Put your pension to work for your business

12th October, 2018

Small businesses across Suffolk are increasingly seeking alternative funding sources as they look to expand and grow and pensions are proving a popular choice.

Pension-led funding is a favourable option for those who have been turned down for a traditional bank loan or those who feel peer-to-peer lending will affect the level of control they have over their business.

Here our expert team from Jacobs Allen Chartered Accountants and Chartered Tax Advisors explain more.

What is pension-led funding?

Owners or directors can finance their business using funds from their own pension pots, effectively making a loan to the business.

While you cannot withdraw money until a certain age, there is no such restriction on pension-led funding although you will generally need at least £50,000 in your fund to be able take advantage of this option.

If you are a business owner with a significant sum in your pension fund, this could be the ideal solution.

Taking a commercial loan

Savers using a small self-administered scheme (SSAS) can, with the approval of the trustee or trustees, borrow money from their pension fund on behalf of the business provided the loan does not exceed 50% of the pension fund’s value and is secured as a first charge against an asset of equal or greater value to the loan plus interest.

The loan must be paid back with interest which is at least 1% higher than the Bank of England base rate and must be repaid in equal annual instalments, within a maximum time frame of five years.

The funds that have been released can be used to purchase commercial property, stock or machinery.

Using intellectual property

The other option for pension-led funding is slightly more complicated, but can be done with either a SSAS or a self-invested personal pension (SIPP).

Money is released from the pension fund to ‘purchase’ intangible assets such as intellectual property. This can include any patents, trademarks, designs, copyrights, databases and domain names owned by the business.

Once you’ve identified these assets in your business, they must be valued by an independent expert to meet HMRC’s requirements.

The intellectual property is then leased back to the business at a commercial rate, meaning that if the business grows the pension pot will increase in value. This means you benefit in the short term from your business’ success and longer term you will be financially better off too.

However, if your business struggles you could see your pension fund reduce in value.

Purchasing property

As both SIPPs and SSAS can hold commercial property, you could put your pension funds towards buying your own business premises – and your SIPP or SSAS could even borrow a further 50% of their value from a traditional bank towards this investment.

Alternatively, if your business already owns premises, you could ‘sell’ it to your pension fund and lease it back, freeing up liquid assets to fund the growth of the business.

As a side note, it is worth remembering that you could be liable for capital gains tax if you sell a property already owned to the pension fund.

Lump sum investment

The older you are, the more you are likely to have set aside for your retirement – and if you are closer to retirement you could simply withdraw a lump sum to invest in your growing business.

Anyone aged 55 or over can access their pension, with no tax to pay on the first 25% and the rest taxed at their marginal rate of income.

Data from the Office for National Statistics shows 72% of self-employed people were over the age of 50 in 2016 and the number of self-employed people aged over 65 increased from 159,000 to 469,000 between 2001 and 2016.

That means a growing number of business owners could take advantage of the tax-free lump sum option, provided they are confident there is enough remaining for a comfortable retirement should the business not grow as expected.

Benefits and risks

One of the key benefits of pension-led funding is that, unlike some of the other finance options available, you won’t be required to use your personal assets, such as your home, as security.

In addition, if your business has more than one owner-director, you can use your pension funds together to provide a greater investment.

However, you are using your future income source to grow your business and that carries some element of risk. Our expert team are able to discuss these risks with you and help you safeguard your personal finances as much as possible.

We want our customers to be absolutely certain their business is in a strong enough position to make it a worthwhile investment, and that they have a contingency plan in place to enable them to replace the funds that have been taken from the pension pot should the worst happen so their retirement income is unaffected.

Here at Jacobs Allen we can offer a comprehensive service, and help you understand the benefits of transferring your existing pension pots into a SIPP or SSAS versus the rewards for keep the pension where it is.

Author: Keith Senior