Since its launch I have expressed my views many times on the impact that pensions freedoms has had on the business owner. Some of which has been positive - with many more business owners now seeing the potential for business funding from their pension pot – and some less so – with many still not getting advice before doing so, and then finding themselves hit with a major tax bill.
To help provide advice on the options open to an individual looking to ‘cash in’ their pension pot using pension freedoms, the government created Pension Wise, a free advice service which provides basic information about the things you can do with an accumulated pension fund.
But with £17.8m spent on advertising since its launch and over 5million people visiting the Pension Wise website, is it actually working?
This was just one of the questions asked by the parliamentary Committee for Work and Pensions, when they recently called for evidence from involved organisations concerning the effectiveness and safeguards surrounding the new pension freedoms regime.
Having only recently had discussions with Pension Wise about providing business owners with a better understanding of their options, we provided (in so many words) the following views to the committee’s question ‘Is Pension Wise working?’
Firstly, Pension Wise have done the public a great service by offering impartial guidance, but this avenue has clearly been under-utilised. Currently despite the guidance being free, only one in 10 people have accessed the service before taking pension benefits. The low level of use threatens to undermine the long-term success of pension freedoms and indeed its own existence.
However, the most alarming deficiency in Pension Wise that we have experienced is their lack of understanding of the distinct additional options that are available for the business community. This is illustrated by a study undertaken by AXA Wealth in 2015. The later-life entrepreneurs study in April 2015 found that more than 500,000 over 50s were considering taking advantage of pension freedoms to help start a new business. Almost half (250,000) said they would use their 25% tax-free lump sum to fund their start-up. With over 100,000 over 50s starting up in business each year, we estimate that £326million per year is being extracted from pensions (equating to £815million since the start of pension freedoms in April 2015). This is a conservative figure based on only tax-free lump sums in an average pension, and for only start-ups, not established businesses – which are a much larger proportion of the SME community in the UK. We therefore estimate that well over £1billion has been taken out of pensions to fund both start-ups and established businesses.
This is where there is a clear lack of understanding and guidance on the part of Pension Wise. Where the principal reason for drawing down funds is for starting a new business or for injecting capital into an existing business, then there are a further set of choices that need to be explained. Where funds are required for business purposes of this nature, then a significant portion of this sum could have been accessed from utilising the ‘pension-led funding’ option. Just one simple example being a loan through the established pension vehicle of a Small Self-Administered Scheme (SSAS). The advantage is clear. Principally this would avoid potentially large sums of tax being paid on drawdown sums above the tax-free cash limit.
Additionally, the funds are retained in the tax-exempt environment meaning that the funds continue to accumulate tax free growth. Also, and an advantage that it is so often overlooked, the retention of funds in the pension scheme remains protected against Inheritance tax upon the individual’s death.
It is therefore vitally important that Pension Wise understands that the relationship between a business owner and his pension is completely different to the relationship between an ordinary individual and his pension, so that when an individual engages with Pension Wise, they determine at the earliest opportunity what the drawdown funds are being used for. Where there is a suggestion that the funds are required for business funding, then the pension-led funding options must be explained as it will almost always be a better option.
So, yes, and no. For employed individuals yes, but for business owners or start-ups, no Pension Wise is not working. They really do need to get their act together on this one.
About Adam Tavener
Adam is founder and chairman of Clifton Asset Management Plc, the innovators behind the Pension-led funding brand (www.pensionledfunding.com), providing high quality non-bank finance to SME's across the UK. Clifton employs approximately one hundred staff in their headquarters near Bristol.
Currently more than 2,500 businesses have used Clifton for pension-led funding. With over £210million of pension-led funding provided to these SMEs, Clifton is now one of the largest alternative funding providers in the UK, and it was recognised at the Business Moneyfacts Awards 2014 as the Best Alternative Funding Provider in the UK.
Pension-led funding leverages the value of Intellectual Property (brands, logos, ideas, databases etc.) that belongs to most SME's, but which has historically been difficult to fund against.
The Clifton Group of companies also includes Pensioneer Trustee’s Morgan Lloyd (www.morgan-lloyd.co.uk) and Wealth Management and Employee Benefits business, Clifton Wealth Ltd (www.clifton-wealth.com).
Adam and Clifton were the catalyst for the creation of the Alternative Business Funding (ABF) collaboration and non-bank funding portal - www.alternativebusinessfunding.co.uk. The portal unites the country's top non-bank funding providers to exchange rejected applicants for credit between themselves. In 2014, ABF successfully lobbied BIS and The Treasury to introduce legislation to force the major banks to pass over the details of rejected SME applicants to the non-bank sector.
In the course of developing the ABF collaboration Adam was part of The Treasury working group created to deliver the new bank referral legislation. As well as HMT, Adam has advised the British Business Bank, Downing Street and The Department for Business, Innovation and Skills.
In 2017, HM Treasury, acting on the advice of the British Business Bank, appointed ABF as one of the Government’s designated finance platforms for the Bank Referral Scheme.
Adam is a CBI regional council member.