New Rules for your pension to stop your company going bust

 

 

Do you have a trading business that is going through difficulty and the bank won’t support it.

 

Do you have a sensible business proposition and you can’t get the bank to support it

 

At the same time you don’t want to be at the mercy of outside investors

 

Under revised rules from 1 October 2008, your pension can invest in your company, within a series of rules that we will outline below. This can provide a lifeline to your company and the external investor will be you (as your pension fund)

 

What types of companies can do this ?

 

Any pension scheme can invest in unlisted companies, as long as those companies do not have residential property assets in them, but there are rules about “connected parties” and you have to invest your pension in a business that you can provide a sensible valuation for.

 

The “connected parties” rule mean that you could not previously invest in a company, you or your close family had a controlling interest in (more than 25%). This has changed. If your company has less than £6,500 in tangible assets on its balance sheet then the connected party rules may not apply. So you may have a trading business with only small assets which has a reasonable turnover. You may be able to use your pension scheme to invest into it and provide it with cashflow.

 

If you have a business with more than £6,500 of assets on the balance sheet, perhaps a commercial property, it may still be possible to structure help in other ways. Please contact us using the enquiry form.

 

What Pension funds can I use.

 

Until 1 October this year, it was possible to use pension funds to buy unlisted company shares (i.e. private limited companies) but you could only use money from your own contributions, you could not use money that was “protected”, for example it came from contracting out of SERPS or from the guaranteed element of final salary pensions. Now all pension funds can be used

 

Is this suitable for all businesses

 

No, this is a complex process and involves investing your pension fund in high risk and illiquid assets, but those assets are your business, so it can be suitable for some people. You should take independent financial advice from a firm with a specialist knowledge of pension transfers. You can check a firms authorisation status at www.fsa.gov.uk and you should check within their “permissions” that they are authorised to advise on pension transfers and opt outs.

 

City Gate have been advising small businesses on their pensions arrangements for 7 years. Its directors have been through the process of using this method of funding for clients and know exactly how the process works.

 

This funding method is not suitable for property investment companies, partnerships or LLP’s. It is currently only suitable for UK trading companies

 

Start Ups

 

It is worth mentioning that this scheme is ideal in the current market for certain start up operations, where it is more difficult to get bank or investor backing. There is a need to obtain a valuation of the business plan from a qualified accountant and we do have access to qualified partners for this.

 

Does City Gate manage the process

 

City Gate will consider your circumstances quickly and advise you whether you could use this method of pension funding to invest in your business. We will carry out this initial assessment free of charge and generally within 48 business hours of you providing us authority to contact your pension schemes.

 

After this, we will provide you with a detailed report and discuss all of the aspects of the arrangement with you and your advisers. We can then implement all of the plan and finalise the arrangement.

 

We can also provide you with appropriately qualified professional individuals to assist you, if you do not have them.

 

Case Study 1

 

Jim had a recruitment company. He had previously worked in a large recruitment firm and had built up a significant company pension scheme. He had been trading well, so he had taken on more staff.

 

In order to meet the cashflow pressures, he had factored his bills, which was great, it allowed him to expand and someone else worried about cashflow.

 

Then two crunches happened at once. The economic slump meant that nobody was recruiting, so he was dependent on a few accounts to feed him. This made his factoring company nervous and they started to restrict his funds. Additionally, his clients paid slower, so he was funding up to his limit.

 

The second crunch was liquidity, his factor was funded by the bank and they made them restrict the facility further. Jim had staff now and he had nowhere to go when it came to wages time. He had enough in the bank for one more salary run

 

At the same time he knew that if he could just hold it together, that there would be a huge opportunity for small companies to get back into the market and no lack of available candidates.

 

His business clearly has a value and we were able to provide an investment from his pension to provide liquid capital to fund him through the downturn and prepare for the inevitable upswing.

