A progressive, South West based accountancy practice

A new source of funding?


The new pension rules give a great opportunity for some tax free cash. The additional flexibility that kicks in next year is to be welcomed, but there are opportunities NOW.

The preconditions

You do have to be over 60 years of age in order to benefit, but I am told by one financial adviser that you may be able to get access to your funds earlier in “special circumstances”.

One surprising aspect of this is that you do not need a large pension pot in order to benefit. In fact, if you have less than £10,000 in a pension fund, you can take all of it now, under the “triviality” rules. These have been with us for many years, but the limit was only increased from £2,000 this month. This applies even if your total pension savings exceed the £30,000 limit.

If your total pension’s savings are less than £30,000, you can take all of it as a lump sum, even if one scheme has more than £10,000 in it. (The previous limit was £18,000). This applies even if you are in draw-down.

How does it work?

You still benefit from the 25% tax free lump sum, but the rest would be treated as your taxable income. If you are a non-taxpayer, then no tax would be due. For example, if your total income, including the pension extraction, is below the personal allowance (£10,000 for 2014/15), you would pay no tax on the lump sum, and tax at 0% on the extra taken from the pension fund.

Even if you are a taxpayer, there can be an advantage by making a contribution and immediately cashing it in.

I’ve heard you can make £500 on a small pension contribution? How is that done?

Making a pension contribution attracts tax relief from the Government. The tax relief is given at ¼ of the amount invested (i.e. the Government put in 20% and you contribute 80%).

Putting some numbers on it, gives us:

You put in                                   £8,000

Tax relief adds                          £2,000

Total invested                           £10,000

Tax free lump sum taken     £2,500

Taxed lump sum                     £7,500

Tax due at 20%                       £1,500

Net amount received back  £8,500 (being £6,000 from the taxed element, plus £2,500 tax free).

This equates to a post-tax return of 6.25% in a matter of weeks. I would suggest that this is better than most other investments, in the current climate (although I do have a couple of clients who have doubled their money in a month by investing in a North American tech stock, but that’s a different story).

You will of course, have to consider any charges which might be incurred, as this will reduce the investment return.

So can I just repeat the exercise over and over again?

Sadly not. There are a number of rules which prevent this. There are already rules which prevent lump sums being reinvested in pensions (the “recycling” rules) and there are also limits on the amount of savings you can invest in pensions over your lifetime (the “lifetime allowance” rules).

The title of the blog suggests this could be a new source of funding. How?

The opportunity noted above requires an initial investment (in this case £8,000). However, the triviality rules apply to existing schemes as well. It is therefore possible to draw down a reasonable amount of cash, up to £30,000 with careful planning, and pay tax of less than £5,000 on it (assuming you are a basic rate taxpayer). This would leave more than £25,000, which could be a massive help to a small or medium sized business.

Many small businesses are struggling to raise finance, and have done for several years. I have seen many approach their banks, only to be told that nothing can be done. With a large cash injection, the risk to the bank, or the improvement in cash flow, can make it easier for main stream lenders to back more proposals.

What should we do now then?

I would suggest you review your current pension provision, with a view to unlocking some of the value. If you are a business owner looking for funding, speak to your family and friends to see if their pension could be used in this way.

Loans to private businesses would generally earn interest at between 5.5% and 15% depending on the risk, so there is plenty of scope to negotiate a rate of return which helps both parties.

The human factor – a word of warning

There are real dangers in borrowing money from/ lending to friends and family. Wherever possible, you should have a proper legal agreement drawn up. It needn’t cost a fortune, and it could save you a lot of time and stress later.

I want to explore this, what help can you give me?

We can prepare a formal report on your financial position, including an estimate of what funds may be available from your pensions, and put you in touch with a great financial adviser, and a lawyer who can give you the essential financial and legal advice to implement any plan you decide upon.

This is an opportunity that may transform your business, and it is worth investing a few hours of your time in exploring your options.