There’s a growing trend among entrepreneurs over the age of 50, known as ‘olderpreneurs,’ to utilize their pension funds to start or boost a business. This is considered an alternative to traditional bank loans, venture capital, or crowdfunding platforms.
How Does It Work?
Olderpreneurs can tap into their pension pots using two primary methods:
- Small Self-Administered Scheme (SSAS): This allows the pension pot owner to invest money in their business via a commercial loan. Key conditions must be met, such as a maximum loan amount (half of the SSAS fund’s net value), equal repayments, a maximum term of 5 years, and a minimum interest rate calculated at 1% above the average of leading high street banks. The loan must be secured, often by a first charge on a suitable asset.
- Self-Invested Personal Pension (SIPP): This is less common, as it requires making an unlisted share investment in the business, protecting the return and ensuring repayment to the SIPP.
- Control: Unlike bank loans, pension-led funding puts decision-making in the hands of business owners.
- Tax Advantages: Interest paid on loans goes back into the pension fund, offering tax benefits.
- No Need for Personal Guarantees: Owners won’t risk losing their home if they default.
- Potential Growth: If managed wisely, the repayment interest can offer significant pension fund growth.
- Double Loss: If the business fails, not only does the entrepreneur lose their venture, but their pension also suffers.
- Complexity: There are various regulatory matters and conditions that need to be met, requiring professional advice.
- Potential Exploitation: Disreputable firms may encourage risky decisions to collect fees, making independent financial advice essential.
- Graeme Winram: Used his pension to recover his furniture business after a fire, transferring his existing pension into a SSAS and lending to his own company.
- Rebecca Shorthouse: Funded her business coaching firm with an £85,000 preference share investment from her pension.
A Growing Trend:
Recent data indicates that olderpreneurs have established more businesses than any other age group in the last decade. This increase has been seen in the rise from 1.47 million entrepreneurs over 50 in September 2008 to nearly 2.2 million in December of the previous year.
Is It Right for Everyone?
While this funding model offers several advantages, the potential risks are also significant. Professional advice and careful consideration are essential. Pension-led funding might be appropriate for part of the business, or when other lending options are limited.
The trend of using pension funds to fuel entrepreneurship among those over 50 is an exciting development in the world of small business finance. However, it’s not without risks and complexities. Anyone considering this path should seek independent financial advice and approach with caution, understanding both the opportunities and challenges that this funding model presents.