Covid crisis: SME business owners should be allowed tap pensions
Spending some of our savings now could save real economy for future
As a result of Covid-19, Ireland SMEs, who are the backbone of our economy, need access to cash that will keep them in business.
As a nation we face a significant dilemma: the need to spend now so that we can save the current economy versus the need to save so that we can spend in the future.
Solving this dilemma means a change of thinking regarding pensions. It involves partially unlocking personal-pension funds and giving SME owners access to some of the savings that they have been prudent enough to lock away so that their golden years will be, if not golden, then at least not impoverished. This change requires a simple action on the part of the Government and is one that, if taken now, could save the current economy and help SMEs get through Covid-19.
This is not about employee pension schemes. Those schemes are critical and the context is important, as dipping into pensions goes against normal and prudent advice given Ireland’s well-understood, long-term pensions gap. I am talking about business owners’ own pension pots and accessing their savings at a time of crisis. As a result of Covid-19, Ireland’s SMEs, who are the backbone of our economy, need access to cash that will keep them in business.
In many cases there is not enough custom in the short term, the businesses are still viable and just need capital to keep going. The Government has acted to support businesses and workers by borrowing huge amounts to inject into the economy. That also makes good sense. But it may not be enough to save viable long-term employers when they need additional capital here and now to survive.
SMEs need more cash and, in many cases, they simply cannot access the bank or other lending channels. This is despite loan schemes supported by the Strategic Banking Corporation of Ireland, Enterprise Ireland supports and more.
SMEs may not be able to further leverage their businesses, given significant uncertainty in terms of operating during pandemic restrictions, their business fundamentals and tight margins. That’s why giving business owners access to a portion of their own personal pension pot needs serious consideration. Raiding a rainy-day fund of any sort, not least a pension fund is usually not advisable. But these are not usual times.
SME owners have pension-pot savings, yet they cannot access the cash as they continue to face tough decisions and difficult days. Business owners, who are already agile and who have already done everything to stay afloat, still need funding. While some banks say they are lending, the practicalities of getting access to those funds means it is restrictive to the point of being unworkable for a great many businesses around the country.
To make this happen the Government could, and should, make a simple change and give SME owners access to a set 20 per cent, or up to €30,000, from their own personal-pension fund to be used for investment in their business. This would ensure that those who need funds, and who are in a position to do so, can get access to their own money for use in their business. If done at scale across the economy this would have the potential to unlock – at no cost to the taxpayers – the investment capital needed by our SMEs.
Proactively the Government could turn around in the morning and say everybody and all age groups are entitled to get 20 per cent of their pension fund now if they want it. So, if somebody has built up their pension fund and they are in their early 30s or 40s and could get 20 per cent – that could mean the survival of a business. By allowing people access to a certain portion of their pension pots, due to the Covid-19 impact on their business, it means they would still have a number of years to return money to these funds while also keeping their business going. A win-win if ever there was one.
Earlier this year, the Association of Pension Trustees said pension savers should be enabled to make a once-off, early-access withdrawal of up to €30,000 without applying income tax, PRSI or USC, and to deduct the accessed amount from the tax-free lump sum payable at retirement.
While this is an option that was not considered in Budget 2021, there is still time to take action and perhaps the time is right for a rethink from the Government. With funds tied up in a pension becoming available for the average punter, accessing much-needed cash for significant spends, such as children’s education, would also help stimulate the real economy.
Of course, the advice remains that people should examine this option only in make-or-break cases and with the benefit of appropriate advice. But in the run-up to Christmas – one we will never forget thanks to the pandemic – wouldn’t it make sense for consumers, for employees, for business owners and for the Government to change past thinking and to take the money that is being saved for a future economy and instead put that money to work in the current economy?
It’s a small change but spending some of our savings now could save the real economy for the future.
Derek Ryan is director of personal financial planning at Smith & Williamson