The pension route to business survival

19th January 2009

Despite repeated promises to the contrary, there is widespread anecdotal evidence that banks are still not lending to small businesses. The proposed Government intervention is likely to start working in due course, but that will be little consolation to the small businesses who are strapped for cash today.

Cashflow is what keeps a business - and particularly a small business - alive. It is the cash you have physically available in the bank to pay for stocks, wages and rent that makes the difference between being in business and calling in the administrators.

When traditional lines of credit from banks run dry there is an alternative option that only relatively few business owners seem to consider. Utilising your pension fund to provide cash can keep you in business until economic conditions improve.

Since the introduction of new 'pension simplification' rules in April 2006, there have been three main pension options to consider if you need to access cash for your business.

Taking benefits

The first is to simply access benefits from your pension plans. Assuming you are at least 50 years old, you are able to take up to 25% of the value of your pension funds as tax-free cash. This is more properly known as the 'pension commencement lump sum' although perversely the rules introduced in 2006 mean there is no need to actually commence a pension income.

Once you take the cash, which can be invested in your business in the form of a director's loan for example, the remainder of your pension fund can stay invested with the prospect of growth in the future. Taking your tax-free cash now does change the tax treatment of the pension fund on your death but for some small business owners this is a small price to pay for relatively easy access to cash during the credit crunch.

It is worth noting that the minimum age for taking pension benefits is being increased to 55 from 6th April 2010, so if you are in your early 50's there is a relatively short window of opportunity for taking benefits.

Buying assets

Pension option number two can be effective if your business already owns assets in which your pension fund is able to invest. A good example here is commercial property. It is possible for a pension fund to buy the commercial property from the business, in return for the cash within the pension fund.

It is also possible for the pension fund to borrow some money (up to 50% of the value of the pension fund) in order to fund the property purchase. Whilst this still requires raising bank finance during a credit crunch, you may find it easier to borrow money against the security of a commercial property than based on your business plan alone.

Again, it was the rule changes in 2006 which made this option possible. Before then, it would not have been possible such a 'connected parties' transaction to take place, but the pension investment rules are more relaxed now than they used to be.

Borrowing money from your pension

Thirdly, there is type of pension scheme which is able to loan money to a sponsoring employer or associated company. Known as a Small Self Administered Scheme, or SSAS, this type of pension was gradually falling out of favour until the prospect of loaning money came back into fashion.

A SSAS can loan up to 50% of net assets and must be secured with a first-charge on non depreciating assets of the borrower which are of at least equal value to the loan plus interest. The loan itself must have an interest rate of at least 1% above the Bank Rate, although in the current low interest rate environment this is unlikely to deter businesses in need of cash.

So, three often overlooked pension related business funding options which may or may not be suitable for a given business. In any situation where cashflow is becoming an issue and business survival is at stake, it is essential to have a thorough discussion with your professional advisers, including your accountant and independent financial adviser.

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