Alternative Sources of Business Finance

With banks showing contunued reluctance to provide borrowings to small busineses funding new projects, buying new plant or machinery or even simply restructuring the finances of a business has become more difficult. However what business owners often overlook is that there are other sources available to them.

These include the use of personal savings and investments as well as using some of the equity that they may have in their form to take a further advance on their mortgage. However there is a further source that is often overlooked which is available to the owners of limited companies.

Limited company owners are able set up a type of pension scheme which can make loans to the company or buy property, including the trading premises of the business if they are already owned by the company or its owner. Whatever people may think of pensions, most people have accumulated funds over their working lives, perhaps built up during previous employments. These are often dispersed amongst a range of policies with different insurance companies.

These funds can be brought together into a single arrangement which can then be used to do a number of things. It can make a loan to the company at a minimum interest rate of 1% over base (somewhat better than rates generally available from banks). This needs to be secured with a first charge over assets held by the company, which can include its book of debitors (unpaid customer invoices). If the company owns its trading premises the fund can buy the building thereby releasing cash which can be used to restructure the business finances and perhaps get rid of the overdraft.

Alternatively the pension can buy new trading premises for the business for which the business would pay rent at a commercial rate, which goes into the fund.

These schemes are extremely versatile. However, they are not without their pitfalls and it is important that advice is taken from an experienced pension consultant.

Final Salary Pension Scheme Shortfalls - Ecademy

Final Salary Pension Scheme Shortfalls - Ecademy

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Inadequate Protection When Final Salary Schemes Close

The Pension Protection Fund only provides limited protection if an employer goes bust and in some cases substantial reduction in the pension payable. Anyone with final salary benefits should arrange for them to be reviewed by a specialist pension consultant.

Pension savers miss out on £720 million

Research recently published by Unbiased has revealed that UK pension savers are missing out on £720 Million in tax relief by failing to top-up their employers' pension schemes. Higher rate tax payers who make additional contributions are entitled to tax relief at up to 40% on contributions, which they make to improve their retirement income. These can be to the employer's scheme or to a private arrangement.

With many schemes under pressure and reducing the rate at which future benefits build up, or even ceasing to provide future benefits, it has never been more important for people to take personal responsibility for their retirement planning. Tax breaks are available for pension contributions as well as for other forms of saving. Unbiased have provided a tax waste calculator to help you find out whether you are making full use of the relief available to you. Find out how much tax you are wasting here

Half of all UK adults are making no retirement savings

A recent survey commissioned by the BBC suggests that half of all UK adults have made no pension savings. Only 36% of under 30's make any contributions and only 45% of 41 to 65 year olds contribute. Most cite lack of affordability but others expressed concerns about pensions given recent stock market falls and the well publicised failure of companies such as Equitable Life.

This is not as straight forward as it seems. For many on low earnings it is arguable that they are quite right in not making private pension contributions as this is simply likely to tip them over the threshold for state benefits of far greater value than the pension which they will receive. The UK government has tried to remedy this effect by introducing Pension Credits. You can find our more about Pension Credits here If you know what your expected private and state pensions are, you can can obtain an estimate of your entitlement, if any. It would be sensible for anyone on low earnings who is considering making private contributions to check whether they will actually be better off.

The FSA consumer website Moneymadeclear also provides a great deal of useful information, not only on pensions but other aspects of financial planning.

Whilst I recognise only too well that younger people can only afford very limited contributions, it is worthwhile mentioning that if an early start can be made with retirement planning a respectable level of retirement income can be built up at an affordable contribution rate. The opposite is also true. If contributions are left too late, it will be nearly impossible to make them up. In this table the FSA have shown estimates of the levels of pension which can be expected given different levels of contributions and starting ages.

For example, a 20 year old contributing £50 per month could expect a pension of £238 per month when they retire at 65. They would need to live just under 8 1/2 years after retirement (i.e. to age 72 1/2) which is within most people's life expectancy, i.e. they are likely to get their money back.

Of course, other assets can be used such as properties and business sale proceeds. These need to be factored into retirement planning. The key word here is 'Planning'. In order to ensure that you are able to achieve the level of income in retirement which is needed to maintain your standard of living, you need to have a plan which is updated regularly. The plan should be based on cash flow modelling as this is the only effective means of analysing the impact of different types of assets as well as changing levels of requirement.

Government Restricts Higher Rate Relief on Pension Contributions

In today's Budget the Chancellor has restricted higher rate tax relief on employee contributions to pensions where the employee earns £150,000 or more and makes annual contributions of £20,000 or more.

For further details see this

Good news ISA allowances have been immediately increased to £10,500 for the over 50's and for everyone from 6th April 2010.

Is Higher Rate Tax Relief On Pensions Under Threat?

A number of commentators have suggested that The Chancellor will abolish higher rate tax relief on pension contribution in The Budget on 22nd April.

Financial Times

Yahoo Finance

These could just be 'buy now while stocks last' rumours but there may be some truth in them, given the financial pressure, which the government is under.

If in doubt, it would make sense to bring forward contributions to prior to the Budget. It is unlikely that any changes will be retrospective but this can not be ruled out.

If tax relief is removed, this should not be a reason to stop making savings for retirement. After all, at some stage, like it or not, employment and the earnings associated with it will cease. When that day comes, there needs to be a replacement source of income. This does not just need to be provided by way of a pension but as long as there is some tax relief on contributions they probably have the edge on other methods of saving. See my last blog for more information on this.