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Did you know that the average age of a start-up founder is 45? Us neither! But this amazing figure shows us two things. First, it is never too late to follow your dreams and start a business. Second, you can use the gains of your employment to fund those dreams.
By the age of 45 most people have around 25-29 years of employment under their belts, and most of that time they should have been building up funds in one or multiple pension pots. Depending on the type of work, this could add up to a very nice sum of money sitting tucked away. We all know that starting a business requires funding, as does growing one, so it makes sense that one of the most common questions we get asked is “can I use any of my pension to fund my start-up?”
The answer? Yes! But it might not be as straightforward as you think.
There is a way to access your pension funding early and use it to invest into your business. It is called pension-led funding and is an option for any business owner who has either a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS) valued above £50,000. While you usually have to be 55 to access your pension fund, there is no minimum age requirement to access it via the pension-led funding route. There are three ways you can use funds accessed this way:
Commercial loan: If you have a SSAS, your business could take a commercial loan from your pension fund. To do this you will need the approval of the trustee(s), and it works in a similar way to a standard commercial loan. Your business borrows the money, and then pays it back with interest. Your business can use this money in any way it sees fit, but the loan must meet some strict criteria before you can access the funds:
- It must not exceed 50% of the pension fund’s value.
- It should be secured as a first charge against an asset of equal or greater value than the loan plus interest.
- The interest rate charged must be at least 1% higher than the Bank of England base rate.
- The loan term can only be a maximum of 5 years.
- The loan must be repaid in equal annual instalments.
Purchasing property: A little known fact about SIPP and SSAS is that they can both hold commercial property. So rather than drawing money out of your pension, you could simply put your pension funds directly towards buying your own business premises. If you don’t have enough in your pension to buy it outright, you can borrow up to 50% of the pension value from a bank to go towards the purchase. In this arrangement, your pension owns the property and then leases it back to your business. The only downside is that if you make a profit on the sale of that property, you may be liable for capital gains tax.
Buy intellectual property: This is a bit more complex but can be valuable for certain types of businesses. Both SIPP and SSAS pensions are able to own intellectual property, so you can use your pension to buy said property. This includes things like patents, trademarks, designs, copyrights, databases and domain names owned by the business. Sadly this process is not all that simple. Once you have identified all of these properties, they must be valued by an independent expert to ensure they meet HMRC’s requirements. If they do, the pension can purchase them and lease them back to the business. If your business then grows in the future, your intellectual property will grow in value as will your pension pot.
Should I use my pension to invest in my business?
So, you know you can access your pension for investment in your business, but does that mean you should? Just like every other form of funding, there are pros and cons to this route.
Benefits: Pension-led funding can be a fantastic alternative for businesses who have struggled with traditional finance, or who want to retain more control over their business loan. Since the funds are yours, you are able to dictate terms more flexibly than with a traditional finance option. You also do not have to use any personal property as collateral, so there is no risk to your personal assets if repayments become difficult. Finally, if your business has more than one director, you can both use your pension funds to access a greater investment into your business.
Risks: Any form of finance comes with risks, and the same is true of pension-led finance. For example, if your business should fail in the future, both your current and future income could be affected when using this type of finance. So you need to make sure your business is in a strong position and able to make the most of the investment, ultimately replacing the pension funds you invest. There are also a lot of benefits attached to pension pots that could be void if you transfer out of them, so it is worth evaluating where your pension funds are and what benefits you may be entitled to if you kept it. For example, if you have a defined benefit pension scheme it is usually best to avoid transferring out of it, as you will have to give up the set income you are entitled to.
So yes, you can use your pension to invest in your business. But it is by no means a straightforward option. We recommend speaking with a professional about your plans, get help to evaluate your pension and ensure your business is suitable for pension-led funding. If you are not sure where to start, we can help. At Purple Lime, we can do all of this and more. If you would like to know more, please just get in touch by emailing email@example.com or calling us on 01249 691360.
Visit Purple Lime online at: www.purplelime.uk.com