This is the first in a series of four blogs on PLF. In our view, PLF represents an excellent tool for entrepreneurs looking to obtain finance for their businesses beyond the traditional sources.
What is pension-led funding (PLF)?
PLF is a means of using funds within a registered pension scheme to invest in your trading Company.
PLF follows the express statutory ability for a Sponsoring Employer (essentially, the Company which establishes the scheme) to borrow up to 50% of the pension fund.
There are certain conditions that must be met for the loan to be a qualifying loan. These are set out in greater detail in Part Three of this blog series. However, in general, the loan must be:
- for a maximum of 50% of the value of the scheme’s assets;
- Be written for a maximum period of five years;
- Be fully secured; and
- Bear a commercial rate of interest.
These conditions are discussed in greater length in the third installment of this blog.
Overview of the steps
In order for an entrepreneur to avail themselves of the planning it will be necessary to undertake the following steps:
- Secure appropriate financial advice from a regulated individual as to whether this is a suitable course of action;
- If the planning is suitable then their trading Company should establish, along with the assistance of a Pensions Administrator, a Small Self-Administered [pension] Scheme (SSAS) with the Trading Company acting as Sponsoring Employer;
- The Administrator will apply for the scheme to be registered with HMRC. This process can take anything from one week to three months;
- Once registered, it is possible to set up the SSAS’s bank account in the name of the Trustee. It is likely that you, as well as being a Member, will also be the sole Trustee of the scheme;
- With the assistance of your financial adviser, you will then apply to your existing pension scheme provider for funds to be transferred to your new SSAS scheme;
- Once the funds have been transferred, then the loan can be implemented with the balance invested as you see fit.
As mentioned above, Pension Led Funding is an enormously attractive facility for the owners of SMEs. Some illustrations of where our clients have used PLF successfully in order to grow their businesses.
Case study one
Mr Singh managed to keep his textile business afloat during the recession.
As the economy improved he wanted to take advantage of the green shoots and sought finance to provide working capital and improve his workforce by recruiting three specialist members of staff.
The banks unanimously refused to entertain this opportunity as the sum required (£50-60k) was too small.
Mr S transferred three under-performing funds (totalling £110k) held with large insurers to the new SSAS. We arranged with the Trustees for the pension scheme to make a loan to the business of £50k.
The loan was:
- secured on the value of a commercial property held by the Company
- for a 5-year term
- repayable in 5 equal annual installments
Mr Singh was able to grow his business.
Case study two
CD had £200k in a SIPP sitting in cash. His business had an existing overdraft of £45k paying a high level of interest plus an annual ‘renewal’ fee.
CD had valuable intellectual property (IP) within the business. A valuation of this IP was undertaken by a specialist and it was agreed that it was valued in excess of £75k.
He transferred his existing pension arrangements in to a SSAS
The Trustees made a loan facility made available to his trading company advancing £75k to clear an overdraft and provide additional working capital.
Case study three
Mr Dickens owns a market leading coatings business. It works in the area of aviation parts. The Company undertakes extensive qualifying R&D – often with the support of the EU. The business is very successful and US investment was ‘circling’.
Mr D was looking to make pension provision for himself and other Directors.
A £250k contribution was made to a large occupational scheme. Again, this being tax efficient for the Company. The Trustees of the scheme immediately lending back £125k to the Company.
The £125k was invested in to developing a new coating process which qualified for R&D. The Company received tax relief of 225% (nb – the rate has since increased) on this investment.
Initial due diligence & professional financial advice
Once a completed fact-find has been received by us, an initial due diligence process will take place.
As part of this we will undertake a feasibility calculation to ascertain whether the proposed loan can be made to the Sponsoring Employer. For example, if it is proposed that a loan of £50k is to be made by the Trustees of the scheme secured on the Company, yet that Company is worth only £10k, then the planning will not be able to proceed on the outlined basis.
If the planning is deemed feasible at this stage then the case will be passed to a regulated financial adviser to compile a suitability report.
The next in this series of blogs will concentrate on the set up of the scheme…