If you have clients that run their own small business, then you may well be familiar with how big a challenge access to funding still is for small and medium enterprises (SMEs).
So, at first glance at least, it may seem slightly surprising that only 3% of SME owners would consider using their pension savings as a funding source by placing their business premises in a self-invested personal pension (SIPP), according to our recent survey of 750 SME owners.
But we believe the core issue behind this is that very few people are actually aware that using a SIPP in this way is a legitimate business funding option while, for others, there is a lack of understanding as to what is actually involved.
This low awareness may also be driven by the fact that only 8% of small business owners said they would speak to a financial adviser when seeking business funding. By contrast, respondents who had used their pension savings for funding highlighted that financial advice had been an important factor for them.
Even when someone does seek advice, the process of placing business premises in a SIPP can be a complex subject for advisers to approach with a client. We spoke to a number of financial advisers as part of our research, many of whom echoed that advising clients in this situation is an educational process.
And it is also understandable that advisers themselves may be cautious about the level of complexity, particularly if they are not involved in property transactions.
Two models
So, before we go any further, it is worth explaining the two main models used to place business premises in a SIPP in a simple way that clients can easily understand. Both of these are based on the rules governing SIPPs allowing for commercial property to be held directly as an investment, including a company’s own premises.
The first is the equity release model where the business, or its owner(s), already own the premises and place it into a SIPP, effectively exchanging the pension fund already accumulated for the property itself (releasing the ‘sale’ proceeds to be invested in the business).
The other route is the funded purchase model where the accumulated pension savings of those involved are used to fund the purchase of the property, which they do not already own. This means the business does not have to source alternative funding for the purchase and can use any capital held for other priorities.
Using pension savings in this way will not be suitable for all clients who own a business but it is incumbent upon advisers to be aware of the possibility, have an understanding of the process and be able to lead clients through it. The SIPP provider will also be key to this as, understandably, few advisers will have the depth of legal or technical knowledge to confidently navigate all aspects of the process. There are some specific factors that advisers should focus on when considering the suitability of placing business premises in a SIPP for a client, as per the table below.
| WHO IT MAY SUIT | WHO IT MAY NOT SUIT |
| A long-term view: No plans to sell the business within, say, the next ten years | Short-term view: Likely to want to move business premises in the next few years |
| Financially stable: Very unlikely to need access to the capital value of the property | Financially unstable: Any financial issues in the company must be resolved before tying up the capital of the premises |
| Steady income: Can comfortably meet the rent and any maintenance costs | Emotionally attached: The single biggest challenge to placing business premises in a SIPP is the transfer of ownership to a professional trustee |
As we have already hinted at, there are times when the process of placing business premises in a SIPP may start to feel complex, although it is worth remembering these steps are generally in place to protect the client personally, their pension savings and their property.
Our research found the main concern around using pension savings as a source of business funding was the perception that it is risky and could materially erode the value of pension savings. However, it is important to bear in mind the SIPP fund is investing in a physical asset (the bricks and mortar of the business premises) and not the business itself.
There are also some realities of holding business premises in a SIPP, which the client must feel comfortable with, namely understanding and accepting that they are effectively handing legal ownership of the property to the trustees for the benefit of the individual and not the business.
This means that the business cannot simply reduce rent or take rent payment holidays in the event of hitting cashflow problems, for example. There are also benefits attached to paying rent, as it is effectively contributing to the SIPP (but not against the contribution annual allowance) and also goes towards paying off any loan on the property.
As with any solution, it will not be suitable for all. But I am sure most would agree that all options should be on the table at least for initial consideration and, in order to do this, there definitely needs to be more awareness and understanding of using pensions savings as a legitimate and readily available source of business funding.
Eddie McGuire is managing director of @SIPP