Alternative finance case study: Pension-led funding

Start-up business Alago needed credit to grow its business, but most providers were reluctant to help the firm realise the full potential of its heated glove technology.

That was until pension-led funder Clifton Asset Management stepped in with a novel funding solution based on unlocking the business owner’s existing pension pot.

For Alago, the story started with a light bulb moment when Bristol-based Tony Curtis was standing on the touchline of a freezing pitch watching his 12-year old son play rugby.

The game had been tough one, particularly because the weather had played havoc with the teams’ ball handling skills. The solution, thought Curtis, was heated gloves.

The kitchen table soon became his test-bench and the family his guinea pigs until he managed to come up with a working prototype.

Curtis patented his invention and set about finding designers to take the gloves to the next stage. Through online research, he found 35 manufacturers who could assist with the component parts of his gloves.

“We needed someone who really understood the product, as we had to go through a lot of sampling and testing,” said Curtis.

In the end, he chose a company in Pakistan that part-funded the product development and a Chinese manufacturer to supply the heat packs.

“From my initial idea to having the glove ready for market took five years,” explained Curtis. “In that time I spoke with a huge number of sports players, athletes, sailors, gardeners and triathletes.”

However, the step from development to mass production was costly and Curtis had reached the point where he needed additional funding to get his gloves to market.

Search for funding

Curtis hadn’t spoken to his bank as he knew it would only lend the money secured against his home.

“The one thing that we had was the house,” said Curtis “and this was the family safety net. We wouldn’t use this unless we exhausted every other avenue.”

One of those many avenues Curtis explored was the BBC TV’s Dragons’ Den programme. After setting up his new company Alago in 2010, he appeared in front of the Dragons with the aim of raising £100,000.

Dragons’ Den pitch

The response was a definite “no”, but Curtis knew that the Dragons had missed opportunities in the past and was determined to prove them wrong.

Around the same time he attended a series of business courses and was introduced to Anthony Malcolm of Clifton Asset Management.

Malcolm explained the idea of pension-led business funding, in particular, funding based on intellectual property (IP).

After a meeting with Clifton in December 2011, Curtis decided to take the pension-led funding route, using his existing pension pot as the source of finance for his company.

“I felt that I needed to make my pension work harder for me,” he said. “By choosing pension-led business funding, I could finally invest in something that I have control over, take my own risks rather than those of the stock market and make the money work for both my company and my pension.”

His £60,000 pension was in a local authority scheme and was transferred to a Clifton SSAS, established under Alago’s sponsorship.

This allowed him to release £27,000 of his total pension by way of a self-invested loan.

Intellectual property

The loan was secured through a general debenture but, crucially, from a collateral perspective, a portion of the company’s IP (the pending UK patent) was independently valued to supplement the business’s balance sheet to facilitate the loan.

Curtis said: “We decided to take the loan-back option as our projected figures showed that we would make a rapid profit and this would allow us to pay the loan back to the pension more quickly.

“The whole process was really good. I met with Clifton’s Anthony Malcolm regularly and he couldn’t do enough for us. Once we signed the paperwork, the money arrived in our account in just a couple of weeks.”

With the help of his accountant, Curtis was able to put together a detailed business plan, which served as a foundation for the formal/independent valuation of the company’s IP.

Alago’s IP valuation was prepared by Adam Kelly of David E Seabright & Co in Nailsea.

Typically, valuations are predicated on:

  • a detailed analysis of a business’ trading position - historical, current and forecasted
  • a robust assessment of implied goodwill
  • an allowance for industry-specific financial data - price/earnings multiples, discount factors

By the summer of 2012, Alago received its first batch of heated gloves (1,300 pairs), with manufacturing and delivery financed by funds from the director’s own pension.

With pre-orders growing, Curtis expects Alago’s turnover to hit £200,000 in its first year of trading.

Products will be stocked online and a new riding glove has been developed with equestrian products distributor EFI Westgate. Alago has also been contacted by a Premiership Rugby Club which wants to test the heated gloves in its lead up to the 2012/13 season.

A client’s accountant can play a pivotal role in securing much needed credit to grow a business.

Clifton aims to act “in concert” with the accountant, thereby extending the overall suite of advisory services available to the client. The idea is to “dovetail our operations, to the mutual benefit of all concerned,” chairman Adam Tavener added.

Have you had experience of pension-led funding or any other alternative source of finance? If so, what was outcome?

Comments
Bob Harper's picture

Where was the accountant

Bob Harper | | Permalink

Isn't this what accountants should be doing?

I'm going to write a report on alternative funding options - anyone want to help? I know there are a couple of people who would love to work with me on this!

Bob Harper

Crunchers Accountants

I was

justsotax | | Permalink

thinking john? (only kidding)

 

I would agree in part....funding options, and what is available can be quite specialist...so whilst accountants should be aware of the options I am not sure it is realistic to expect all accountants to be offering this as standard...probably requires a larger practice where the additional manpower allows partners to research into these type of areas and the ever changing products available.

