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As bank lending drought drags on, should entrepreneurs consider using their pension pot to invest in their business? Read this: As bank lending drought drags on, should entrepreneurs consider using their pension pot to invest in their business? While owners may have confidence in their business and are hopeful of a successful future, the same can’t always be said for lenders, many of whom are still unwilling to take the smallest risks. Struggling to finance expansions, more and more start-ups and established firms are looking to alternative forms of finance. One innovative method involves using business owners’ pension funds to release money in exchange for certain business assets being held in the pension as an investment asset. This is Money has spoken to Adam Tavener, of advisory firm Clifton Asset Management, to find out more about ‘pension-led’ funding. In spite of Funding for Lending being designed to increase the amount of cash banks are lending small and medium-sized businesses, some firms eager to expand are still finding themselves arbitrarily rejected for business loans.
While these owners find it difficult to levy the cash they need to fund their ventures, at the same time they may very well have a decent-sized pension pot which, as an individual, they are unable to touch. But they can however be used for business funding, through Sipp or SSAS pensions, and this can be done in two ways: through a commercial loan or an intellectual property purchase. Quite often this can be done in conjunction with banks, who will become more amenable to a large business loan if the owner shows they’re willing to put some of their own capital at risk. This is a reasonably straightforward process of a business owners’s pension fund loaning money to the business, and being repaid with interest. Clifton Asset Management, which runs the pensionledfunding.
The loan cannot exceed 50 per cent of the pension fund’s value, and must be paid back at an interest rate of at least one per cent higher than the Bank of England base rate. It can only be done via a SSAS with the approval of the scheme trustees, and not from a Sipp. Although pension funds are banned from owning physical assets such as property and machinery, non-tangible assets such as intellectual property are a permitted asset class for pension-led funding. The purchase can exceed 50 per cent of the pension fund, but never 100 per cent. Around 70 per cent is about as high as you’re likely to get. What are the benefits and risks?
Unlike taking a loan from the banks, you are not going to be hit with punitive charges, hounded, declared bankrupt and potentially lose your home if you default. The owner, or at least their pension pot, takes on all the risk and those confident of business growth will be similarly confident of paying back the money to their pension pot. What’s more, if you take the route of selling a firm’s IP to your pension, then the pension pot will grow as the business grows as the value of the intellectual property increases. Upon retirement, this property can be sold back to the business at a profit, or can continue to provide an income as the business continues after the owner has put his feet up. And owners can repay the money to their pension sooner by increasing the amount they spend on the lease as the business becomes more profitable, with those payments gaining 100 per cent relief from corporation tax. But obviously, if the business fails then its your pension pot that will take the hit in what would be a double whammy for the owner. That said, if the business has sold its IP to the pension then all might not be lost, as this property may still retain an element of value even if the business goes under.