Pension led funding

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Pension Led Funding (PLF) is a financial services product offered in the United Kingdom (UK) that raises funds for businesses based upon the use of pension benefits accrued by owners or directors of the business they control. The money can then be used for the provision of a secured commercial loan , the purchase of commercial property, *the purchase of intellectual property assets, or the purchase of share capital (ordinary and redeemable preference shares).

Contents

Various corporate structures are eligible for this type of finance, including sole trader, partnership, limited liability partnership, limited company or franchise. The funding must be compliant with both financial regulations [1] and Her Majesty’s Revenue and Customs (HMRC) prescriptions, and be planned so as to benefit both the company and the Pension Fund belonging to the business owner.

The two main sources of funds for PLF are Member-Directed Registered Pension Schemes, i.e. Self-Invested Personal Pensions (SIPP’s) and Small Self-Administered Schemes (SSAS’s). The schemes are typically devised by suitably-qualified and authorised financial advisers and implemented by experienced pension scheme administrators. Other professionals (i.e. chartered surveyors, solicitors and valuation specialists) may also be indirectly involved in the process.

Claimed benefits

The benefits of PLF claimed by providers [2] are that such schemes provide access to commercial finance in circumstances when traditional lending options (such as bank loans or invoice discounting / factoring) to businesses is restricted and/or subject to potentially onerous terms. In PLF schemes, it is the owners of the business and funds who decide whether the risks are acceptable, not an outside party such as a bank. Thus, providers claim that PLF can assist business owners in achieving financial and operational independence, control and flexibility.[ citation needed ] According to independent research by Nesta (charity) and the University of Cambridge: "Since obtaining funding, 62 per cent have seen their profit grow, 59 per cent have increased turnover and 43 per cent have employed more people." [3] Because PLF effectively requires a substantial accrual of pension benefits, it has proved attractive to more mature entrepreneurs - particularly the over-50s, known as 'olderpreneurs' [4] [5] [6]

Assessment of appropriateness

Financial and taxation regulations require that a PLF programme must benefit the owner(s) of the pension scheme. [7] Thus PLF providers require that several criteria are satisfied through a process of due diligence to establish the suitability of a PLF programme on a case by case basis. The risks associated with PLF make it less appropriate for some, particularly those who have few non-pension assets or whose organisation’s cashflow position is such that it would prevent scheme repayments. A detailed analysis of attitude to risk and capacity for loss is, therefore, part of the process of assessment.

The due diligence process includes detailed assessment of the following:

Risks

Like any form of investment, PLF is not without risk.

Regulatory risk

Ensuring that the process is compliant with relevant financial and taxation regulations is an important and complex consideration. Those seeking to implement a PLF programme can reduce the risk of failure to comply with regulations by engaging the services of suitably experienced and qualified financial professionals to set up the PLF arrangement.

The legislation governing the self-investment of accrued pension funds is complicated. Most of the current rules and regulations came into effect on 6 April 2006, [8] although there have been some amendments and developments since that time.

The sanctions imposed in the event of non-compliance and/or misconduct (whether due to oversight or malpractice) can be severe. [9] [10] [11] Working with Financial Conduct Authority (FCA)-regulated advisers and pension administrators who ensure all Her Majesty’s Revenue and Customs (HMRC) scheme registration criteria are met is, therefore, to be recommended.

Risk of default

Using some of the accrued pension benefits of an individual (or a group) to fund a single trading entity is a relatively high-risk undertaking. This is why pension funds are often placed in a spread of investments to minimise the risk of loss. Risk also comes from the degree of exposure to market vagaries and trading (mis)fortunes. It is possible to mitigate the risk of default to an extent and the provision of security or collateral is a typical characteristic of PLF transactions. Pension funds can still be detrimentally affected. In the event of a default, HMRC sanction charges can be applied if the default process has not been administered correctly.

Skill and credibility of providers

Levels of experience and specific expertise vary significantly within the finance industry. [12] Thus anyone who is looking to engage in a PLF programme should be encouraged to research the options thoroughly, giving equal attention to assessing the credibility of practitioners.

Costs

There are typically two main costs with PLF. An advisory firm will devise a suitable strategy, having satisfied the relevant due diligence and compliance requirements. A trustee/administration company will then assume responsibility for the implementation of the project (in accordance with HMRC rules and regulations). It is standard practice for advisers and administrators to be paid separately for their respective services.

Related Research Articles

Pension Retirement fund

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An individual savings account is a class of retail investment arrangement available to residents of the United Kingdom. First introduced in 1999, the accounts have favourable tax status. Payments into the account are made from after-tax income, then the account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme. Cash and a broad range of investments can be held within the arrangement, and there is no restriction on when or how much money can be withdrawn. Since 2017, there have been four types of account: cash ISA, stocks & shares ISA, innovative finance ISA (IFISA) and lifetime ISA. Each taxpayer has an annual investment limit which can be split among the four types as desired. Additionally, children under 18 may hold a junior ISA, with a different annual limit.