 

Jim realises he is taking a risk with his pension, but it was either that or loose the business. The factor had personal guarentees and could have bankrupted him. Now his pension fund is his only investor- something that makes him happy

 

Case Study 2

 

Elaine had a brilliant idea for a new coffee shop. It was a perfect business for her. It wasn’t likely to be affected by the downturn. She had identified premises and someone to work there. She just needed the capital to get started.

 

She had a relationship with the bank for 30 years. They had said they would lend her the money if she put her equity up as security. Then, as a result of the credit crunch, they said that they wouldn’t lend and that it was because she had no experience.

 

She had a friend who said that he would invest in it with her, and although she thought it would be good to share the risk, she didn’t have any idea whether he would be a silent partner or he would put his oar in.

 

We arranged for a business plan to be drawn up and she used some of her pension assets to act as seed capital for the venture. It gives her enough working capital to not worry and she only has her own pension scheme to answer to.

 

Elaine knows that it could go wrong and that she could loose part of her retirement income as a result, but she is doing what she wants to do and answering only to herself.

 

For more information on this have a look at www.citygategroup.co.uk

 

 

 

 

Directors- make sure you are protected

Small business owners are under intense and compounding pressure. I know- I am one!

 

Here is the checklist of things to do if you feel the pressure – mostly just watch your back stuff that should be second nature, but at times like this sometimes gets forgotten

 

1. Have you got liquidity? Have you got your own little secret pool of liquidity? You should,

 

2. Check your bank position. Are you exposed to an overdraft review coming up? Relationship banking won’t work, having a fallback position will, I will be publishing a note on new forms of investment capital from your pension scheme shortly.

 

3. Watch other trade credit arrangements, factoring could be “crunched” so the only people they can squeeze are you.

 

4. Your debtors are going to push their luck with credit and some of them will fold. There is nothing you can do about this other than the age old motto, all your eggs. If you are exposed, get diversified. Also get in first, and don’t be afraid to take a deal.

 

5. Your trade creditors are going to treat you in the way I have just described your debtors. Take advantage of the crunch, play fair, but everyone is having it tough. Do deals

 

6. Keep your key clients close, make them know that you value them

 

7. Have a plan and be prepared to change it. Small businesses will be the ones who will take advantage of the upswing (when it happens)

 

8.  MAKE SURE THAT YOU HAVE DIRECTORS AND OFFICERS PROTECTION. Don’t cancel it. You ust don’t know when you might need it. Ditto life and critical illness. If you have a heart attack now, you will thank me!

 

9. Stay positive- someone is making money, even if it isn’t the taxpayer.

 

 

 

 

Stewart Domke, MBA,ASI, CertPFS

Group Operations Director

 

City Gate Group Ltd

1 Park Circus

Glasgow G3 6AX

 

Tel: 0141 332 4141

Fax: 0141 332 4142

 

 

Members of the City Gate Group Ltd are authorised and regulated by the FSA

 

 

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Auto Enrolment in UK Pension Schemes

There is a huge debate over auto-joining pension schemes. If you are an employer, and you set up a pension scheme for staff, do you want them automatically enrolled or do you want them to sign up.

 

You can see the pros and cons from the employer’s side-

 

1. If you set up auto join, everyone goes in, so you don’t get a huge amount of hassle explaining the scheme to members and financial advisers around your work place while staff take time to think about whether they join or not
2. At the same time, maybe it is good for them to reflect on the generosity of their employer contributing to their old age. So many benefits are just a “given”- maternity pay, holidays, getting away before 9pm. Taking just 5 minutes to opt in sounds like a good thing
3. But then, if you auto enrol them, then you have to pay for them, whether they would really have joined. Younger staff would perhaps just take the money and spend it. One of my colleagues cashed in a final salary scheme for his first decent guitar. He reckons he did the right thing.
4. What about short term and temporary contracts. More red tape and hassle for employers.

 

From the staff point of view it is difficult to think of the downside apart from being forced to save, get tax relief and probably an employers contribution without having to even think about it.

