'Olderpreneurs' cash in their savings to the tune of £360m as pension freedoms lead to over-55s start-up boom

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When it comes to start-ups, most picture graduates fresh out of university starting a dotcom business or mobile app. 

But that perception could be misleading as 'olderpreneurs' take advantage of new pension freedoms to kick-start their own business by tapping into their retirement savings as funding.

According to Nesta's Alternative Finance Report, pension-led funding was worth a mere £25million in 2014 - dwarfed by peer-to-peer consumer and business lending, which were worth an estimated £547million and £749million respectively.

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Tea time: Keith Garden has taken his teas all over the world with the help of pension-led funding (see box)

But the £25million figure is predicted to balloon to around £400million this year, following the biggest pensions shake-up in generations that came into effect earlier this year. 

Since April, pension savers from the age of 55 have been able to access their entire pension fund, taking the first 25 per cent tax free.

With the remainder, rather than being forced to turn it into an annuity as was previously the case, George Osborne gave savers the choice to do with it what they pleased. They can now withdraw the lot at their marginal rate of income tax, continue to invest it and or purchase an annuity. 

Within three months of the rule change kicking in, £2.5billion had been withdrawn from pensions. 

Of those who opted to access a lump sum, 95 per cent took out the whole of their pension pot [add the figure just to make the point they were mostly small pots]. 

An Axa Wealth study conducted in April found more than 500,000 pensioners were planning to use their pot to to fund their own business. And of them, almost half intended to use their 25 per cent tax-free lump sum to back their ventures.

Tax implications 

However, if an 'olderpreneur' wants to access more than their tax-free lump sum to fund their business, they may be hit by a hefty tax bill, as the rest of the pot will be charged at their usual rate of income tax.

For example, on the average £29,000 pot, £7,250 can be withdrawn tax-free. A basic-rate tax payer would pay £4,350 in tax for taking the £21,750 remainder, effectively reducing a £29,000 pension fund into a cash injection of just £24,650 for their business.  

To reduce the amount of tax they pay, they could take multiple smaller lump sums from the remainder, or use self-invested personal pensions or small self-administered pensions to engage in pension-led funding (for more information, see box).

Adam Tavener is chairman of Clifton Asset Management and Pensionledfunding.com. He says: '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 pension changes are not a giveaway for all business owners – particularly for those who wish to mobilise tens of thousands of pounds from their pension to fund their business.'

'Providing funding to these experienced individuals, who have the energy and enthusiasm to start and run a business, is vitally important to the growth of the UK economy. Research has shown that if the employment rate of 50 to 64 year-olds matched that of the 35 to 49 age group, the UK economy could be boosted by £88billion.'  

Between 80,000 and 120,000 over-50s start a new business in the UK each year, according to the Office for National Statistics.

With ONS figures pointing to an average pension pot of £29,000, if 50 per cent of those over-50s took their tax-free lump sum, £362million could go into funding new ventures, analysis from Clifton Asset Management suggests.

However, olderpreneurs tend to have a bigger pension pot than average, and take an average of £70,000 to fund their business, meaning this figure could prove to be conservative.

Just over half of the businesses that had turned to pension-led funding said it would have been 'unlikely' or 'very unlikely' that they would have secured the funds they needed from other sources, according to the Nesta report.

Since getting hold of the funding, 62 per cent have seen their profit grow, 59 per cent had increased turnover and 43 per cent have employed more people.

Respondents' view of PLF was generally positive. Some 81 per cent say they would be 'likely' or 'very likely' to recommend PLF to a business they know. 

And 79 per cent are 'likely' or 'very likely' to approach PLF for investment in the future with 66 per cent inclined to do so, even if a bank offered funds on similar terms.

What are the risks?
The purpose of your pension is to provide you with the income you need to see out your retirement, so savers would do well to keep some of their pot in reserve as a fall-back.

Studies show time and time again that prospective retirees woefully underestimate how much money they need to see them through their old age. 

For many people, running their own business is a lifelong dream, and they often have decades of experience in their designated field. 

However, it is worth bearing in mind that just 41.3 per cent of businesses set up in 2008 were still going five years later, according to the Office for National Statistics, so essentially more will fail than succeed.

 And even if your business does go the distance, the reality of having your own company can be very different from what you envisaged, with a huge amount of work and stress involved. Having worked for forty years or so, olderpreneurs should think carefully about whether they want to take on the perils and of running their own business. 

Jackie Spencer, pension expert for the Money Advice Service said: 'When planning what to do with your pension it is important to think about how long you are likely to need your retirement money to last for, what sort of lifestyle you would like and how you will pay for care costs in later life.

Before making any decisions, make sure you research all of the options that are available to you so you have a good idea of which one will best suit your circumstances.

'If you are contemplating launching a business you should consider how this will impact on your retirement income.' 

Only Natural Products: Taking the humble afternoon tea global

English tradition: Keith has taken the concept of afternoon tea all around the world

For centuries drinking tea has been a famous British pastime, and the country is famous for having the best blends in the world. 

Only Natural Products founder Keith Garden has used his pension pot to capitalise on this prestige by exporting a range of high-quality teas and infusions around the world under different brand names.

When Keith launched his company back in 2008 after a career in sales and marketing he struggled to secure funding.

He needed £150,000 to fund a management buyout and says the banks were not being 'terribly helpful' when it came to lending money.

'I was scratching my head. There was a sum of money in the pension that was sitting there and not performing very well.'

Pension-led funding became an attractive option for his small company that needed major investment in machinery, design and packaging.

With the help of PLF, a small self-administered pension was set up, which purchased the company's intellectual property and then leased it back to the company. 

Since then, Keith has dipped into his pension several times to fund his growing export-led business in Gloucester. 

While major British tea producers have focussed production in Eastern Europe, Only Natural Products have concentrated their efforts on development back at home. 

Sales have grown steadily and the company has continued to invest in its people and machinery. 

Keith said: 'Our production has swung around to become 65-35 per cent export led.

'Tea is synonymous with the UK. We have a huge advantage over companies in France, Spain and Germany. We can deliver 20 million packs of tea around the world, have seen fantastic growth internationally, in Europe, Scandinavia as well as in America and the Far East.'

His latest PLF has helped to purchase a loose tea machine to target drinkers in Australia, where Only Natural Products is now the leading organic tea brand.  

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