Pension-led funding explained

Pension-led funding is still a relatively unknown product within alternative finance, but it's a valuable form of funding for some firms. If your business needs a loan, it can borrow money from the personal pension of one of the directors and pay it back with interest. Alternatively, the pension can invest directly in the business through an unlisted share purchase.

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Pension-led funding explained

What is pension led funding?

Although it's a complex product, there are significant benefits for businesses in certain situations, and it's well worth exploring as an alternative route to business finance.

How does pension led funding work?

Borrow funds from an existing pension within HMRC rules:

  • 6 to 10 weeks from quote to drawdown

  • Suitable for pension pots of at least £50,000

  • More security and independence than some traditional forms of lending

  • Grow your business and your pension

There are two main types of pension-led funding: commercial loans and unlisted share investment:

A commercial loan from a pension

This is the more straightforward form of pension-led funding. The business borrows money from the pension and pays it back with interest.

  • Available via a Small Self-Administered Scheme (SSAS) with trustee approval

  • The maximum loan is 50% of the pension fund's value

  • The interest rate needs to be a 'commercial' rate

  • 1st charge security required – this can include intellectual property assets

Unlisted Share Investment

  • Available via a Self-Invested Personal Pension (SIPP)

  • Either ordinary unlisted share investment or preference share investment

  • Independent share valuation appraisal required from a suitably qualified accountant

  • Can potentially use up to 70% of pension scheme value

  • Only suitable for asset-light businesses

  • A good option for franchise opportunities

Intellectual property (IP) sale and leaseback

In many forms of funding, lenders will often ask for security, which might be a charge over commercial property or other valuable assets like machinery or vehicles. When lending is 'secured', it gives the lender reassurance that their risk is lowered because there's a valuable asset in the background that they can claim and sell to recoup their outlay if repayments stop.

On the other hand, pensions aren't allowed to own tangible assets like property or machinery, so securing the lending is more complicated.

That's where intellectual property (IP) comes in. Pension funds are allowed to hold this type of 'intangible' asset, so your business can sell intellectual property to a pension fund and lease it back. When the director retires and starts using the pension, they could either sell the IP back to the business for a profit or keep it as a source of income and continue leasing it to the company.

Intellectual property means patents, trademarks and copyrights, or it could be domain names and other assets associated with your brand. If your business grows over time, the IP will go up in value, as well-meaning your pension will get a series of lease payments and a reasonable lump sum when it sells.

How is pension-led funding different to other types of business finance?

Pension-led funding gives you greater independence because it's your business borrowing from your pension. Within the rules, you're the one that decides how much can be borrowed. Of course, the pension provider will have to agree to your plans, and you'll need a specialist to look through all the details — but fundamentally, pension-led funding gives you a bit more freedom than other types of business finance.

Pension-led funding also offers another route to finance if you're considering various forms of security. Many business owners raise significant amounts of finance against the value of their home — or get a smaller sum unsecured. Pension-led funding offers a third option to those who use their pension as security rather than their house.

Pension-led funding also gives you the unique possibility of growing your business and pension. With a standard growth loan, you pay interest in the short-term to grow your business in the long term — with pension-led funding, the pension fund will grow too if the company does well.

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Pension-led Funding

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