Pension freedoms have boosted SME and start-ups with a capital injection of around £400m, but withdrawals are slowing as older entrepreneurs find how much tax they have to pay, says Clifton Asset Management.
Clifton Asset Management bases the figures on Axa Wealth’s 2015 Later Life Entrepreneurs study which found that more than 500,000 over-50s were considering taking advantage of pension freedoms to help start a new business. Almost half said they would use their 25 per cent tax-free lump sum to fund their start-up.
Two separate studies, from the ONS and the 2014 Global Entrepreneurship Monitor, have shown that between 80,000-120,000 over 50’s start-up a new business in the UK each year. They also found 50 per cent intend to use their 25 per cent tax-free lump sum to fund their start-up, and the average personal pension is £29,000,
CAM says this is a highly conservative figure as many entrepreneurs will access more than their cash free lump sum entitlement, with those using pension-led funding on average accessing £70,000 from their pension to fund their business.
CAM says that for some owners, using the new freedoms has resulted in a large tax bill, significantly contributing to the £900million in pension freedom tax receipts expected to be collected by the government.
CAM says those business owners aged over 55 using their tax free allowance to fund their start-up may be taking the right strategic decision, but for larger pension investments, they should also consider pension-led funding.
Adam Tavener, chairman of Clifton Asset Management and pensionledfunding.com says: “This last year we have seen a marked rise in entrepreneurs aged over 50 looking to use their pensions to either start a business, or fund an established enterprise. However, the government’s pension changes are not a giveaway for all business owners – particularly for those that wish to mobilise tens of thousands of pounds from their pension to fund their business.
“Also, many business owners have rushed into using pension freedom to cash in their pension fund, and taken little or no external advice. Taking this approach has even led to financial disaster, where some business owners invested in unsustainable businesses that could not provide a return on the pension investment. This ultimately resulted in the failure of the business and a loss of part, or all, of the pension.”