“Olderpreneurs” are cashing in pension pots to start or fund businesses, but they need to be careful…
If you believe that getting older is all about whiling away the days in a comfy chair or on the deck of a cruise ship, think again. “Olderpreneurs” are giving younger entrepreneurs a run for their money. A growing number of retirees – or, more accurately, people of retirement age – are taking advantage of the new pension freedoms that took effect in April 2015: they’re using tax-free lump sums to start their own business or fund an existing one. Although this use of the pension pot certainly carries its risks it has also opened up new avenues for success and fulfillment, and in some cases for the proverbial second chance at life.
Turning Hobbies Into Retirement Income
It really should come as little surprise that these pensioners are turning hobbies and talents into cottage industries, launching web sites and apps, and exploring a variety of other ways to reinvent themselves.
A combination of increased life expectancy, worry about making ends meet and just plain boredom are fueling the boom in the number of people 50 and over who are starting businesses for the first time.
According to the latest Global Entrepreneurship Monitor, a record 7.1% of 50- to 64-year-olds in the UK were starting or running a new business in 2014. This represents about 800,000 people, up from 300,000 in 2010. If you’re amongst this crowd, congratulations for thinking outside the norm, or helping to create a new norm. But with the congratulations come a few caveats.
Be Fearless, But Not Foolish
The obvious risk of cashing in the pension pot for any reason – be it business or pleasure or just for some mundane task such as paying off a credit card – is that once the money is gone, it’s gone. This reality has been brought to light by a study from a think tank called The Social Market Foundation, which examined policies in Australia and the US that are similar to the UK’s pension reforms. The study found that a significant proportion of people in the US and Australia withdraw funds at an unsustainable rate. The research illustrates the dangers of pensioners spending money too quickly.
Here at home, figures from HM Revenue and Customs (HMRC) found that 146,000 people cashed-in pension pots in the six months between April and October 2015, withdrawing a total of £2.7 billion. The Association of British Insurers released separate data suggesting that £2.5 billion was withdrawn over the same period in 166,700 cash lump sum payments, with an average withdrawal of just under £15,000. However you parse the data, that’s a lot of money in just over six months, and a lot of lives being affected for better or worse by that decision.
Always Consider Taxes
It’s good to have the freedom to use one’s pension in creative ways, but you should know that taking out a big lump sum could land you with a substantial tax bill. Currently only the first 25% of withdrawals are free from tax, and the balance is taxable at the highest marginal rate of income tax paid. Your decision could also have a major impact on your future retirement income as there could be other penalties and loss of benefits such as guaranteed annuity rates.
Keep in mind too that if you invest your pension in your new or existing business and the business ultimately fails, the funds invested will – and we can’t stress this enough – be gone for good.
At the very least consider setting up a limited liability company (LLC) to protect personal assets such as your home in the event of a business failure. Since different types of companies have differing tax consequences be sure to consult an accountant or other qualified adviser before making a decision.
Consider Other Ways To Fund Your Business
One increasingly popular way of raising money is crowdfunding, via sites such as Kickstarter, GoFundMe or Indiegogo. Crowdfunding offers a way for a startup to raise capital and allows investors to put in as much or little as they like, either in return for a stake in the company or some other incentive.
The government funds a Start-Up loans programme which so far has provided loans worth more than £170 million to over 30,000 people. The scheme also provides advice, loans and mentoring to start-up businesses.
If crowdfunding doesn’t appeal and a government loan isn’t feasible there’s always the more conventional route of taking out a business loan from a bank or building society, or even a credit union. Do know that these institutions will generally want to see a comprehensive business plan before they will agree to offer you a loan. If you don’t know how to create a business plan, the write-business-plan page on the gov.uk site has free templates you can download. The page also offers additional help and information on how to write your business plan.
Lenders may have other eligibility requirements regarding the amount of time you’ve been in business, your revenue or projected revenue, and of course your credit rating. If you have a solid business plan and a reasonably good credit rating, you shouldn’t have too much trouble getting a business loan.
In any case you should diligently research your loan options; you may not necessarily get the best rate at your own bank. Shop around for a lender via various comparison sites who offers reasonable rates and good customer service. Don’t just take the word of the adverts or sales reps; do a little digging and find out what customers who have actually used the lenders have to say about them.
Reinventing yourself through your own business, or expanding an existing business, can be a profoundly rewarding experience. But it’s also risky, which is to be expected. Just don’t take unnecessary risks; do your homework, consult with qualified experts and take care to protect the assets you have.