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When holistic beats silos

5th Apr 2017
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The Forum of Private Business is a noble organisation providing real resource and a voice for a huge number of SMEs.  Here at Clifton we have been fortunate enough to be part of their core partnering strategy, providing their members with access to finance, through our Alternative Business Funding platform, and education around their pension options through our Pension-led funding product.

Both they, The Forum, and we, have years of accumulated knowledge and experience of the problems, issues, opportunities and complexities that confront SME owners in the course of their working lives.  It’s so much at the heart of what we do, you could almost say that we share the same DNA.  And yet… much of the experience and knowledge that I refer to has been gained ‘at the coalface’ so to speak, rather than in a scientific data gathering way, so we decided to do something about it, and commissioned a survey of Forum members, backed up by a wider YouGov poll, which looked at SME owners’ attitudes to, and preparedness for, later life circumstances such as retirement, succession, business sale and so forth.

The resulting report, “Pensions and Small Business – Ticking Time Bomb or Hidden Treasure?”, and its findings, will undoubtedly be published in the press, and it will be of particular interest to small business owners, Government ministers, accountants, and business/financial advisers, as some very interesting themes emerged.

A sizeable chunk of respondents (roughly half) felt that their pension arrangements were inadequate to fund their retirement, and were thus likely to run out of money at some point.  Their decision, therefore, was to continue to work and let the business fund their old age.  This is fine, and indeed has some health benefits, assuming that the health knife doesn’t cut the other way, and prevent an active working old age.

Another group were relying on the sale of their business to provide a sufficient capital sum to generate an adequate retirement income. Although we did not question them in detail about this plan, I suspect very few had gone through the exercise of calculating what valuation they needed to realise for the business in order to realistically replace their earned income over what might conceivably be thirty or more years of retirement.

Since the survey respondents were all SME owners or key decision makers they would all be well aware that in small business land ‘siloing’ (is there such a word?) your assets doesn’t really cut it, since the moment you sign a personal guarantee for anything all that you own is on the line.  Thus this leveraging of personal assets is hardly unfamiliar territory when being done to support a particular need, an overdraft facility, maybe, or a line of trade credit.

When asked about using personal assets such as their pension in order to provide extra funding to grow the business (and thus, hopefully improve its profitability and sale value) most were either unaware that this was an option, or reluctant to consider it, even though they had already acknowledged that the self-same pension was inadequate for the job, and was thus, effectively dead money.

I am certain that they didn’t come to this contradictory mind set by themselves, and I would respectfully blame a rather self-serving pensions industry for failing to educate them properly as to what their real options are when it comes to investing in their own enterprise.  ‘Never touch your pension’ is not advice; it’s a mantra whose real purpose seems to be to ensure an ever growing pile of cash in the coffers of the fund management businesses.  In a world such as these individuals inhabit, where financial risk is a daily reality, and the family home will probably have been used to support a credit line, protecting an inadequate pension pot that might be otherwise deployed to improve the overall wealth of the individual by growing the business seems perverse.

Which is why holistic advice will always trump individual asset class focussed advice.  Your pension adviser is very unlikely to be interested in the fact that you have a business overdraft that is personally secured, or that you are paying many thousands of pounds a year for a factoring facility.  It’s not his language.  Your accountant will be aware of this, however, and will be aware of all your other assets and liabilities as well, and is thus in an ideal position to advise you as to how to leverage the whole package most efficiently in order to get you closer to your ultimate goal, security in old age, be it from pension income or an income drawn from a well-financed and profitable business.

As Peter Seed, head of PDS Accountancy, observed in response to the survey findings, ‘owners often see their businesses as pensions and don’t realise how their pensions can actively contribute to growing their business in a very efficient manner.’ Quite.

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