Lobby group, the Institute of Directors (IoD), has recently suggested that older entrepreneurs should be able to dip into their pension pot without any tax penalties so they can fund a new business venture. They feel that the government should let older people withdraw up to 10% of their pension pot completely tax-free in order for them to get their start up idea off the ground.

In 2016, the government brought in major reforms to the pension sector which allowed people to access their pension from the age of 55, subject to tax. Although many agree that these reforms are a good idea, the IoD thinks the reforms should be extended to support a more flexible business outlook and ageing population.

Under the pension’s freedoms, as they have been dubbed, anyone aged 55 or over can take 25% of their pension pot as a tax-free lump sum. Anything taken after that, as a lump sum, will be taxed at the usual rate by the government.

The Financial Conduct Authority recently released a report which suggested that withdrawing money from a pension pot early had become the new norm for many. As a result, the IoD feels that older entrepreneurs should be able to withdraw a further 10% of the pension pot to fund the set-up of a business within the same tax year.

Chair of the IoD, Lady Barbara Judge, said; “People in their 60s now are on the front line of the shifting boundaries between work and retirement. The government should consider introducing tax incentives to encourage people to pursue their ideas and invest in training, so that they can continue to have fulfilling working lives beyond the age expected by previous generations.”

Although, IoD is calling for new help for pensioners because of the freedoms, those over 55 can still use money from their pension to set up a new business. So how do the freedoms work and how can you use them to fund a new start up?

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What do the pensions freedoms mean?

Pension savers no longer have to use their defined contribution pension pots to buy an annuity – a product which would provide them with an income for the rest of their life. They now have the option to keep it invested and draw on it when they need it or cash in their entire pension.

The main three choices for what to do with your pension under the new freedoms are:

  • Move your pension into a drawdown, keep it invested and draw on it when required
  • Buy an annuity which provides an income for life
  • Keep the pension where it is and take multiple lump sums, the first 25% of which is tax-free.

So how can I use this to start a business?

Going into business can be risky and not something to rush into without careful consideration and planning. You should also chat to a pension’s adviser and an independent financial adviser (IFA) before taking any money out of your pension and setting up a business.

If you want to start up a business with your pension fund, you should first make sure that you will have enough money to secure an income for yourself should your business venture not go to plan. Get the help of an accountant and plan how much you will need to set up your business and how long it will take before it is providing you with an income.

Based on the freedoms, there are two main options for using pension cash to help you set up a business, these are:

  • One large lump sum – If you take 25% or less from your pension pot then it will be tax-free and this can be used as the cash to help you start up your business. Any money taken out above the 25% threshold will be charged at income tax levels.
  • Multiple sums – You could split the sum you need into smaller parts to withdraw as and when you need them. The new freedoms allow you to access the money you need from your pension as and when you need it so this can make it easier for you in the long run when it comes to dealing with your money. Be aware of the 25% threshold though as that is still in place for multiple withdrawals in the same tax year.

Some things to remember regarding using your pension to set up a business

  • Be sensible with your money – Your pension is for your retirement so ensure that you have enough to live on whatever happens with your business venture. If the business goes well, it could provide you with a good way to boost your income but it is always a good idea to keep some money set aside to live on just in case.
  • Don’t forget tax – If you decide to take over 25% of your pension pot out in one tax year, you will get taxed at income tax levels so this can range anywhere from 20% to 45% of your entire pension savings which is a significant amount of money to pay in tax all at once. Therefore, it can be better to take out smaller amounts and keep the rest invested on your pension pot as a monthly income.

As we are not pension’s experts, we recommend you get in touch with a pensions adviser as soon as possible to discuss anything relating to your pension, particularly taking money out of it.

For more information on business finance or for your free quote, get in touch with us on 0800 084 3923 now.