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Banks won’t lend, have you tried your pension? by Michael Wiggins

Mike Wiggins

Since the onset of the credit crunch in 2008 and the subsequent economic malaise, many business owners across the UK have found banks becoming less willing to provide the loan facilities which they need. In some cases the terms of future loans become restrictive or expensive whilst in others, simply unavailable.

Clearly, the inability to obtain finance can be debilitating for a business and this is where a little lateral thinking and an understanding of pension legislation can be useful.

Whilst most consider pension arrangements to simply be a tax efficient savings vehicle for future income provision, and I appreciate there are those who would not even credit them this far, they can also offer a lot more to the entrepreneur.

The language surrounding pensions can be very confusing and this includes the variety of schemes available, for example, what is a SIPP or a SSAS and why should I care?

There are two main types of pension scheme in the UK. Defined benefit arrangements which provide a guaranteed income at retirement dependent on the years of service provided to the employer such as public sector pensions and the second are those referred to as Money Purchase. Money Purchase simply means that the employer and/or employee contribute monies to the scheme and those funds are placed into allowable investments. The idea being that these investments grow over time and are then used at a chosen retirement date to provide the employee with an income. However, many business owners I meet do not understand that for certain schemes, allowable investments include loans to the employer.

A Small Self Administered Pension Scheme (SSAS) can be operated on both a defined benefit or money purchase basis and can be an extremely useful business tool for the entrepreneur.

For those caught by recent legislation aimed at restricting the contributions and tax relief for high earners, a defined benefit SSAS can significantly improve contribution and tax relief available and both the defined benefit and money purchase options can lend monies to the business. These loans need to be made on a commercial basis and therefore will need to charge interest at today’s rates. Currently the Inland Revenue consider this should be no lower than 1% above the Bank of England Base rate of the 6 leading High Street banks.

For those with Self Invested Personal Pensions (SIPP) loan facilities are not available, however, do not forget that pensions can be transferred to alternative arrangements (always take advice and be fully aware of all costs involved, including the loss of benefits secured under the existing scheme).

SIPPs are however able to undertake other investments which also apply to the SSAS and can be very useful to the entrepreneur who is in need of cash.

Both the SIPP and the SSAS can invest in commercial property. Where a business owns a commercial property and the owners wish to retain control over or use of the property but are also in need of cash, they have options. The pension scheme could purchase the property from the company. The pension arrangement lets the property back to the company at a commercial rent, which is a good investment for the pension scheme and the company has the cash it needs. It should be remembered that the pension arrangement has the ability to borrow to enable it to make the purchase.

This leads to a further opportunity. The pension legislation does not dictate who can lend monies to the pension arrangement. It could be a bank but it could be anyone else. The loan simply has to be on commercial terms and can be secured or unsecured.

In the current climate there are many business owners I meet, sitting on personal cash which is earning very little in the way of interest and yet a loan to their pension could not only provide a higher return but may just provide a solution to the business owners corporate needs.

Take the example of a current case. A business owner, who is married, is trying to put together an exit strategy with his fellow company director. The business owns a property and has half the cash required to purchase the shares of the retiring director. The director would like both the property (to provide an income stream in retirement) and his full buy out figure which is twice the sum the business has in cash. The other director is keen to take control of the business but does not want to use all of the company cash and nor does he want further loans. In this instance the property is no longer used by the company and is simply an investment.

Two accounting connections were advising the client, one favoured a full cash buy out, the other a cash and property combination. Both solutions would leave the business very tight on cash and the exiting director having to compromise.

We suggested the pension solution. The retiring director had a Self Invested Pension Scheme which had a value equal to 75% of the property value, however, the SIPP can of course borrow to help finance the purchase. Borrowing was arranged to enable the pension scheme to purchase the property, providing additional cash to the business which was then in a position to buy out the director in full without a loan. Despite the long relationship with the director’s bank they were unwilling to make funds available. This however proved to be a great opportunity.The retiring director’s wife was a non tax payer and with a little creative thinking we were able to arrange for her to make the loan to the pension scheme. This loan has been arranged at an attractive rate of 6% (twice that achieved on her high street account) and will be paid to her gross because of her tax position. The loan will be repaid by the pension scheme from contributions and the rental income it will receive from the property investment (tenants). And can of course, the loan can be secured against the pension assets, removing the investment risk of the lender.

Our client has retired with the commercial property owned by his pension scheme providing good, regular, rental income as well as his full cash buy out sum from his company. In addition, his wife is achieving an excellent rate of return on her investment.

So, pensions don’t have to be just for retirement. They could provide immediate access to capital required – may be the banks are not as important as we or they, believe.

Mike Wiggins is a Director and owner of Orchard Wealth Cultivation, a successful Financial Planning business based in the South of England. Mike is a Certified Planner and NLP Practitioner and believes it is his focus on an individual’s outcomes, values and beliefs which enables him to design bespoke financial solutions. Mike speaks on Lifestyle Financial Planning and is currently providing his ‘Bear Hugs and Bountiful Lives’ workshop to Academy groups.

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