The trail blazed by Pension-led funding

A multi-billion pound boost for start-up companies and infrastructure projects from pension savings would be a catalyst for growth, says Clifton Asset Management chairman Adam Tavener.

Adam has welcomed Government proposals to potentially give more than 10 million members of Defined Contribution (DC) pension schemes access to more diverse and innovative investments.

Pensions Minister Guy Opperman has said members of DC schemes were missing out of the potential benefits of long-term investments in small firms, housing, green energy and sustainable development.

The Government is currently consulting on reforms which could see larger occupational DC schemes required to report on how much they allocate to the types of investment the Government is keen to encourage with assets in occupational DC schemes almost tripling since the start of 2011 and the success of auto-enrolment.

Adam said the Government should look for inspiration to Pension-led funding which has given business owners access to their pension pots to invest in their businesses for many years.

“It’s encouraging to see that the government is waking up to the potential impact that pensions could have as a catalyst for growth in the SME sector,” Adam said.

“In this case they are targeting larger defined contribution schemes to diversify part of their investment strategy into the SME lending space. It is worth remembering that through Pension-led funding SME owners have been able to access growth finance for many years now by utilising the business owners own accumulated pension pot, a process that has been adopted by thousands of small businesses already.

“SME lending is, of course, an inherently risky endeavour and appropriate processes to mitigate this risk should always be undertaken, whether the pension is a large collective scheme or the property of one or two directors. We would be happy to share our experience in this field if the DWP felt that it would be useful.”

Second store opening puts Inovape brand on the High Street map

Former smoker Chris Breslin turned to his pension to launch his dream of running a string of High Street e-cigarette shops.

With his Solihull vaping shop performing strongly he had no hesitation in taking the same route to secure a second commercial property deal in one of the most prestigious streets in the West Midlands.

His latest Inovape store on New Street, Birmingham, has been open for just over less than four weeks and is already doing five times the volume of the start-up shop at the same stage.

“Early signs are extremely positive,” said Chris, who used Pension-led funding to launch the Inovape brand with a view to opening a nationwide network of stores stocking more than 170 different e-cigarette flavours and a broad range of E-cigarette equipment to suit all needs.

This time around Chris accessed £30,000 from his pot and a bank loan to secure the lease on the new premises, a move which paves the way for a future financing stream for a further 10 shops in the near future.

“We’ve dropped right in the middle of three competitors. We needed to sharpen up our prices but that has also boosted the growth of our Solihull shop. It has cost us a little in margin but put us in a good position to flourish in a highly competitive environment.”

Chris faced tough negotiations to secure the New Street premises even with the ability to use his Self-Invested Personal Pension (SIPP) to fund a commercial property opportunity.

“We looked at eight different properties but they were not interested in speaking to start-ups.”

But with customers already showing their support, a delighted Chris said: “The seed money from my pension back in 2015 enabled all this to happen. Without that, none of our current strong position in the market would have been possible.

“The second tranche this time around reassured the bank that I was committed and opened up the route to further critical finance to accelerate growth ”

Funding business growth using your pension, great idea or barking mad?

Adam Tavener, chairman

This month, the Institute of Directors (IoD) called on the government to make it easier for business owners to invest their pension into their own business. Some voices, most notably from within the pensions industry, have condemned this as too high a risk.

Here I look at the risk of a pension-led investment into a business compared to other sources of funding.

The ability for certain types of pension to provide financial support to SME owners is well established and not in dispute. SSASs (Small Self-Administered (pension) Schemes) have been lending money to their parent company since 1979. SIPPs (Self Invested Personal Pensions), although slightly different in method, have been able to do much the same since the 1990s.

Over this time hundreds of millions of pounds have been injected into UK SMEs, creating thousands of jobs, generating huge amounts of additional payroll and corporate tax revenues for the exchequer.

So why do a minority of commentators continually decry the practice of Pension-led funding as either illegal (simply not true), dubious (ditto) or just insanely risky?

If we dismiss the first two as simply a lack of knowledge, we are left with risk, which definitely does exist, and merits further examination.

I would argue that an individual who has been running a successful business over a long period of time would have a completely different approach to, and understanding of, commercial risk than, say, a local council employee. The council employee’s risk lies outside of their control. Redundancy, a reduction in hours or pension benefits.

Successfully avoiding these employment pitfalls results in (hopefully) a state of financial security underpinned by pension scheme membership, personal savings and home ownership. These are, in most cases, the three pillars that support an individual’s lifestyle after retirement.

Based on the above employee profile it’s pretty easy to see why the idea of investing some of his or her pension into a small business would seem to be extremely foolhardy. But this, of course, is where the difference lies, and where, in many cases, commentators on the subject expose their lack of understanding of small business owners.

