The Government is about to close an inquiry into whether Pension Freedoms have actually led to savers making informed and sensible decisions about their lifetime savings.
The probe comes two years after the launch of the freedoms – which allowed anyone over the age of 55 to access their pension pots and use them as they see fit.
As a Bristol-based business that advises business owners on how they can use their personal pension pots for business funding (a method known as Pension-led funding), we have a real interest in this inquiry.
Specifically, there are three areas of the inquiry that interest us, and they are all connected to the importance of good quality advice. First, are people taking proportionate advice? Second, are there persistent gaps in the advice, and finally, is Pension Wise (the government’s free and impartial advice service), working?
Through our experience to date, there simply isn’t the right level of independent advice for either the small business owner looking to use his/her pension pot for business funding, or enough signposting to the advice that already exists. I say this because we have spoken to scores of business owners that have regretfully informed us that they withdrew more than their tax-free cash lump sum from their pension without advice to fund their business, and paid the price with a rather hefty tax bill. Ouch!
This has already led us to have a discussion with Pension Wise, who were very receptive to our view that there should be specific and tailored advice from Pension Wise for the 5 million plus small business owners in the UK who are considering funding their business with some, or all, of their pension pot.
This advice can be distilled down to five options. A single lump sum, multiple lump sums, small sums or using a SIPP or SSAS. The route a business owner takes will depend on the level of funding required, how quick they need it, what their tax position is in the financial year, and whether they’re likely to need more funding from their pension pot in the near future. Consideration needs to be given to these areas, before deciding.
Alternatively, if the business owner requires a significant investment into their business and they’ve accumulated pension funds greater than £50,000, a SSAS or SIPP can open the way to Pension-led funding. Following professional advice, owners can decide where pension funds are invested. Subject to fund size, there is no minimum age for the funds being accessed. However, the scale of this funding model requires a pension pot with a level of maturity that can support the transaction.
Business owners and/or directors need to consider their options and take expert advice if they want to benefit from ‘pension freedom’. However, as the IoD recently advocated, with government support, and a considered approach from business owners, we could certainly see pension pots being put to work more effectively to back their business.