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An unlikely radical

14th Sep 2017
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That stalwart of Pall Mall deal-doing, the Institute of Directors (IoD), recently published a report concerning the landscape for older people wishing to start their own business.

In fairness, the IoD are far from alone in looking into the phenomenon of ‘olderpreneurs’ as the press, particularly the Mail on Sunday likes to call them.  The number of new businesses being started by the over 50s is three times greater than their younger counterparts, and the success rates are higher too.  This can be explained by any number of societal changes, but I suspect that an increasingly healthy population of over 50s, combined with a decreasing level of financial security provided by most typical pension arrangements is behind a lot of it.  Simply put, if you are going to live longer you have to pay for it somehow.

So far nothing new. The report contained a bunch of case studies, some stats, and a big plug for membership of their organisation. Predictable, but hardly radical. But then, tucked away at the end of a wish list was a proposal that I had not come across before.

Essentially the IoD were calling for an extension of the current tax reliefs regime in connection with access to tax-free cash from one’s pension pot. Their argument was that, in the circumstances where you were using the money to start your own business, the 25% tax-free cash allowance (pension crystallisation lump sum for technically minded readers) should be extended. They were a bit vague as to what the new rules should look like, but punted a further 10% or an upper limit of £100,000 as examples of how the new limits could look.

Radical stuff indeed, especially coming from an organisation that doesn’t exactly have a reputation for burning the house down and starting again. Funnily enough though, I happen to think that they are on the right track, just a little bit off course rather than massively so.

It is clear that the ability to use some of your pension pot to launch a new enterprise in later working life can be significantly advantageous, often turning a wholly inadequate lump of pension money into a healthy earned income and a valuable asset. That said, things don’t always work out when it comes to small business, so safeguards are always necessary.

I would argue that not only will their request fall on deaf ears, but also that we simply don’t need a change in the regime, just a better understanding of the current one.

It is highly unlikely that HMT or HMRC would welcome this suggestion. George Osborne’s pension freedoms have brought windfall billions into the coffers, much of it from over 55s starting up their own business using their pension as capital and taking the consequent tax hit.  It is also highly unlikely that any government would back a seemingly unfair tax landscape where your pension savings, and the tax you paid on them, were differently treated depending on your employment aspirations. So, close but no cigar for the IoD. However, as mentioned above, we don’t need revolution, we need evolution.

You see, for many, many years, entrepreneurs seeking to fund their business, who also had access to good advice, have been able to leverage their pension values with no adverse tax or future contribution consequences. This process has become known as Pension-led funding and relies upon the long-standing capabilities of a SIPP or SSAS vehicle to interact with the business and provide funding.  This may be through loans, share purchase or asset purchase, but the result should always be the same - capital for a growing business and a steady stream of payments back to the owner’s pension pot, with no adverse tax consequences.

The big problem is that currently there are really small numbers of appropriately experienced, qualified, and regulated advisory businesses out there capable of safely delivering such transactions (and subsequently monitoring the resultant commercials) and dreadfully low awareness amongst the SME community, and SME advisory space.

It is this writer’s view that, based on the above, the IoD have some of the basics right - yes, pensions can be a great way of funding businesses, but they have missed the mark in terms of how to improve things. Instead of calling on HMRC to make unlikely and unnecessary changes to the existing regime, they should be calling on the FCA to make the delivery of Pension-led funding a permitted activity, in line with final salary transfers and so on. This would ensure that only properly supervised businesses are engaged in advising on such transactions (believe me, some kind of filter or screening is vital, not all businesses are a good place to invest pension money) and also the awareness of the existing capability of pensions as a source of funding would be hugely enhanced as market forces played their part. 

So, whilst mildly disagreeing with their proposed method of delivery, I am enormously encouraged to see this important business organisation come out and call it for what it is.  Pensions are, and should continue to be, a really good way of funding your own business.  Full stop.

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