Commercial  

Tpas attacked for failing to flag pension-led funding

A separate survey conducted by insurer Axa in April 2015, when pension freedom was introduced, found one in 10 over-55s due to retire in the following 18 months were considering using their pension savings to help start a small business or a consultancy, FT Adviser’s sister title Financial Times reported at the time.

Since the freedoms, people have been able to access their pension cash subject to their marginal rate of income tax, which is levied on all but the first 25 per cent they withdraw.

But they can also use a small self-administered scheme (Ssas) or a self-invested personal pension (Sipp) to make a commercial loan or to buy commercial property.

Any interest on such a loan or any rent payable on the property would then go back to the pension as opposed to another lender such as a bank.

Mr Tavener said one of the most important things to consider when funding a business with a pension was the quality of the underlying business plan.

“The nightmare scenario is when these things become more commonplace to do and people are accessing their pensions through the pension freedom regulations without taking appropriate advice as to the wisdom of putting that money into a small business,” Mr Tavener said.

Clifton advises the maximum advance from a Sipp should not exceed 60 per cent under normal circumstances and 65 per cent for certain exceptions, while regulation dictates a Ssas loan must not exceed 50 per cent. 

To make it commercially viable, the pension fund should have accumulated at least £50,000, he said.

Dobson and Hodge financial services director Paul Stocks said he was once asked by a client to set up a £200,000 pension-led funding structure with a Ssas but the cost involved became "prohibitive".

“Whilst the will was there when we set it up the cost from legal, administration and so on quickly snowballed,” he said.

“I don’t see it as a mainstream thing, it would probably work for sums closer to £1m. I would suspect it’s harder to lend money from your pension than to get it from your bank.”

Nevertheless, he said there was a place for the products in today’s market.

“Where we see it working well is buying property for your business and becoming your own tenant but obviously the risk is still there if the business goes belly up,” he said.

carmen.reichman@ft.com