 

The government has to do the balancing act. Euroland says it might breach our human rights, the UK Government says it should be brought in and is seeking ways to ensure that it is. From the government’s point of view, it will certainly pull many people out of retirement poverty who would only get their through sheer lethargy of not joining an available scheme.

 

Having dealt with schemes for a number of years you would be shocked at how many people don’t join a scheme that is set up and waiting. And how many people say that they had no idea that it was even there. You don’t believe them either, but you will have to bail them out in retirement, while they enjoy their extra pint today.

 

 

Self Certification Mortgages

 

The credit crunch gets blamed for a lot of things, but it is fascinating to see what has been going on in the self certification market.

 

Self Certification, in case you don’t know is telling a lender what your salary is without having to prove it. Over the last few years, it has developed from a niche based product to highly touted favourite of equally desperate brokers and lenders.

 

Historically, “self cert” was where self employed people with highly fluctuating income, could get round the need to produce three years audited accounts or physical proof of their tax assessment before lenders would lend. They simply told the lender what they were earning and in the higher lending amounts, their accountant signed off to the fact they could afford the payments. Voila up to 85% loan to value.

 

But then lots of greedy people got on the bandwagon. Employees could certify their irregular commission or bonuses and borrow 5 or more times their salary. With some lenders, they just made a quick call to the place of work, checked your job title and job done.

 

Some lenders would lend clients with unlimited arrears on their current mortgage up to 75% of their home value with full self cert. Can you guess their name?

 

The regulator warned brokers that if they lied about clients’ income they faced being struck off or disciplined, which did not have a huge effect, but the credit crunch and inter bank lending has absolutely changed this sector.

 

Personally, I think it is a shame, the traditional self cert is a very important aspect of funding for small business people. Let’s face it, these people should be living in the best houses so that they can pledge them to the bank when they get the jitters about their trading businesses.

 

I also think that lenders have over-reacted and will calm down in die course. There are still a number of schemes working on self cert basis, albeit on reduced total loans and a much smaller number of lenders. Expect a tougher ride on underwriting, more delays and tell your IFA absolutely the truth about your income. If he offers to fudge the numbers, walk away- he really doesn’t value his licence. Of the few self cert lenders left they do vary markedly on their income multiples and affordability calculations. Some lenders will lend on a multiple of your profits, share of profit, earnings; some on your affordable income.

 

There may be other ways to legitimately increase your net profit, consider car allowances under the fixed cost car scheme to increase net income or pension contributions to increase gross emoluments. Think dividend instead of schedule D for a period if you are a company director.

 

There is no doubt that there are buying opportunities coming in the housing market, but it is not for the faint of heart- so business people will want to take advantage. My message- think outside the box, use all of the available products, but do not buy it if you can’t afford it. IT REALLY IS AT RISK IF YOU CAN’T KEEP UP THE PAYMENTS, however you got the mortgage.

Oil Prices hit $100/barrel

Many people laughed at the $100 forecast per barrel for crude only a few years ago. Yesterday that price became a reality.

What is the impact for investors?

Firstly what has brought the price to this point- many economic and political factors have had a bearing, lack of investment in refining and production, the dollar position and the importance of hedge fund commodity dealing.

Fundamentally supply and demand is a important consideration, world oil consumption in 2004 to 2.7m barrels per day- this has been seen by some commentators as the tipping point. There is also a generally held view that OPEC is running out of spare capacity

So, how much should investors worry? There is no doubt that this will be a major factor in world economic conditions- many investors will recall the impact of the last period of high oil prices in the 1970’s .

Prices will no doubt be pushed up as suppliers pass on the costs to consumers.

In Euroland and the UK much of the impact is yet to be felt because the pricing of oil is in dollars

This represents opportunities to invest in the sector but investors should have a careful eye to the cost side of these businesses.

There are many smaller energy companies that have seen significant upswings in their price, but investors should look to larger integrated companies too. Eggs and Baskets- as always!