REAL pension freedom for business owner

Cover photo REAL pension freedom

REAL pension freedom
for business owners

When it comes to funding their business, 40 per cent of SME owners use their own money as the main source of finance1. Increasingly these business owners are over 50, as there is a growing trend of ‘olderpreneurs’ launching new enterprises.

So, with the UK government’s new ‘pension freedom’ legislation coming into force in April 2015, the natural reaction from business owners could be to simply withdraw their accumulated pension pot and put it directly into their company.

1. SME Finance Monitor - source

tax calculator

For most directors that is likely to mean tax at the higher 40 per cent rate or indeed 45 per cent for the highest earners.

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However, not only does the maths and tax benefit of this approach arguably not stack up, but a pension-based alternative already exists which has allowed 2000 business owners to self finance their companies to date. It can also deliver significantly greater pension growth alongside the business funding.

This alternative is called pension-led funding (PLF) and delivered SME funding worth £25m in 2014 alone, according to a report from innovation charity Nesta and the University of Cambridge2.

The Nesta report found the average amount raised by a small business through PLF in 2014 was £70,527, with almost three quarters (73 per cent) of respondents claiming PLF provided them with more control over their business finances. It also showed that almost two-thirds of SMEs using PLF (62 per cent) saw profits rise and almost half

(43 per cent) employed more people as a result of the funding boost.

However, with 91 per cent of respondents initially unfamiliar with PLF, Nesta stated there is significant scope for PLF expansion.

‘Pension freedom’ is not free

In a nutshell, the new pension regulations allow anyone over the age of 55 the freedom to use accumulated pension funds in any way they wish, including taking the entire pension pot as cash subject to tax. Whilst the average defined contribution pension for an individual in the UK aged between 55 and 64 is just £25,0003, the average SME director has £117,000 in accumulated pensions, based on Clifton Asset Management’s client base of more than 2000 businesses. For many small businesses, this presents a significant funding opportunity.

Under existing pension regulation, only 25 per cent of the accumulated, untouched, pension fund is available tax-free.

Any further withdrawals, however, are subject to income tax in the year in which they are taken.

For most directors that is likely to mean tax at the higher 40 per cent rate or indeed 45 per cent for the highest earners.

The new regulations will mean that, when it comes to replenishing the pot, the maximum annual tax relievable pension contribution allowable will be reduced to £10,000, when any taxable amount is withdrawn. Bearing in mind the maximum annual tax relievable pension contribution is £40,000pa, this may be disadvantageous to business owners seeking to use pension contributions as a means of reducing their tax liabilities.

2. Nesta Report, Understanding Alternative Finance, The UK Alternative Finance Industry Report 2014 - source (PDF)

3. Office for National Statistics 11.12.14 - source

Business funding -
A little?
A little bit more?
A lot?

From April 2015, there are three main options for all pension holders, many of whom will be SME business owners.

There is also one additional option that only applies to business owners looking to fund their business using their pension.

Whilst all of these options are available in theory, an individual’s existing pension provider may not have the required flexibility to enable business owners to take advantage of the new legislation.

This might mean changing provider and pension scheme which, clearly, will require professional advice.

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The options are:



If you take your pension out all in one go the first 25 per cent will be tax free, however the rest will attract income tax – likely to be 40 per cent, but it could be as much as 45 per cent if your total income is more than £150,000. While this may be the easiest option for releasing money to put into a business, it may not be the most tax-efficient or personally beneficial in the long-term.



This involves splitting the sum you need into multiple smaller parts allowing you, for instance, to release £30,000 from your pension by taking £10,000 to launch the business and drawing more later. However, the same drawback as the previous method remains, with the first 25 per cent being tax free and the rest being subject to income tax – likely to be 40 per cent or possibly higher – whenever it is taken and depending on future tax rates. In fact, the timing itself can be important, depending on whether the sums are taken in the same tax year or spread across two or more years. Other downsides to this approach include the likelihood of incurring multiple sets of transaction charges for arranging each withdrawal and a potential loss in performance of investments.



If you don’t expect your business to cost much to set up, an alternative would be to free up your pension money in small chunks - a few thousand here and there - to buy a new piece of equipment or help with cashflow when needed. The issue of attracting income tax still remains, but this approach makes sense for those with income closer to a higher bracket. However, pension fund providers have warned that ‘bank account-style’ access to funds would take time to build, test and roll out4.

Pension-Led Funding brand stripes logo


This form of finance is aimed specifically at business owners and directors who, in order to make it commercially viable, have accumulated pension funds greater than £50,000 to enable them to back their own business. They don’t need to be 55 or over, and should there be more than one owner director in the same firm, the pension funds can be amalgamated to invest in the business.

Pension-led funding v ’pension freedom’

Pension-led funding (PLF) allows company owners or directors to finance their business using one or more accumulated pension pots placed in a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). Both are pensions that allow the owner to make decisions as to where their money is going to be invested, in conjunction with professional advisors and the pension scheme’s trustees and fund managers.

There is generally no minimum age for the funds being accessed – although the scale of funding will require a pension pot that has reached a level of maturity that will support the transaction.

Clifton advises that the maximum advance from a SIPP should not exceed 60 per cent under normal circumstances and 65 per cent for certain exceptions. Regulation dictates that a SSAS loan must not exceed 50 per cent. A SSAS loan offers the benefit that there is no tax to pay on the loan advance.

Just as importantly, the capital and interest taken from the SIPP/SSAS has to be repaid by the business directly to the pension fund. With interest on the repayments usually set at around 10 per cent or more, there is also the potential for significant pension fund growth.

Subject to a number of factors, including the repayments being met, the owners are even free to access the scheme again for further business funding if required.

  • 65%

    SIPP advance for certain exceptions

  • 60%

    SIPP advance under normal circumstances

  • 50%

    SSAS Loan

doing the maths

With interest on the repayments usually set at around 10 per cent or more, there is also the potential for significant pension-fund growth

Doing the maths

Based on Clifton Asset Management’s base of around 2000 clients, the average SME director pension pot is £117,000.

The maximum amount that can be taken from a SSAS is 50 per cent; that’s £58,500 of potential funding.

Total amount available using PLF = £58,500 (no tax payable)

In comparison, under the new pension freedom regulations, the amount available from a £58,500 pension withdrawal for business funding is:

£14,625 (25% tax-free allowance)

£26,325 (the remaining £43,875 minus 40 per cent higher tax rate deduction. This percentage will, of course, vary depending on the director/owners’ individual marginal rate of tax.)

Total amount available under the new pension freedom regulations, for director’s loan into business = £40,950

Nesta findings of PLF clients

  • Job Creation
    employed more people
  • Profits Up
    saw profits rise
  • Future Funding
    were likely or very likely to approach PLF for funds in the future