Rise of the Empire: Over 55s are using pension cash to start businesses

Many people are starting a business later in life and the new pension rules that were introduced in April 2015 have helped some aspiring entrepreneurs to realise their dreams. One in ten over 55s due to retire are considering turning their pension into a small business start-up fund.

The revolutionary new freedoms allow people aged 55 and over to empty their entire pension pot, with 25% of their fund still being tax free. Retirees have more choice and flexibility than ever before and as a result, starting a business is becoming an increasingly popular way to enter retirement, or rather, to continue working.

The relaxation of pension rules is not the only factor encouraging older people to start a business. People are living longer and the number of years they spend in retirement is increasing. This means that their pension needs to stretch further and they should save more, but it is estimated that around 11.9 million people in the UK are not saving enough. For some, setting up a business could solve this problem and provide much-needed extra retirement income.

Another factor that may prompt business start-ups among those over 55 is ageist attitudes towards employing older people. Some may experience difficulty in securing a job because of stereotypical views that deem them unemployable.

The Pensions Minister, Ros Altmann, says that keeping older people employed would significantly boost the economy, and is becoming increasingly important as the population ages.

It is a common misconception that if more older people are employed they will be taking jobs from the young, however, there would be more spending power in the economy which would create more job prospects. People are getting healthier as they age and have their energy and ambitions still intact, and this is reflected in their desire to continue working and start a business.

Other reasons why over 55s are taking the plunge include:

  • To have a sense of purpose in later life
  • To continue using the skills they have built up during their careers
  • To turn a hobby into a business
  • To pass the business onto their children when they’re gone
  • To continue doing something that they enjoy
  • To fulfil a life-long dream

Using your retirement income to fund a start-up business

If you are thinking about cashing in your pension to fund a business venture there are some important factors you need to consider. Firstly, your pension was intended to provide an income in later life, so unless you have any other sufficient income, this should remain your priority over plans to start a business.

Secondly, not all businesses are successful, and it can take a while to start making a profit, so consider the risks involved and whether you can afford to take them.

Choosing how to withdraw money from your pension is a big decision that you need to get right. How much and when to withdraw money may be dependent on the start-up investment and running costs that your business will require.

Your enterprise may have very low start-up costs and therefore carry less risk, for example you may turn your hobby of buying items on eBay into a business, and this might not require a huge sum of money. On the other hand, you may plan to set up a coffee shop and need to invest thousands of pounds in equipment.

The money that you withdraw after taking your tax-free cash is considered taxable income and if you take a big sum in one go you could be faced with a large tax bill. It is important to note that you may not need to withdraw a substantial amount of money to be pushed into a higher income tax bracket.

For example:

  • You have already taken your tax-free cash,
  • You are no longer earning an income,
  • And you withdraw £70,000 from your pension

You will have to pay £17,403 in tax, that’s almost a quarter of the withdrawal!

There are tax-efficient alternatives to emptying your pension; if you withdraw smaller amounts of money over several different tax years you could significantly reduce your tax bill.

It is important to explore all of your pension options; a professional adviser can explain the options available and advise on the most appropriate one for you.

Add new comment

Call 0800 304 7288 for a friendly chat about your pension

Important Information

Tax treatment depends on individual circumstance and is subject to change. 

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

We are really looking forward to reading your comments. Before you start writing, please just remember that everything you write will be displayed publically – including your name. Not sure what sort of thing you can write, and what sort of things you should avoid? Please have a quick read of our social rules for guidance.

Back to top