Robert Palmer and Stuart Price of Quantum Advisory, Pension Specialists, comment on a recent announcement from the IoD.

The Institute of Directors has suggested that the government should allow older people to withdraw up to 10% of their pension tax-free to fund a new business. The proposed allowance would be on top of the existing 25% of the pension pot that people over the age of 55 can take as a tax-free lump sum.

The proposal is an interesting one and may help to stimulate business growth and meet the needs of an ever aging population, and it will certainly add to the flexibilities already on offer. People are living longer and as a consequence working longer - many into their mid and late seventies - so the concept could be of real interest to them. Older people don’t necessarily want to be working nine to five, five days a week, or doing strenuous, manual jobs. Offering an incentive like this could allow them to set up a business that they can run in their own time which utilises experience gained throughout their working lifetime, doing roles they enjoy and are physically able to do.

The average pension pot by the time someone reaches 65 is at present between £50,000 and £100,000. 10% of this is a healthy amount; I term it a ‘Goldilocks’ amount, as it isn’t too much and it isn’t too little, it should be just right to provide seed money for a new small business venture. However, if the business didn’t succeed, it is unlikely to be the difference between comfortable retirement and poverty.

Another positive aspect is that the sum could be used to help with inter-generational planning whereby the older generation can fund the younger generation with a business idea. The key advantage being that the “Bank of Mum and Dad” will require lower rates of return than commercial banks.

On the downside, anyone who has ever set up a business will know it’s not as simple as it sounds. Not only does it take a lot of effort to establish a company and build a client-base, there is a significant time commitment ongoing to run the business and people often find themselves working much longer hours than the traditional nine to five. Despite the additional 10% tax free lump sum, this may not be enough of a financial incentive for older people to set up their own business. Going it alone also has its risks, and someone who is thinking ahead to their eventual retirement, may not want to take on that added risk.

This option for pensions also opens up the industry to potential scams. A cold caller may target someone and claim they can invest their 10% into an investment opportunity much akin to those that are currently being used to lure the innocent into opting for pension liberation scams.

If the government was to agree the Institute of Director’s idea, the move will require some clear guidance from HMRC, to provide absolute instructions as to how the money can be used in order to retain the tax privileged status. This is vital as Chancellors of the Exchequer are notorious “fiddlers” – in that rules are changed to address short term expediencies or loopholes, often perceived. This kind of policy will require lots of planning on behalf of the individual and commitment to the concept. For this to be swept away on a political whim would cause significant distress and real damage to long term pension planning.

So there are benefits and pitfalls of the Institute of Directors proposal, but it is clear to see the logic, particularly because as the person would be working, they would less of a retirement income, if at all, during that time. This would mean that the retirement benefits that the person has built up are stretched over a reduced period of time and so providing for a more comfortable retirement overall.

Quantum Advisory has offices in Birmingham, Bristol, Cardiff, Amersham and London, Robert Palmer, is a Partner in Birmingham,Stuart Price, is a Partner at Quantum Advisory in Bristol,

Quantum provides pension and employee benefits services to employers, scheme trustees and members.

For more information about Quantum Advisory, please visit: https://quantumadvisory.co.uk/about-us/