Are you thinking of starting a business? Or maybe you run one already, but are looking for investment to give you the boost you need to grow? This is a situation most business owners find themselves in at some point, and if you are one of the entrepreneurs who has a decade or two of work behind you, you might be eyeing up your pension pot and wondering if you could access that big sum of money. After all, it is your money, so why not invest it?
The good news is you can! Pension-led funding exists to help business owners invest in their own businesses using their pension funds. The bad news is it isn’t quite as simple as you think.
What is pension-led funding?
Pension-led funding is funding for your business using your pension money. Pension funds are normally locked away until age 55, but if you are a business owner with either a self-invested personal pension (SSIP) or a small self-administered scheme (SSAS) valued above £50,000, then you can access those funds early to use as business funding. There is no minimum age to do this, which means if you have a large pension pot/s, this could be a good option for you.
What can pension-led funding be used for?
Once you have decided pension-led funding is the right choice for you, there are a few different options, depending on what you intend to do with the funds:
Commercial loan: This option is only available to SSAS pension funds and essentially enables you to borrow money from your pension fund as a commercial loan. This works in a similar way to a bank loan, in that you can use that money in any way you wish, but you have to pay back that money with interest. Once you have the approval of all trustees for the pension, your loan will have to meet the following criteria to be approved:
- It must not exceed 50% of the pension fund’s value.
- It should be secured as a first charge against an asset of equal or greater value than the loan plus interest.
- The interest rate charged must be at least 1% higher than the Bank of England base rate.
- The loan term can only be a maximum of 5 years.
- The loan must be repaid in equal annual instalments.
Purchasing intellectual property: This is a bit more complex but can be valuable for certain types of businesses. Both SSIP and SSAS pensions are able to own intellectual property, so you can use your pension to buy said property. This includes things like patents, trademarks, designs, copyrights, databases and domain names owned by the business. Once you have identified all these properties, they must be valued by an independent expert to ensure they meet HMRC’s requirements. If they do, the pension can purchase them and lease them back to the business. If your business then grows in the future, your intellectual property will grow in value and so will your pension pot.
Buying property: Both SSIP and SSAS pensions have the ability to hold commercial properties in their own right, which makes them an ideal source of funding if you need to buy a business premises. In this model, your pension would purchase the property, and then lease it back to the business. If your pension is not enough to cover the purchase on its own, then the pension can also borrow up to 50% of its value from a bank to go towards the purchase. It is a handy way to purchase business premises, but bear in mind that if you sell the property in the future, you will pay capital gains tax on any profit made from the sale.
Pros and cons of pension-led funding
Just like any other form of finance, there are pros and cons to pension-led funding. In addition, because it involves pension funds rather than bank loans, they can be more involved with your personal finances as well, so it is important to understand the benefits and risks before you go down this route.
Benefits: If you have struggled to get approval for more traditional funding, or just want to stay in control of your business funding, then pension-led funding could be a great alternative for you. It gives you more flexibility and control than traditional finance while ensuring you do not need to put down any personal assets as collateral to secure the loan. So, if something goes wrong your assets are protected. You can also pool the pensions of multiple directors to unlock even more investment capital, providing everyone agrees.
Risks: The risks associated with pension-led funding will very much depend on your individual circumstances. However, if your business were to fail in the future, it would not only risk your current income but also your future income and financial security. This means your business needs to be in a strong position to not only afford the repayments (if applicable) but make the best use of the investment. Pension schemes also often come with benefits, and you may lose these if you transfer money out of your fund. For example, if you have a defined benefit pension scheme it is usually best to avoid transferring out of it, as you will have to give up the set income you are entitled to.
Using your pension funds to invest in your business is certainly possible, and for many businesses, it is a viable route to finance in an uncertain economic climate. But it is not without its risks, which is why we recommend you speak with an accountant before going ahead with anything. We can help you understand your current pension position, as well as the positives and negatives of pension-led funding, so that you can make the most informed decision possible. If you would like to know more, please get in touch by emailing hello@purplelime.uk.com or calling us on 01249 263 333.