Your pension fund -should you use it for business?

Are you running a successful business as a director, co-director, business partner or member of a family firm that is and could use some additional finance? Have you experienced difficulties trying to raise finance through the usual routes like banks and building societies, or no longer want to worry about the personal guarantees and securities required for conventional borrowing? And, do you, your co-directors, partners or family members have a private pension in the form of a Small Self-Administered Scheme (SSAS) or Self-Invested Private Pension (SIPP). If the answer to all these question is yes then you could consider pension-led finance where funds are released from the pension pot early to provide the funds needed to invest in the business.

In most cases taking money out of a pension pot is a relatively straightforward process but it isn’t one that should be taken lightly and anyone thinking of going down that route should take advice from an Independent Financial Advisor (IFA). Everyone wants their business to succeed and it's a strange entrepreneur who isn’t willing to work hard to make it happen. However, sometimes things do go wrong and if money from a pension fund is lost because a company goes into liquidation, that pension pot can be left seriously depleted with the consequence that retirement plans have to change and perhaps even retirement postponed.

People looking to their pension pot for funding will need to appoint an Independent Financial Advisor (IFA) if they don’t already have one. Although an IFA can approach the pension provider directly there are companies which specialise in facilitating the release of pension funding and will work with an individual's financial advisor. Before negotiating the release the IFA or specialist company will be expected to take an in-depth look at the business through analysis of its business plan, forecast profit projections, accounts etc. and will have to construct a business case which shows due diligence has been considered, details the value of any assets to be used for security, including Intellectual Property e.g. copyrights, domain names etc. and makes a strong case for pension release; pension will not be released early to prop up a failing business. The pension provider will also be expected to furnish information about the pension, it's value and how it works.

If the holder of the pension has a SSAAs an advance from a pension pot can be made as a commercial loan. However, certain rules apply such as, any advance will be limited to 50% of the value of the overall pot, it must be repaid within 5 years, interest on the loan will be set 1% higher than the Bank of England base rate. Where the pension is either SSAS or a SIPP it can purchase Intellectual Property. Using the IP route doesn’t involve as a many rules as raising a commercial loan from a SSAS. Usually the IP is leased back to the company which continues to use it and the money paid to cover the lease is invested back in the pension pot.

So, it can be as simple as that, nevertheless it can be costly due to the charges for professional advice and services, however, it is unlikely to be anymore expensive than taking out a loan from a bank or other finance house once bank charges and interest payments are taken into account. Those considering accessing funds from their pension to finance a business should obtain independent advice and remember that, whilst many people who do these have great success as a consequence, others don’t and sometimes pay a heavy price.