Not yet 55? Why not invest your pension… in yourself?
Children can be cruel – especially your own. “My kids called it a midlife crisis,” said 53-yearold Michael Green, recalling the time he told his family he was swapping corporate life for cake stands. “It was either a café or a Harley Davidson!”
Mr Green, his wife, Lisa, 50, an artist and former buyer for Topman, daughter Anna, 18, and twins Rachel and Eddie, 16, had a stroke of luck. They opened Treacle & Ginger on bustling Church Street in Hove, Brighton’s neighbour on the Sussex coast, just as Britons sweated through the hottest summer on record, desperate for refreshments.
Treacle & Ginger – a nod to the flame-haired family and Sadie, their vizsla – sources its products locally. When Mr Green invested £105,000 in the new business he looked close to home for funding, too: his own pension, which he had built over 28 years of working in other people’s businesses, most recently as managing director of a medical implants company. “After five years a bank would want that money back and then some,” Mr Green said. “I was investing my pension anyway and thought, ‘If I play for safety I’ll only get a couple of per cent return’. I wanted to be in charge of my own destiny.”
Generous tax reliefs on pension savings demand that the money is locked away until its owner turns 55, or they face a tax penalty of 55pc. At 53, Mr Green initially thought he was too young to access his retirement cash. But then he learnt about “pension-led funding”.
A business owner can create a workplace-linked “small selfadministered scheme” (SSAS) to receive pension money held elsewhere, then lend money to the business itself. As long as the pension is greater than £50,000 and can support the deal, there is no minimum age and no tax charge on the withdrawal. But the business must repay the capital, plus interest (usually around 9pc) back to the pension.
Mr Green moved less than a third of his pension into a Treacle & Ginger SASS, hiring Clifton Asset Management, a regulated financial adviser, to advise on and set up the arrangement. The remaining £230,000 sits in low-risk blue chip companies and commercial property. Clifton takes an annual fee of 1pc plus upfront charges of £10,000.
A pension raid can help an entrepreneurial person realise their second career dreams, but is not without danger. “The risk is that we don’t get the return we want from the business,” Mr Green said. He has to pay 16pc of his withdrawal back into the pension pot every year, and return the full £105,000 after five years. “If I can’t sell the business in five years, it won’t go back in. Half went on premises, equipment and set-up costs.
“Sometimes it keeps me awake at night. But you could also lie awake thinking a fund management algorithm will lose all your money. With my café I have more control.”
Scott Gallacher, a financial adviser at wealth manager Rowley Turton, said he would be “very cautious” about pension-led funding. “Pensions offer a good degree of personal bankruptcy protection. If you lose money on a venture and are made bankrupt, your pension is generally protected,” he added. “If using your pension to fund a business, you lose this protection – you can’t protect money already lost. On this point alone there is a strong argument for using other money.”
A four-minute commute and an end to time away from home were strong motivators for Mr Green. “But this wasn’t on a whim,” he said. “Lifestyle is one thing but you have to be realistic. We needed a five-year plan. How do you grow against Costa? So we also sell art. It is part of why people walking down the high street choose us.”
Mr Green joins a rising number of older workers reassessing what they want from work and life. “In your head you think ‘I’ll retire at 65’, but the closer you get you realise you probably won’t be able to,” Mr Green said. “And why shouldn’t you start your own business at 50? You’ve got more experience than a 20-year-old. But it’s important to ask yourself, ‘If I lose it all would it be the end of the world?’ If it is, don’t do it. We have £230,000 still in my pension, equity in our home and critical illness cover if we get sick. Go in with your eyes open.”
Adam Tavener, chairman of Clifton Asset Management, said pension-led funding was most appropriate for over-40s with larger pension pots.
“Assessments and suitability checks aim to minimise risk and hopefully weed out transactions that offer little hope of a commercial return to the owner’s pension,” he said. “In many cases the business owner considers their enterprise their principal source of long-term financial security, so an investment in it can make sense.”
And the answer to the burning question at hand? “Our bestselling cake is chocolate and Guinness,” Mr Green revealed.
Figures from the Ministry of Justice show that fewer than one in five divorces involving a financial award included a pension splitting order. While property is usually first on the list for divorcing couples, pensions are often overlooked – even though they are often the second most valuable asset at stake, experts say.
Grace Brass, a lawyer at Slater & Gordon, said: “Often the person with the higher pension, and I have to say it is usually the man, will want to keep it and offset the cost, perhaps by offering greater equity in the family home. Since the credit crunch, planning for retirement has taken a back seat for the more immediate concerns of buying another property.”
She also pointed out that in some cases there could be no pension to share. The law that requires an employer to provide a workplace pension is fairly recent and pensions with a transfer value of £100,000 or less may not be worth claiming.
Tim Holmes of Salisbury House Wealth, the financial advisers, said it could be difficult to reach an equitable financial agreement in a divorce without considering the pension. He said: “Divorces are a stressful time for both parties, but the financial decisions made then will have lasting consequences. You tend to find people are more bothered about the house or the finances of getting a house, but the pension could be as valuable or more valuable.
“People forget about it because they think of it as an abstract thing somewhere in the distant future. People are saying ‘I will have part of the house’ and they don’t know what they could be missing out on.”
There are two types of splitting order when it comes to pensions: a pension sharing order and a pension attachment order. The former transfers half the pension to the partner, while the latter entitles the partner to a portion but prevents them from accessing it until the pot’s owner decides to draw an income.
Entrepreneurs are taking advantage of a loophole that lets them raid their pension to fund their dreams, Laura Miller finds ‘It keeps me awake at night. But you could also worry that a fund will lose your money’
Michael and Lisa Green with daughters Rachel and Anna and canine companions at their café Treacle & Ginger