Q. I am the FD and a shareholder of my family-owned business. I have received an approach from a firm of “specialist pensions advisers” extolling the benefits of using my pension to invest in my business. I am conscious that there are circumstances when this can be done but I am also mindful of an answer you gave to a recent question regarding pension liberation schemes. I (and my fellow director shareholders) would like to consider using our pensions to invest in the business, but want to be certain that the scheme being proposed is genuine (and not a pension liberation scheme that will result in us being penalised heavily). Please can you help?
A. Yes. It has been noted within the financial services and pensions industries that there has been an increase in “pensions-backed business funding”. You are correct that, when done properly, these can offer valuable and commercial sources of investment for a company. However, it appears that there are other schemes emerging which seem to be more akin to pension liberation schemes.
The most common form of “pensions-backed business funding” involves the director/shareholders’ small self-administered pension scheme (usually referred to as a SSAS) loaning money to the relevant company. The loan is then repaid to the SSAS over a relatively short period, together with interest.
HMRC has established strict rules governing such arrangements. For example there are specified interest rates that must be applied, the term of the loan is restricted, security must be obtained for the loan and the loan must be used for a specific purpose (and cannot be used to ease cash-flow). This helps to ensure that the members’ pension funds are protected and that people do not lose their retirement savings along with their business.
Other (less common and more risky) alternatives that are emerging involve using funds held within an occupational pension scheme to purchase preference shares in the company. However, it is important to bear in mind that there are strict laws governing the amount of “employer-related investment” a pension scheme can make (in order to avoid a situation as was seen when Robert Maxwell abused the Mirror Group’s pension funds).
It is impossible to say whether the scheme to which you refer is a legitimate pension / business funding option, of which HMRC approves, or whether it is more akin to a pension liberation scheme. Key issues that you ought to consider are the level of charges being levied (high charges are often suggestive of a liberation scheme), the location/jurisdiction of the adviser and their professional and regulatory bodies.
If you and your fellow director/shareholders are considering raising business finance by utilising existing pension savings, I recommend that you seek advice from a chartered financial planner who specialises in advising businesses and in respect of company pension schemes.
Q. I was recently made redundant and I received a small but meaningful redundancy package. I have no need for the money as I secured a new job immediately and I was contemplating therefore investing the money in premium bonds, so as to preserve the money for a “rainy day”. However, a friend has advised me against this as he stated that premium bonds are not as attractive as they use to be. Can you offer any assistance, please?
A. I am sorry to hear of your difficulties, although it sounds as though things have worked out for you.
Your friend is correct that premium bonds are not as attractive as they were. National Savings & Investments is an Executive Agency of the Chancellor of the Exchequer and has to meet financing targets which are set by the government. NS&I has a zero net financing target in respect of the 2013/14 fiscal year.
As a consequence of having to meet these funding targets, NS&I reduced the premium bond prize fund, with effect from 1 August 2013, from £57m to £49m. The odds of each £1 premium bond winning have fallen from 1:24,000 to 1:26,000 and the total number of prizes has dropped from 1.9m to 1.75m. However, the monthly top prize of £1m remains unaltered. The reduction to the total prize fund follows a decrease in the rates of interest paid in respect of a number of NS&I’s savings products.
Whether or not it is appropriate for you to invest some of or your entire redundancy package in premium bonds will depend upon a number factors and I have too little information to be able to provide you with a response here. In determining whether this would be an appropriate investment to make, you ought to consider, amongst other things, your attitude to risk, how quickly you might need access to the funds, what other savings you have (if any), what other options are available to you and the totality of your financial circumstances. I recommend therefore that you seek advice from a chartered financial planner, who specialises in investments, who will be able to assess your circumstances and guide you towards the most appropriate savings or investment solution.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