You see, a business owner has a completely different perspective when it comes to achieving financial security. In a recent survey of Forum of Private Business members, over 50 per cent of respondents stated that their business is their pension, and the asset most likely to provide them with financial security in retirement.

It is also worth pointing out that by its very nature business involves risk. ‘Speculate to accumulate’, the entrepreneur’s adage par excellence is quoted for a reason. Business owners accept risk daily and learn to control and mitigate, to offset and to persevere to create the outcome they desire.

They are taking responsibility for the outcome of all their transactions and their own long-term financial security. Telling an entrepreneur not to take a risk is about as sensible as telling a gazelle not to run. It’s what they do, and they are good at it.
Risk is also relative, however. If one accepts that most businesses need funding to aid growth, the money must come from somewhere, and they all come with some risk.

Starting with the ‘friends and family’ route. All this does is transfer risk from the business owner to some close acquaintance or family member.

The actual amount of risk is no less, indeed if you were to consider the added emotional and personal damage, this is a pretty high-risk approach by all concerned. Add to this that friends and family seldom test the validity of a business model or take adequate legal security, and you have an amateurish recipe for disaster.

That’s what banks are there for, right? Yes, a bank will lend to a business, but only when every last bit of risk has been squeezed out of the proposition.

They will want a robust business model with a strong track record, a squeaky credit history, and, most importantly, real, tangible security.

For many small businesses that don’t have a balance sheet propped up by property, the only available security is the owner’s home. In most cases a charge is taken over this asset, together with a personal guarantee from our entrepreneur.

Far from reducing risk, this significantly increases it. We now have an additional layer of risk – that your supporting lender (the bank) continues to have an appetite to lend to you. A withdrawal of such support can be catastrophic.

Of course, the consequences of failure to repay bank debts don’t stop there. In most cases the business will fold, destroying its asset value, the individual will face personal bankruptcy and the family home might be lost. Devastating for all concerned, and about as risky as it gets.

We need to look at each individual business and its owner’s track record, their risk profile, capacity for loss and the available security.

Only if these all stack up should they proceed and we haven’t really touched on the main issue here. In the vast majority of cases, the business owner’s pension fund will not provide a lifestyle comparable to the one they enjoy whilst working.

In these circumstances, I would argue that the only chance of real financial security lies in creating a genuinely saleable business. Failing to invest in it is the biggest risk of all. In addition, there is no third-party exposure as a Pension-led funding user wouldn’t choose to pull the plug on their own business. In reality, no bank or third-party debt really does equal less risk.

So yes, it may sound risky, using some of your pension to support your business, but failing to understand the whole picture and process is far riskier.

Half of UK workers won’t have enough money to retire

Nearly eight million people believe they won’t have enough money to retire on, the latest research has revealed.

Half of all workers aged 40-64 said they do not expect to have enough money to stop work once they reach their State Pension age, according to YouGov research for the charity Age UK.

The news comes hot on the heels of our own study which showed that small business owners in Britain have unrealistic pension expectations and could be sitting on a retirement “time bomb”.

The report from Clifton Asset Management and the Forum of Private Business revealed that 42% of SME owners questioned by YouGov expect to retire after the age of 70 or have no intention of retiring at all.

A further 33% of those questioned fear they would outlive their retirement funds, while 29% view their business as their pension and would be looking to sell to fund their retirement.

Age UK is calling for Government action to help people plan for the future while there is still time to make a difference, echoing Clifton Asset Management chairman Adam Tavener, who said there was a lack of education and that more advice was needed to help entrepreneurs make their pensions work for them.

He said: “A knowledge-based approach is essential to drive good decisions for SME owners to make the most of their pensions and fulfil their business and retirement expectations.”

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DMACK Tyres on top of the world

Our clients are always aiming high when they launch their businesses and it doesn’t get much better than reaching the pinnacle of world rallying.

After seven years and 88 events, DMACK Tyres are celebrating their first FIA World Rally Championship victory in the Wales Rally GB.

Elfyn Evans and co-driver Dan Barritt dominated the grueling event, leading from start to finish.

Records tumbled as Elfyn crossed the line to become the first Welsh driver to win the home round of the world championship, securing the first victory by a British tyre manufacturer in the event for 38 years.

In the process DMACK broke the dominance of industry giant Michelin, who had reeled off 92 consecutive world rally victories.

This was a remarkable achievement by DMACK Tyres and we send huge congratulations to everyone at the company.

We are proud we were able to play our part when founder Dick Cormack was looking to fund the design and manufacture of his first own-brand tyre to be used by the UK’s rally privateers.

Now that vision has become a multi-million motor sport tyre business with its own world rally team who have made their mark on the global stage.

We salute you.