Should you use your pension to start a business?

City Press reader Arthur wrote in to say that he wanted to take early retirement, invest 75% of his capital for income and then use the remaining 25% to start a business.

“I already have 33 years of experience in warehousing, distribution, transportation and procurement, but I am not sure about how best to get started,” he wrote.

Nkosikhona Mbatha, the sector head for supply chain development at Masisizane Fund, a development finance institution, says that Arthur has the right idea in that he is not putting all his eggs into one basket or sinking his entire retirement savings into a business start-up.

“Holding back 75% of his savings for income purposes is a fantastic start. Often, entrepreneurs fail to realise that in the initial year or even first two years of starting a business, they will not be able to draw down very much in terms of an income.

This is because a clever entrepreneur will initially sacrifice a higher income to reinvest their money in the business to ensure its success,” he says.

Mbatha says the 75% of his savings Arthur is holding back can be invested to give him an income while he is getting his business off the ground. He also says the 25% investment in the business is a wise move as it shows that Arthur has “skin in the game”.

“This shows banks and financiers that he is committed to the business, and any applications he makes for additional funding are likely to be looked on more favourably as he is sharing the risk, provided that his business idea is a viable one.

While development financiers don’t typically require a certain amount of funds from the entrepreneur, this is a positive move and shows that Arthur believes in his business plan enough to risk his own funds,” he says.

He compares an entrepreneur and his business to a bacon-and-eggs breakfast – “the chicken is involved as it supplies the eggs and continues to live, while the pig is 100% committed and willing to die for the breakfast to be a success”.

The fact that Arthur is venturing into an industry where he already has 33 years of experience bodes well for him. Mbatha says one of the key reasons many businesses fail is that people venture into industries they have little to no experience in, and then they also have no idea about how to manage employees or staff.

“The fact that Arthur has so many years of experience is definitely another advantage in his favour,” he says.


Even though Arthur has two starting blocks in place in that he has allocated some of his own capital towards the start-up venture and he has experience in the industry, Mbatha notes that many entrepreneurs don’t realise the importance of having a business plan.

“The common thinking is that a business plan is just a document that you need to access finance, but it is really so much more than that,” he says.

He says a business plan should ideally be your business’ bible – something that you constantly go back and refer to.

“It is not a one-page document that you use to get funding and then forget about, but is rather an evolving document that changes over time as your business changes and grows. Companies such as the Small Enterprise Development Agency (Seda) can help entrepreneurs draw up an appropriate business plan.

However, he cautions that although agencies such as Seda can assist with business plans, the entrepreneur should always be as hands-on as possible when developing their business plan.


Mbatha says Arthur needs to do thorough research and will also have to do a lot of work behind the scenes before he breaks into the market with his business.

Access to the correct market is key to the success of a business. Mbatha even goes so far as to say that the sustainability of the market is a key driver behind the success of a business.

“Without a ready market, you are doomed from the start.”

He also mentions that it is always important for entrepreneurs to keep their fixed costs very low to increase their chances of success.

“This is why most entrepreneurs start out working from home. They keep their costs low,” he notes.

“Arthur needs to know who is able to provide additional funding for his venture, who to approach in terms of business contracts and how to put forward a solid business proposal,” he says.

He notes that South Africa has a strong enabling environment, where new and existing businesses have access to government spending on black entrepreneurs.

“It will also be an advantage for entrepreneurs to ensure that they fully understand the Broad-Based BEE Codes of Good Practice of 2015, which defines the way in which the broad-based BEE scorecard is calculated. The codes put black entrepreneurs in a stronger negotiating position for contracts with corporates,” he says.

The onus is therefore on the business owner to take the initiative and start knocking on doors. Arthur could start by looking at the supply chain opportunities in his industry, including with his current employer.


While Arthur may initially start the business on his own, he is likely to start taking on employees as the business gains traction.

Malusi Ndlovu, product demand manager at Old Mutual Corporate, points out that 69% of small, medium and micro enterprise employees value employee benefits when they take on a job or are deciding whether or not to stay in a particular job.

“Benefits could include a medical aid subsidy, retirement plans or even something as simple as funeral cover. A retirement funding solution need not be a difficult option for smaller businesses as they can simply join an umbrella fund,” he says.


Ndlovu says it is important that Arthur is using a significant portion of his retirement savings to secure
an income.

“Another option he could look at is deferring his retirement. Retirement funds are now allowed to leave savings invested past the investor’s retirement age, so Arthur also has the option of deferring the retirement benefit and applying for funding for his business instead,” he says.

Ndlovu says that after retirement, the ideal vehicle to invest Arthur’s retirement savings is a living or guaranteed annuity product, as this will secure an income and provide him with maximum tax benefits. If he wants to exit before retirement age, Arthur should consider a preservation fund for maximum tax benefits.

“People often make the mistake of accessing their retirement lump sum benefits and then investing the money in a non-retirement vehicle, which means that they lose out on tax benefits,” he says.


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