. You could split your ‘business investment’ into smaller pots, as and when you need it for the business to expand. You’ll get 25% of each sum tax-free, so just keep a close eye on making sure that the remaining taxable amount, added to your regular income, doesn’t push you into a higher tax bracket.

3)      Take lots of little amounts. As with multiple lump sums, 25% of each amount is tax-free. This could be a good option if your business does not require a big cash injection to get it going, and if you’re close to the next tax bracket.

If your new business proves successful, it could provide you with a regular income and become an asset which grows in value over time. However, if you do choose to use your pension pot to fund a new business, it’s vital that you don’t forget the original intention of your pension – to fund you in later life. If you’ve invested it all in a business which doesn’t turn out quite as successful as you’d hoped, you might find yourself in trouble. Plan carefully and don’t leave yourself short.

If you’re wondering what to do with your pension in light of all the forthcoming changes, come back and visit us in February 2015 when we’ll be running a series of articles to help you get to grips with the changes and what they mean for you.

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

GreenSky Wealth Ltd. is an appointed representative of Financial Limited which is authorised and regulated by the Financial Conduct Authority. FCA No: 516410