Common Pension Led Funding Objections Brokers Hear (and How to Address Them)

Battle-weary business owners can be a cynical bunch at times and they are right to be discerning in the business decisions they make given the amount of sales pitches they receive on a daily basis. However, it’s important they are well informed to make decisions from a position of empowerment and not ignorance.

“Pension Led Funding is expensive”

The fees for Pension Led Funding are fixed and transparent. It costs £5000 to set-up plus a 3% facility fee (minimum £3,000 and capped at £10,000). There are costs to running the pension scheme too but on the basis that there will be running costs on their current scheme, or any other scheme, we will ignore these for comparison purposes.

Before comparing costs it is worth making an important point; any other finance facility will be paying interest to a third party and that interest will be lost forever. With a Pension Led Funding arrangement any interest due is payable to the director’s pension fund and therefore retained. This makes a powerful difference to what the true ‘cost’ of each course of action is.

The most prevalent non-bank lender to SMEs at the moment has an average interest rate of 15% pa although it is not uncommon for them to charge 20% pa or more. Arrangement fees for these loans average 6% although can be higher. Here is a comparison of the cost vs PLF over 5 years for a £200,000 loan:

	Non-bank Lender	Pension Led Funding
Total Fees	£12,000	£11,000
Interest Paid	£200,000	£50,000
Total Cost	£212,000	£61,000
Total Cashflow Saving*		£151,000

* Cashflow saving excludes £50,000 paid to the director’s pension fund. The true cost is therefore £11,000 and a saving of £201,000.

“This sounds like a dodgy tax scheme”

For business owners who have never heard of Pension Led Funding before, the idea of being able to borrow from their pension fund and not have to deal with banks can sound too good to be true and therefore raise questions about the legitimacy of such an arrangement.

While there are numerous ways that a pension scheme can provide funding to a business, loans are the most common route and they are specifically provided for in s.179 Finance Act 2004 and HMRC’s Pensions Tax Manual which support their legitimacy and the concept of a pension scheme being able to invest in a business.

“I’ve already called my pension provider and they’ve said I can’t lend money to my business”

It is not uncommon for people who hear a new idea to try and implement it themselves to save themselves time, money or both and this can be the case with Pension Led Funding.

In the vast majority of cases a client’s current pension scheme will be unable to lend money to their business. The reason for this is that it is the wrong type of pension. Only a Small Self-Administered Scheme (SSAS) is capable of being able to make loans to connected companies and given that SSAS pensions represent less than 1% of the total number of pension schemes in the UK the chances of somebody having one already are relatively small. Furthermore, SSAS pensions are not widely recommended by financial advisors so they are largely unknown which is why specialist advice is needed to determine the correct funding mechanism for a business.

“This might be a bit risky for me”

Pension Led Funding is an unsuitable strategy for any business owner who doesn’t understand the implications of investing in their business.

Pensions are a valuable safety net and protected from creditors in the event of insolvency so any investment in the business by a director’s pension should be carefully considered. Investments in unviable or insolvent businesses are unsuitable for pension scheme investment.

However, the rules around pensions lending to connected companies require that there be security for both the loan and interest due over the term of the loan and it be secured by a charge of adequate value. Provided that the security obtained is realisable the pension fund should be protected against loss in the event of a business’ failure.

“My business needs the money now”

When setting-up a Pension Led Funding arrangement it should be kept in mind that it could take 8-12 weeks to get the scheme established, registered with HMRC and any existing pension schemes transferred into it. This can seem like a long time to a business owner that needs finance quickly and may be offputting in principle.

To assist in these circumstances, we have sourced a lender that understands Pension Led Funding and will ‘bridge’ the funding gap during the establishment period meaning that business owners can receive their funding quickly and then refinance it onto cheaper, more flexible Pension Led Funding once everything is established. Brokers are also at liberty to make other arrangements with funders of their own choosing should they have established arrangements with similar lenders.

Common Pension Led Funding Objections Brokers Hear (and How to Address Them)

Common Pension Led Funding Objections Brokers Hear (and How to Address Them)

Other Articles

What is Pension Led Funding and How Does It Work?

Who Is Pension Led Funding Right For (and Who Is It Not For)?

How Much Does Pension Led Funding Cost?

What Are the Risks and Issues with Pension Led Funding?

How Does PLF Compare to Alternatives?

Is Arranging Pension Led Funding Regulated?