Retirement can signal the start of a grand new adventure or a horrific nightmare. It all depends on whether you have a pension or not. Ideally, pension funds provide retirees with a cash stockpile to make their later years more comfortable once they have called time on their careers. How much pension you have stockpiled by the time you retire and how you use it determines your quality of life in your golden years. This makes setting up your pension one of the most important financial tasks of your life.
It is after retirement that you have time to pursue a lifelong dream or go full time on your favourite hobby. You finally have the chance to take up gardening, take a cruise round the world or become a business owner. While retirement gives you the time to indulge in your fantasies, pension funds are supposed to offer you the means to facilitate them. As such, you do not want to be penniless at this point in your life.
It is never too early to understand how the state pension, company pensions and private pensions work. You should at the very beginning of your working life, find out about the numerous pension schemes available and the rules regarding them. This should help you choose wisely and start saving as early as possible. You can get this information and advice about setting up your pension from a number of reliable sources including a pension guide.
Self-employment in retirement
While most retirees plan to spend their sunset years hanging out with their grandchildren or travelling with their spouses and friends, some feel that they still have a lot to offer. Driven by the urge to put their skills and work experience to good use, a significant number of over 55’s often consider using their pensions to fund their consultancy or business dreams.
Going into business is a risky proposition. Most businesses fail in their infancy. However, the benefit of experience and financial means gives people who set up businesses later in life a better chance of success.
Options for the over 55’s
When it comes to accessing your pension after you are reached retirement age, there are a number of options. You could buy an annuity, allocate the money into a flexible draw down income or take it all out at once. Each option has its upsides and downsides so you should be careful lest you end up losing everything. If you want to invest your pension in a new business venture, turning your pension pot into a flexible drawdown account is the best option.
If you want to use your pension funds to start a small business upon retirement, the best opportunity to take advantage of is that of withdrawing a tax-free lump sum, which is usually 25% of your funds. This could give you enough capital to launch your business venture. If you do not need the lump sum, you could take out the 25% of your overall fund in small tax-free amounts.
After you have taken out the 25% tax-free lump sum, further withdrawals from your flexible drawdown account will be subject to income tax deductions as they are counted as earnings. As such, before withdrawing anything more than the tax-free 25% of your pension in a single tax year, you should carefully consider the tax liabilities.
Going into business is a risk even for a pensioner with a world of experience in business finance. If successful, your venture could supplement your pension income but in the event of failure, the security offered by a pension income could be gone. If you decide to take the plunge and risk a significant portion of your pension, you need to consider carefully what any unforeseeable losses would have on the quality of your retirement.