As people are living longer, many are able to remain in work well beyond their mid-60s. Contrary to what some believe, rather than this ageing working population proving to be a drag on the economy – not least, as some argue, in the realms of youth unemployment – the spending of older workers actually creates an economic boost, which, in turn, begins to create jobs for others, both young and old. According to Saga, it is estimated that the over-50s contribute around 50% of all consumer spending in the UK.
But, further to this spending boost, the economy could also receive stimulus from the acquired wealth which the older generation have accumulated in property, savings and pensions over the years – all wherewithal that could be invested in new property, infrastructure and business.
In 2011, according to the Office for National Statistics, the value of assets held in UK funded pensions was estimated at over £2 trillion (135% of GDP), while total contributions to self-administered pensions in 2012 amounted to £49.6 billion.
A more recent figure is noted in an article for City A.M., which states that “Net of mortgages and other borrowing, the accumulated wealth of UK households – in houses, pensions and other financial assets – is now over £8.5 trillion, seven times annual post-tax income.”
Much of this money is sat in cash deposits earning little or no return, achieving very little for the pension holder and adding nothing to the economy. It is estimated that as much as 40% of the UK pensions pot may be sat idle in this way. If SMEs could access some of this mothballed capital and put it to use, then a serious boost could be achieved – for the borrowing business, the pension holder, and the economy at large.
Investing In Business
One of the biggest ongoing challenges for SMEs is accessing funds. Banks are continuously rejecting small business owners for funding, and, although the alternative finance sector is live, kicking and growing at an unprecedented rate, lack of awareness still haunts the industry, with 42% of SMEs remaining unaware of the AltFi options that are available to them.
One such option is pension-led funding. This is a type of financing whereby business owners can access some or all of their pension funds before retirement in order to invest in the growth of their current business. Indeed, the money raised through such funding need not and is not limited to making investments in the pension owner’s private business, as the money can be invested in any number of third parties. Equally, a borrower is also not restricted to accessing funds from his/her own private pension, but can accept investment from others’, normally via an online platform.
Traditionally, pension providers have had control of the purse strings of retirement funds – that is to say that these providers decide where savers’ monies are held and invested. However, there is another option for those that want to have more control over how their pensions are used – self-invested personal pensions (SIPPs).
What Are SIPPs?
The first SIPP was launched in 1990 and celebrated its 25th birthday on March 19th this year. During this lifetime, SIPPs have allowed investors to take control of financial decision making, rather than leaving it in the hands of insurance companies and fund managers.
SIPPs have grown in popularity since the government introduced its pension freedom reforms in April. Now, over-55s with defined contribution (DC) or ‘money purchase’ pensions can access their entire fund as cash, or put it into drawdown and take an income without being encumbered by any limits on withdrawals.
Put simply, a SIPP is a DIY pension. With a SIPP, savers can invest their pensions almost anywhere they like and choose their own investments, unlike with traditional personal pensions, where investment choices are typically limited to a much shorter list and run by the pension company’s own fund managers.
SIPPs offer greater flexibility. Investors may make choices about what assets are bought, leased or sold, and decide when those assets are acquired or disposed of, subject to the agreement of the SIPP trustees (usually the SIPP provider). They essentially work as a wrapper that goes around pension investments. It allows savers to benefit from tax breaks, for example taking a tax-free lump sum of up to 25% from your pension pot when you hit 55 years of age.
Raising The “Dead” Money
For entrepreneurs who are used to calling the shots and running their own businesses, pensions can often be viewed as “dead money”. Saving into a pension is more of a dutiful chore than a pleasure, and many simply make their monthly contributions without giving the practice a second thought.
With SIPPs, however, active attention is required from the saver, for the onus is on him/her to make the investments that will make or break the retirement fund. Indeed, one of the most attractive things about SIPPs – especially for the business-minded entrepreneur – is the fact that having such a hands-on involvement with one’s own pension fund releases one completely from any misconception that such a pot is “dead money”, for it now becomes working capital with which great things can be achieved.
Anyone can set up a SIPP, and the investment of the pension money saved through SIPPs is the responsibility of the person saving into the pension, though, if preferred, this responsibility can be delegated to an independent financial adviser or discretionary fund manager, both of whom will invest the money according to a risk profile.
Where Can SIPPs Be Invested?
