The Credit Crunch - An alternative source of finance for business
Best Practice - Accountancy Age article submitted for November 2008
The Credit Crunch - An alternative source of finance for business
Summary
Had HBOS Group been a small business and the directors operated a Small Self Administered Scheme, it is highly likely that they would have looked to the pension scheme for investment to get themselves out of the big hole they found themselves in last week. It is highly unlikely that an investment to the business would be appropriate or indeed been ultimately helpful to them. However, if clients are not a HBOS case, then looking to a small self administered scheme (SSAS) might not only be a shrewd move when seeking cash flow assistance but will also benefit your clients when they finally get round to generating as much income as possible for their retirement.
A small self administered scheme is a pension scheme established by the operators of a business, who appoint themselves as members and trustees. They dictate investment policy and ultimately benefit from the proceeds. That investment policy can range from investing money in gold shares to loans to the business. By having a loan to a business from a SSAS, the small business not only gets tax breaks on repayments but the interest terms and conditions can be set favourably by the pension scheme.
Main body
Few small companies are flush with the type of cash that allows them to weather such a shock as the current turbulence in credit. Going to the bank for cash to keep things ticking over when debtors are slow in settling their invoices is one option but is there a better route? Brad Davis of Pension Practitioner .Com, who are a UK leading specialist for small self administered schemes, gives an insight into an increasingly popular alternative of business finance.
Small self administered schemes (SSAS) were once very popular as they allowed controlling directors of businesses to pump lots of pre-tax profits into them and then lend most of the money back the day after the financial year end. However, successive governments changed the rules to make these schemes less financially attractive. Following a Government wide review of pensions, “Pension Simplification” was born which created a new set of rules for SSAS. An unintended consequence of those changes was that a business entrepreneur could set up a SSAS through their business and control their own pension fund by acting as scheme trustee and invest and manage the funds on their terms. The requirement for actuaries and professional trustees was removed.
The previous restriction that only a limited company could establish a SSAS was also removed. Now an investment business or a partnership can set up a SSAS and provided that there at least one employee is a member of the scheme, non employees such as family can also be admitted.
As the member trustee(s) dictate investment policy, loans to the business are an acceptable “investment”. Indeed, the business could sell an asset to the SSAS for cash or contribute an asset it owns on commercial terms.
As many small business operators may have built up pension funds through past employments or through a SIPP, subject to obtaining the right financial advice, an individual may transfer those funds to a SSAS. Provided that the funds transferred do not consist of protected rights, half of those funds can then be loaned back to the business.
The rules for a loan to a business from a SSAS are that the loan can be used by the business for any purpose. The loan term is for a maximum five years, with a commercial rate of interest set by the trustees, but no less than an HMRC minimum rate. A first charge over an asset of equal value is required, but the nature of the asset charged can be very flexible; it does not have to be an asset of the business. This can therefore get around the thorny problem of the bank having a prior charge over the assets of the business. There is flexibility for a roll-over of repayment if the business is in genuine difficulties (useful if the loan is repayable annually in arrears), but this facility cannot be used more than once.
The loan is paid from a pension bank account, which will receive back that money with interest over the term of the loan. The interest benefits the members of the scheme, that otherwise could have been paid to the bank, had the bank been approached for the loan. In making the loan, the SSAS must take a prudent approach to the judiciousness of the loan. Loans to ailing or near bankrupt businesses are not appropriate and indeed, why inject your funds into a business that was unsustainable. For those businesses that are financially sound but who have a cash issues at periodic times a SSAS may well be a shrewd choice.
Pension Practitioner .Com’s website is www.pensionpractitioner.com
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This site gives our thoughts on topical issues of the day for the very many SSAS schemes that we administer. It ranges from the incredulous stories of “I inadvertently booked our holiday through the pension scheme bank account, can I treat this as an expense of my SSAS ?” to the more mundane - “Looking through my rules, if SSAS allows me to do more things than a SIPP why did I never hear of them before?”
Nothing in the site is a recommendation, offer, inducement or solicitation but is intended to be an informative and topical blog of the Pension Practitioner .Com pension specialists. Remember, we are not financial advisors, do not give investment or product advice of any kind.
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