As a business owner, having access to capital to put into your business can be extremely useful.

So, if you’re over the age of 55, you may be able to withdraw funds from your pension and use it directly in your business to provide an injection of cash.

This could be an effective way to help your business. Here’s why.

Taking a lump sum and putting it into your business

Under the current pension rules as of the 2021/22 tax year, you can take a 25% tax-free lump sum from your pension when you turn 55. This is set to rise to 57 in 2028.

You can do whatever you like with this lump sum, and one popular option for many business owners is to loan it straight to their company.

This provides the business with an injection of money to fund business endeavours, such as hiring staff or buying machinery and other assets.

Director’s loans come with tax advantages of their own

Technically, using your pension funds in this way would count as a director’s loan. As a result, you would also see the benefits that come with this type of borrowing.

When you lend money to your company, it counts as a business expense. That means the business won’t have to pay Corporation Tax on the loan.

Additionally, you could choose to charge interest to the company on the loan. Although your business would have to pay the interest less basic-rate Income Tax of 20% at source, this would still provide you with another stream of income from your business.

That means you can use your pension to give your business a tax-efficient boost to the cash flow, while also providing yourself with some extra income.

Can you afford to take a lump sum?

Before you take your 25% tax-free lump sum, first ask yourself: can you afford to?

It’s important to bear in mind that taking the lump sum could have an impact on your retirement lifestyle if you were planning to live on that money.

Make sure you take financial advice first before you take any money out of your pension to put in your business.

Business loan protection

When taking on debt through your business, it can often be sensible to consider business loan protection.

Business loan protection helps cover the cost of any business debts if you or one of your business partners becomes terminally ill or dies while the debt is being repaid.

This type of protection typically covers commercial mortgages or bank loans, but it can also be used to cover a director’s loan.

Having this cover means you can be confident that the business will survive and the debt will be repaid, no matter what happens to you and your business partners.

Download your free guide

You can read more about how your pension can help your business by downloading our handy guide.

Download your free guide, featuring four more ways that your pension can assist your business.

Alternatively, please email or call 0113 262 1242 to find out more.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.