There are a number of options for the SIPP investor. These include:
As long as the use of the property is commercial then it can be considered for inclusion in a SIPP. ‘Commercial property’ is not, however, just confined to bricks and mortar offices, warehouses, retail units and factories, but also land (such as farmland), woodlands, forestry and even halls of residence for students. The property can either be purchased by the member on their own, or jointly with other SIPP members or individuals. This includes property syndicates.
(Note: It is generally not possible for residential property to be held in a SIPP due to penal tax charges.)
Stocks and Shares
Within a SIPP, publicly quoted shares, gilts, debentures and loan stock will either be held via the SIPP provider’s platform or through a third-party stockbroking or discretionary management account.
Some SIPPs allow cash to be held in third-party bank accounts. Those SIPPs that do offer flexibility often restrict investment options to a panel of bank accounts. Others offer complete flexibility.
Tangible Moveable Property
This refers to things like jewellery, antiques, art, vintage cars, boats, rare books, stamp collections etc. Most tangible moveable property is subject to substantial tax charges when held within a SIPP. The exception is in the investment of investment-grade gold bullion in the form of wafer or bar, provided it is of a weight accepted by the bullion markets.
Business Loans and Investments
Even though a SIPP cannot make a loan to a connected company or individual, it is possible to make a loan to an unconnected third-party individual, company or partnership.
The actual terms of the loan are not subject to specific HMRC regulations and can be agreed between the SIPP member and the borrower. This includes the term, the loan amount, repayment terms and the interest rate.
However, it needs to be borne in mind that the loan should be a genuine investment of the SIPP and be prudent, secure (but this does not necessarily mean that security has to be taken) and on a commercial basis.
SMEs – Accessing The SIPP Pot
SIPPS are growing in popularity. The number of fully invested and insured plans has increased by 20% – from around 700,000 to nearly 850,000. The total figure now invested in SIPPs is estimated to be approaching £127 billion.
As mentioned already, as much as 40% of this money is simply sat in cash deposits gathering dust. So, what needs to happen for these pots of gold to start opening up for SMEs?
Well, firstly, the regulation of SIPPS is still very stringent. When it comes to a SIPP buying unquoted shares, there are essentially two sets of rules – those laid down by HMRC, and a further set drawn up by each pension provider.
HMRC allow the purchase of unquoted shares in a trading company to be made by SIPPs. However, because of potential issues with taxable property and connected party transactions only a small number of self invested pension providers will allow such transactions. Each case needs to be looked at on its own merits, to confirm what is indeed possible and furthermore that it is to the benefit of all parties concerned.
It is for this reason that considerable expertise is required by both investor and borrower when deals are being struck. Security is one issue, as is described by pensionledfunding.com:
“With pension-led funding, there is no requirement for business charges and personal guarantees. The security of a director’s non-pension personal assets will no longer rely on the fortunes of the franchise.
“Equally, if balance sheet assets are used to secure the loan, the pension can create its own charge over all assets and the pension scheme becomes a preferential creditor to the business. This means, in the worst case scenario of business failure, the scheme has priority in claiming back its security, although that level of priority will depend on the status of any other creditors that might hold a secured charge on the business’ assets – such as a bank.”
Working With A Provider: The Route – Finance
Working with a finance provider that has an understanding of the intricacies of pension-led funding is crucial, and will open up a safe door to a source of valuable funds. The Route – Finance has a longstanding relationship with self-invested pensions specialists Dentons, a company which has been delivering its expertise since 1979 and has now grown to manage over 3,800 SIPPs, with over £2.6 billion of assets under administration.
The Route – City Wealth Club has a collective membership of high net worth and sophisticated investors who utilise SIPP funds to lend to SMEs, which is good for all. Of the nearly £40m that The Route – Finance has currently pledged from members for lending via the Private Debt Platform, more than 30% is held in members’ SIPP funds.
We believe that SIPPs can be great benefit to SMEs looking for alternative means of finance, and that pension holders would also benefit greatly by investing in such businesses. Our platform is already making this happen for companies up and down the nation, and we are proud of the part that our investments are playing in the boosting of the economy.
Find out more about how SIPPs could provide the funds for your business by getting in touch today. And please download your free copy of our Alternative Finance Guide where you will find more information on the funding options available and the various providers operating today.