Availability of credit is poor or unaffordable. According to the Federation of Small Businesses, more and more small companies are being refused finance, hindering the potential for UK growth.
Businesses are therefore looking at pension funds as an alternative source of credit. Opportunities for business funding via small self-administered schemes (SSASs) are particularly relevant to existing schemes where there are liquid assets or to company directors with pensions that they could transfer to a SSAS.
Finding finance
One option is loan finance. A SSAS can lend to its sponsoring company provided certain conditions are met, which are outlined in Box 1.
Unencumbered commercial property is ideal as security, but other assets, including residential property and tangible moveable property, could be used, although care is required. HMRC’s pension scheme newsletter 37 published in May 2009 provides guidance.
Another option is leaseback of property. Many companies, or their directors, own their trading premises. Selling this to the SSAS would:
• Give the company, or directors, cash for expansion;
• Keep the asset beyond the reach of creditors; and
• Provide the SSAS with expected higher returns than cash.
The entire SSAS, plus borrowing of up to 50 per cent more, could theoretically be invested in property. However, the trustees should remember the lack of diversification and illiquid nature of property. This could impact their ability to pay retirement or death benefits other than in specie.
The company, as tenant, must pay a commercial level of rent. SSAS trustees must not give preferential treatment to the sponsoring company and must deal on an open-market basis. For example, valuations must be obtained by the trustees to verify purchase price and market rent for leaseback transactions. Tax penalties may be imposed for any deviation from market rates.
Difficult decisions
Arranging business finance through a SSAS is not without risk. The company should not stop paying rent or making loan repayments simply because it is inconvenient. If a company is in genuine financial difficulties and is struggling to meet its liabilities, the SSAS trustees should take a commercial view, which would normally require external professional advice. This may mean agreeing to a temporary rental holiday or extended loan-repayment term. Members should also realise that non-payment of loan interest or rent will adversely affect their retirement fund.
There are still opportunities though, and provided the terms can be met, loan finance from a SSAS can be cheaper than from a bank due to savings in arrangement fees. Orchestrating a leaseback can not only improve the company’s cash position but also create more input to the SSAS from the company via rent, which could be useful given recent reductions in contribution limits.
SSASs can step in where over-cautious banks have failed businesses, but there are still restrictions in place. Last year, the Association of Member-directed Pension Schemes wrote to the Treasury to suggest an easing of the loan rules – for example, to permit less security in exchange for a higher interest rate. So far, this suggestion has not been taken up.
