Corporate Finance

New Rules for your pension to stop your company going bust

  • Do you have a trading business that is going through difficulty and the bank won’t support it?
  • Do you have a sensible business proposition and you can’t get the bank to support it?
  • At the same time you don’t want to be at the mercy of outside investors?

Under revised rules from 1 October 2008, your pension can invest in your company, within a series of rules that we will outline below. This can provide a lifeline to your company and the external investor will be you (as your pension fund)

What types of companies can do this?

Any pension scheme can invest in unlisted companies, as long as those companies do not have residential property assets in them, but there are rules about “connected parties” and you have to invest your pension in a business that you can provide a sensible valuation for.

The “connected parties” rule mean that you could not previously invest in a company, you or your close family had a controlling interest in (more than 25%). This has changed. If your company has less than £6,500 in tangible assets on its balance sheet then the connected party rules may not apply. So you may have a trading business with only small assets which has a reasonable turnover. You may be able to use your pension scheme to invest into it and provide it with cashflow.

If you have a business with more than £6,500 of assets on the balance sheet, perhaps a commercial property, it may still be possible to structure help in other ways. Please contact us using the enquiry form.

What Pension funds can I use?

Until 1 October this year, it was possible to use pension funds to buy unlisted company shares (i.e. private limited companies) but you could only use money from your own contributions, you could not use money that was “protected”, for example it came from contracting out of SERPS or from the guaranteed element of final salary pensions. Now all pension funds can be used

Is this suitable for all businesses?

No, this is a complex process and involves investing your pension fund in high risk and illiquid assets, but those assets are your business, so it can be suitable for some people. You should take independent financial advice from a firm with a specialist knowledge of pension transfers. You can check a firms authorisation status at www.fsa.gov.uk and you should check within their “permissions” that they are authorised to advise on pension transfers and opt outs.

City Gate have been advising small businesses on their pensions arrangements for 7 years. Its directors have been through the process of using this method of funding for clients and know exactly how the process works.

This funding method is not suitable for property investment companies, partnerships or LLP’s. It is currently only suitable for UK trading companies

Start Ups

It is worth mentioning that this scheme is ideal in the current market for certain start up operations, where it is more difficult to get bank or investor backing. There is a need to obtain a valuation of the business plan from a qualified accountant and we do have access to qualified partners for this.

Does City Gate manage the process?

City Gate will consider your circumstances quickly and advise you whether you could use this method of pension funding to invest in your business. We will carry out this initial assessment free of charge and generally within 48 business hours of you providing us authority to contact your pension schemes.

After this, we will provide you with a detailed report and discuss all of the aspects of the arrangement with you and your advisers. We can then implement all of the plan and finalise the arrangement.

We can also provide you with appropriately qualified professional individuals to assist you, if you do not have them.

Case Study 1

Jim had a recruitment company. He had previously worked in a large recruitment firm and had built up a significant company pension scheme. He had been trading well, so he had taken on more staff.

In order to meet the cashflow pressures, he had factored his bills, which was great, it allowed him to expand and someone else worried about cashflow.

Then two crunches happened at once. The economic slump meant that nobody was recruiting, so he was dependent on a few accounts to feed him. This made his factoring company nervous and they started to restrict his funds. Additionally, his clients paid slower, so he was funding up to his limit.

The second crunch was liquidity, his factor was funded by the bank and they made them restrict the facility further. Jim had staff now and he had nowhere to go when it came to wages time. He had enough in the bank for one more salary run

At the same time he knew that if he could just hold it together, that there would be a huge opportunity for small companies to get back into the market and no lack of available candidates.

His business clearly has a value and we were able to provide an investment from his pension to provide liquid capital to fund him through the downturn and prepare for the inevitable upswing.

Jim realises he is taking a risk with his pension, but it was either that or loose the business. The factor had personal guarentees and could have bankrupted him. Now his pension fund is his only investor- something that makes him happy

Case Study 2

Elaine had a brilliant idea for a new coffee shop. It was a perfect business for her. It wasn’t likely to be affected by the downturn. She had identified premises and someone to work there. She just needed the capital to get started.

She had a relationship with the bank for 30 years. They had said they would lend her the money if she put her equity up as security. Then, as a result of the credit crunch, they said that they wouldn’t lend and that it was because she had no experience.

She had a friend who said that he would invest in it with her, and although she thought it would be good to share the risk, she didn’t have any idea whether he would be a silent partner or he would put his oar in.

We arranged for a business plan to be drawn up and she used some of her pension assets to act as seed capital for the venture. It gives her enough working capital to not worry and she only has her own pension scheme to answer to.

Elaine knows that it could go wrong and that she could loose part of her retirement income as a result, but she is doing what she wants to do and answering only to herself.