Bob Harper's picture

Networks

Bob Harper | | Permalink

@JustSoTax - which is why I think it is fast becoming a necessity for accountants (especially sole-traders) to join networks.

Bob Harper

The Crunchers Network of Accountants

I can see that,

justsotax | | Permalink

I do have a colleague who specialises in this area, so if any of my clients required funding i would pass them on to him....and certainly i can see the benefits 

Great idea

Steve Carlson | | Permalink

Curtis took this method of funding because he wanted his pension to 'work harder' for him so he could 'take my own risks rather than those of the stock market'

What on earth do stock market risks have to do with a local authority pension?

Does he realise that in real terms the value of his pension in the last 5 years has probably gone up by about 50% whilst the stock market, property and nearly every other asset class have gone down?

Admittedly I am working on the assumption that his local authority pension was a defined benefit scheme, as the main ones are, so my apologies if that assumption is incorrect.

If Curtis had a £60k pension pot (or more likely a CETV for £60k for pension benefits that were worth a lot more than that) then how has he only been able to raise £27k?

A SSAS can loan back up to 50% of it's funds to a sponsoring employer. Either the IP was only valued at £27k, he only needed £27k, or the fees have already depleted the fund to £54k.

If it's the latter then he has already spent £6k to raise £27k and that's not to mention the ongoing fees and administration of running the SSAS, which are disproportionally large for such a small fund.

I wonder if Curtis really appreciates how much it has, and will cost him to raise this money?  

There are many instances where using SIPPs and SSASs can have enormous benefits for business owners, but if not used properly then they can seriously damage your wealth.

 

 

 

 

 

 

Bob Harper's picture

Cost and value

Bob Harper | | Permalink

@Steve - you sound very knowledgeable. Your post focusses on the cost, have have you considered the value? 

He seems to be on-track to make money. How much does he need to make so the £33,000 (£27,000 plus £6,000 fees) a good investment?

Perhaps this option was the way to avoid giving away a share of the business. What percentage of the business makes £33,000 a good investment?

I suppose only time will tell but I wonder how may people have not had the choice because the accountant doesn't even mention these type of options.

Bob Harper

Crunchers Accountants

Value

Steve Carlson | | Permalink

I agree that this type of arrangement can sometimes be the only way of helping someone realise their dream or save their business. If the circumstances are right,all other options have been explored and the client really understands what they are doing then pension funding can offer a really good solution to a client.

In the case of a personal pension then the choices are a bit clearer, because you either have a lump sum being invested by someone else or you can choose to invest the money yourself.  

It's an entirely different ball game with a defined benefit scheme as the 'value' of it is a bit harder to get your head around. You should only be giving up those rights if you really understand the value of what you are giving up.

It doesn't appear to me that this is the case here. I am only basing my opinion based on the facts in the article (such as the stock market quote), so there may be material facts that haven't been included.

I hope things work out for Curtis, and if they do, then the £27k invested may be very well turn out to be worth a lot more than the pension rights he has given up.  

If it does work out though, he would also have been able to pay off the business loan he might have been able to get secured against his house, which would have cost an awful lot less.

He is obviously concerned about the risks involved which is why he didn't like the idea of putting the house at risk, and which is why this option seemed attractive, but what about the risk he has taken with his retirement?

You will be on the poverty line if you try and live off the state pension even today, nevermind by the time he comes to retire, so he will need to build up the funds again at some point and it is going to cost him an awful lot more money to replace those benefits than he probably realises.

If he has been misquoted, there is missing information or I have taken words out of context, then I will retract what I have said. 

If he really does understand the value of his pension, and had no other choice but to go down this route to start a very profitable business that could change his life and help him realise his dream then best of luck to him, but this approach can be very dangerous in the wrong circumstances.

 

 

 

Bob Harper's picture

Balance

Bob Harper | | Permalink

@Steve - thanks.

I accept the client needs to know (and understand) all the options and pensions funds may not be the best/right option but I think this is a very interesting strategy, especially as many people do not have enough invested AND returns are falling. 

This is not my area of expertise but roughly what could £33,000 in a defined benefit scheme be worth annually?

Bob Harper

Crunchers Accountants

value

adam tavener | | Permalink

Good afternoon.At the outset of this comment I should declare a conflict as I am chairman of Clifton Asset Management Plc.

I have read the various opinions expressed on here with genuine pleasure as there seems to be a good level of understanding and insight demonstrated.  I should also make it clear that i am not in this forum to 'advertise' or 'defend' the use of Pension Led Business Funding, merely to add my own thoughts to some of those expressed.

Clearly giving up benefits under a final salary arrangement is a serious subject and requires detailed analysis which we would always undertake as a matter of course.  in the final event, however, the decision rests with the business owner as to which route is likely to bring him a greater level of financial security, a guaranteed pension (in this case somewhere between two and three thousand pounds per anum) or a succesful business.