Public finance Study of the role of government within the economy

Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones. The purview of public finance is considered to be threefold, consisting of governmental effects on:

  1. The efficient allocation of available resources;
  2. The distribution of income among citizens; and
  3. The stability of the economy.
National Insurance Tax and social benefit system in the UK, introduced in 1911

National Insurance (NI) is a fundamental component of the welfare state in the United Kingdom. It acts as a form of social security, since payment of NI contributions establishes entitlement to certain state benefits for workers and their families.

HM Revenue and Customs Non-ministerial department of the UK Government

Her Majesty's Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, the administration of other regulatory regimes including the national minimum wage and the issuance of national insurance numbers. HMRC was formed by the merger of the Inland Revenue and Her Majesty's Customs and Excise, which took effect on 18 April 2005. The department's logo is the St Edward's Crown enclosed within a circle.

Taxation in the United Kingdom Overview of taxation in the United Kingdom

Taxation in the United Kingdom may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.

A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).

A self-invested personal pension (SIPP) is the name given to the type of UK government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).

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A common contractual fund (CCF) is a collective investment scheme structure in Ireland introduced by the European Communities UCITS Regulations, 2003.

A Qualifying Recognised Overseas Pension Scheme, or QROPS is an overseas pension scheme that meets certain requirements set by Her Majesty's Revenue and Customs (HMRC). A QROPS and it can receive transfers of British pension benefits. The QROPS programme was part of British legislation launched on 6 April 2006 as a direct result of EU human rights requirements of the freedom of capital movement.

Small Self Administered Scheme (SSAS) is a type of UK Occupational Pension Scheme.

Defined benefit pension plan Type of pension plan

A defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum or combination thereof on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provide defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.

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A Qualifying Non-UK Pension Scheme (QNUPS) is a form of overseas pension scheme available to British citizens that reside permanently outside of the United Kingdom or who reside in the United Kingdom. If the QNUPS complies with specific HMRC regulations, it will be recognised as a QROPS which allow individuals to transfer UK based approved pension assets to an overseas based "QROPS". A QNUPS can also allow individuals to invest more into their pensions than the usual UK limit in terms of both annual contributions and overall 'lifetime limit' of fund size

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Income drawdown is a method withdrawing benefits from a UK Registered Pension Scheme. In theory, it is available under any money purchase pension scheme. However, it is, in practice, rarely offered by occupational pensions and is therefore generally only available to those who own, or transfer to, a personal pension.

In the United Kingdom, pension liberation is a term used by confidence tricksters that purports to allow individuals to access the funds within a pension before the age of 55 when permission has not been provided by HM Revenue and Customs (HMRC).

References

  1. ↑ H M Revenue & Customs. " RPSM07300070-Scheme Administrator Pages: Investments: Can a registered pension scheme make a loan?" www.hmrc.gov.uk/manuals/rpsmmanual/rpsm07300070.htm Retrieved 6 September 2013
  2. ↑ Capital Reserve (2013). 'Pension Led Funding' http://www.sterlingcapitalreserve. c o.uk/business_loans/pension-led-funding.php Retrieved 17 September 2009
  3. ↑ Nesta/University of Cambridge - Understanding Alternative Finance - The UK Alternative Finance Industry Report 2014 Retrieved 9 April 2015
  4. ↑ Cook, Lindsay (2017-02-16). "Over-50s are the new business start-up generation". Financial Times. Retrieved 2018-07-19.
  5. ↑ Prosser, David. "How Pension-Led Funding Could Kickstart Your Business". Forbes. Retrieved 2018-07-19.
  6. ↑ Evans, Peter (2017-12-17). "This is the age of silver start-ups; how more people in middle-age are starting businesses". The Sunday Times. ISSN   0956-1382 . Retrieved 2018-07-19.
  7. ↑ Burgis & Bullock Chartered Accountants (2013). 'Can I borrow money from my company pension scheme?' http://www.burgisbullo c k.com/blog/can-i-borrow-money-from-my-company-pension-scheme/ Retrieved 17 September 2009
  8. ↑ HM Revenue & Customs. "RPSM02101010 -Technical Pages: Registering a pension scheme with HMRC: pension schemes set upon or after 6 April 2006: Schemes applying for registration from a date on or after 6 April 2006: form of application." www.hmrc.gov.uk/manuals/rpsmmanual/RPSM02 101010.htm Retrieved 4 September 2013
  9. ↑ HM Revenue & Customs. "Unauthorised payments from pension pots" www.hmrc.gov.uk/pensionschemes/unauthorised-payments.htm Retrieved 5 September 2013
  10. ↑ H M Revenue & Customs. "RPSM07109230– Technical pages: Investments: Taxable property: Direct h o lding of taxableproperty: What tax charges apply to direct holdings?" www.hmrc.gov.uk/manuals/rpsmmanual/RPSM07109230.htm Retrieved 6 September 2013
  11. ↑ H M Revenue & Customs. "RPSM07400110- Employer Pages: Investments: What tax charges are there?" hmrc.gov.uk/manuals/rpsmmanual/rpsm07400110.htm Retrieved 6 September 2013
  12. ↑ FTAdviser. "Ssas fines and tax charges on the rise, Xafinity warns" www.ftadviser.com/2013/09/04/pensions/personal-pensions/ssas-fines-and-tax-charges-on-the-rise-xafinity-warns-EMJa6tyeZD9MVcQiEyjT7I/article.html Retrieved 5 September 2013
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