Caution urged over business pension unlocking schemes


Concerns have been raised about the niche models being used by firms to encourage people to use their pension to invest in their business.

Pension liberation schemes, which offer individuals early access to their pension and incur a 55 per cent unauthorised payment charge, are coming under increasing regulatory scrutiny.

But schemes have also emerged which are aimed at releasing money for business use.

Preston-based firm Charterhouse Wealth offers one such scheme it calls “pension-backed business funding”.

According to its promotional brochure, seen by Money Marketing, business owners consolidate existing pension funds and transfer these to an occupational scheme. Trustees would then invest the pension by buying preference shares in the company.

The brochure quotes total costs of 13 per cent of the transfer value plus VAT, now reduced to 10 per cent plus VAT.

Charterhouse chief executive David Hargreaves says: “The vast majority of our clients are well advised. If it is a viable long-term business, this injection of capital can make a considerable difference. It is certainly not for struggling businesses, and this scheme follows HMRC rules and is not designed to go around them.”

AJ Bell technical resources manager Gareth James notes there are more widely recognised ways of using pension funds to invest in a business, such as a loan from a Ssas to the Ssas’ employer. HMRC restricts the level of investments that can be made via these schemes.

James says: “Those restrictions are in place is to ensure the primary purpose of a pension scheme is to provide for an individual in their retirement, as opposed to providing business support.

“There is no evidence of this being done here, but I have heard of structures being specifically targeted at owners whose businesses are in financial difficulty, with the supposed attraction that the pension scheme can keep the business afloat. The risk is, if the business fails, the individual not only loses their livelihood but their pension as well.”

Yellowtail Financial Planning managing director Dennis Hall says: “There may be some justification in arrangements like this for larger multi-million pound pension schemes but for the small sole trader the risks are considerably higher.

“Should people be encouraged to invest their pension into their business in the first place? It is a concentration of investment risk, something we spend a lot of time telling clients to avoid.”

Suffolk Life head of marketing and proposition Greg Kingston says there is a wider problem with the range of methods being used to liberate pension funds.

He says last week’s Advertising Standards Authority ban of a pension unlocking advert is a start, but adds: “The difficulty is it is the ASA, rather than the Financial Conduct Authority that is taking action. The ASA cannot be expected to know what is possible at the extreme edges of pension legislation.”