 We dont comment on that choice other than to provide the client (and usually his advising accountant) with the facts, costs and timescales.  We assume that as a business owner they are equipped to asses risk, cost and benefit and to seek advice where necessary.  In other words we treat business owners as grownups and allow them to back themselves.  we must, however, be satisfied that the business has a good chance of returning the investment made by the scheme, together with a real profit.

Investments of this kind, made by an individuals pension, must be on a commercial basis and made with the objective of generating a real return to the scheme, whether by way of interest charged on a loan or licence fees and an increase in the value of the intellectual property in the case of a sale and leaseback.  In the case of a succesful business (and lets face it, the business is more likely to succeed if it has adequate operating capital) the increase in the value of its intellectual property can be very great indeed, and its ownership by the pension scheme adds a signifcant level of tax and creditor protection.

Yes, its not for everyone, but where it works it is incredibly effective.  The current value of pension funds collectively in the uk stands at well in excess of a trillion pounds.  Much of this belongs to business owners and can be used to stimulate growth in the economy and prosperity for the individual.  It is for the entrepreneur to decide whether an investment in their own business is likely to return them a better overall outcome than an investment in someone else's.

I hope this was a useful contribution, i dont often comment!

 

Adam Tavener

Value of DB pension

Steve Carlson | | Permalink

@Bob

The answer to that will vary enormously depending on the person and the scheme.  

It would be like asking how much tax would someone pay if they were on a salary of £60k a year without finding out about other benefits, income, losses, pension contributions etc.

Adam has mentioned figures of between £2-£3k in this case, so you are best off asking him for whatever specifics he can give you about this case. 

Trying to do such valuations can also be misleading as the 'value' of the pension can also be very different to the 'cost' of the annual pension you receive.

Things like the revaluation rate of a deferred pension, the escalation rate of the pension in payment, death benefits, dependant's pension etc can often effect the 'value' of the pension and the 'value' of some of these factors will be different to each person depending upon their circumstances.

As Adam has stated, Clifton would no doubt have gone though an analysis of these factors, but trying to assess and explain to a client the 'value' of their DB pension is difficult. He might be a grown up and understand his business more than anyone else, but he isn't a pensions specialist, and he also needs to understand what he is giving up in order to fund the business, so that he can make a truly informed choice.

As I have stated I do not know all of the facts of the case but the stock market quote was the one that sent a shiver down my spine the most, as it was completely irrelevant to his circumstances.  

It may sound like I am nit picking at tiny details, but the transfer out of a DB scheme is all about the tiny details.

It could be the case that everything was explained in perfect detail and Curtis confirmed his understanding of the issues, only to completely forget about it by the time the interview was conducted, or he was quoted out of context.

I agree with Adam that in general unlocking pension funds to fund small businesses can be a very good idea for some individuals, and I am certain that on a macro scale it could provide the means for this country to finally produce sustainable and significant economic growth as that is only going to come from a grass roots level.

That being said, I'm not sure if this article was the best advertisement, as the impression it gave was that if you didn't want to risk your house to fund a business, then it's fine to give up your DB pension rights for less than they are worth, because the returns on the stock market aren't that great at the moment, despite the fact that it has little to do with your pension.

 

Bob Harper's picture

Not my impression

Bob Harper | | Permalink

@Steve - that wasn't my impression. 

What I took was that when no-one would back him he preferred to use his pension (his savings) rather than a loan secured on the family's safety net.

For me this is a great idea. Whether it is the right idea will depend on the individual but my question is how many accountants are proactive enough to even tell their clients about this opportunity?

Bob Harper

Crunchers Accountants

It's hard to know everything

Steve Carlson | | Permalink

@ Bob

Maybe I'm just getting hung up on a few small details because this is an area I specialise in but if the message is that these options exist but should be explored in full, then it's doing a good job.

There are plenty of things you can do with pensions to reduce tax, increase cashflow and protect assets but most people just think of pensions as investing in pension funds and then buying an annuity, when in reality there are a myriad of different options for funding, investing and accessing the money.

There are lots of different things that a good IFA should pick up on with a client that an accountant won't know about and vice versa as it's hard to know everything. I think if accountants and IFAs worked together as a matter of course with every client then there would be serious benefits for the majority of clients.

Unfortunately though a lot of people go to an accountant to get their accounts and/or tax return done and go to an IFA when they have decided they need a financial product, and can miss out on the true value that both professions can add.

 

I try and work together

justsotax | | Permalink

with IFA's...because as Steve touched upon they are often aware of products/options that I am either not experienced in or unaware of.  Of course the other side of the coin maybe that having released £27k, this is all lost because the product and business this guy has is doomed to fail.

 

Image the scenario where a client comes to you, he has no assets, but a pension (his only other savings vehicle for his old age)...and you suggest risking a large portion of this on his untested business venture.  Are accountants specialists in financing....no....do they have the PI cover to offer advice in this area....?!.....and perhaps in the above case the accountants advice wasn't sort?