A business support group which provides a voice for 12,000 SMEs has warned entrepreneurs of the dangers of using their pension pots to fund existing or new companies.
The Forum of Private Business said the risks associated with doing this needed to be widely highlighted, and urged people to seek financial help before putting their finances in jeopardy.
“People think, ‘Oh, it’s only my pension’,” says FPB managing director Ian Cass. “We wouldn’t be so incautious if we were putting our houses on the line.
“Many small business owners feel indestructible but then the downsides [of using your pension pot] and the risks just haven’t been well-publicised.”
Pension led funding is when a business owner uses their accumulated pensions, often with several other directors, to pool their money for investment in their company, or to start a new venture.
But there are tax implications for people who do this as only 25 per cent of retirement savings come tax-free – the remainder must be repaid with interest. Despite this, the option has been taken up by about 2,000 SMEs in the UK, who have borrowed a total of £210m.
“It’s the most expensive money out there,” said Adam Tavener, chief executive of pension-led funding provider Clifton Asset Management.
“Most credible financial advisers would not say take out your pension and plonk it into a business with no repayment plan. There is an urgent need to tell business owners to think carefully and seek advice before embarking on this route.
“There are going to be a lot of people out there whose pensions are gone, or significantly diminished. They won’t feel it until they can’t work anymore or hit 70 and want to slow down. That’s when we’ll feel the pain.”
Clifton Asset Management’s financial planning director, Anthony Carty, told the Financial Times: “Businesses that have taken funds from alternative sources are coming to us saying they are paying 10 per cent to this platform and my pension is going backwards.
“At the end of the day we are still talking about someone’s pension. Businesses can fail and if you invest your pension in your business and it fails you can take a loss.”
The FPB revealed to the Telegraph that it gets up to 10 calls a week from people about pension-related issues. “There are usually better sources of finance,” Cass added. “This is becoming more and more of an issue as awareness grows.”
For further advice on pensions please contact the expert team at Birchwood today.