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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.”



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Technically, unless the shares are in a sponsoring employer (and subject to 5% of net asset value of the scheme) there is nothing wrong with this.

    However; as scheme Trustees they still have a legal obligation to ensure that all investments are prudent and all is done to protect scheme member assets. This seems to be forgotten in a lot of cases.

  2. Richard Bishop 26th July 2013 at 9:53 am

    Amazing arrogance from advisers who they think they can tell business owners how to run their businesses and what they should do with their pension pots.

    Seems a much better option than paying a numpty IFA sitting in a shop or office to pick a fund for you.

  3. @Richard Bishop – I am not to sure about what you are saying there? Please clarify.
    I agree with Dennis Hall and have changed slightly what he said: “There may be some justification in arrangements like this for larger ………… pension schemes but for the small business owner, with no other significant and secure assets.. the risks are considerably higher.

    “Should people be encouraged to invest their pension into their business in the first place? It is a potential OVER concentration of investment risk, something we spend a lot of time telling clients to avoid. Some concentration can work well, but working out how much to bank and how much to put on the table is key”

    The only single asset we have clients holding in pension schemes is their commercial property and sometimes we advise against that too. We only have 3 with commercial property one I inherited and he and I both think it should NEVER have been done, him because it doesn’t work well for him and me because it doesn’t work well for him and he risked everything putting his pension in there and it didn’t look viable looking back on his figures from day one to me and it obviously didn’t look viable to a lender as they wouldn’t lend him the money, hence why a different adviser delivered what he wanted at a price, which includes 15 years of grief for him so far of a property he no longer occupies and can now not sell…… The other two businesses have gone from strength to strength, but then they always were whether they’d used their pension monies or NOT as the business idea still had to stack up, the lenders would have leant, but it made more sense to use the owners own pension monies and both had other security (a wife’s significant pension benefits for one) and a domestic property portfolio too.
    Would I market this as an option as Charterhouse are doing? No I wouldn’t, but mainly due to a concern for clients “misbuying” through another firm who might be “order taking” rather than advising. I would advise some clients on issues they they are marketing for the right client, I just wouldn’t market it so I don’t see any reason to be critical of them unless someone can show me proof to the contrary.

  4. David Hargreaves 26th July 2013 at 11:39 pm

    Most directors who use our services have a wide spread of investments and the minority is within a frankly restrictive ‘pension’. As our clients pay little tax (with our help) and the majority invest elsewhere to reduce risk.
    If a sophisticated director wishes to invest some of their pension in shares of a company they understand and trust then surely this is their prerogative.
    I am disturbed to hear about directors of struggling businesses using their pensions and this we largely disagree with. We believe that the company must be viable and already profitable.
    Of course our funding will enhance clients businesses, their pension rights and other investments

    That said tax and remuneration is far more valuable tool to build wealth and prosperity

  5. I have done the above through another company , a new pension scheme buying shares in your company with a 100 per cent of fund less fees , I have now come to have my accounts done and accountant says I could be liable for a 55 per cent tax charge , as I am under 55 , is there anyone here who I could contact for advice as I promised it was tax free , My accountant has no idea how to deal with this ??? Any help would be greatly appreciated

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