Can I use my pension to fund my business?

Accessing finance can be difficult, and traditional borrowing options like bank loans or overdrafts aren’t always straightforward. Sometimes clients ask us, “Can I use my pension to fund my business?”

The short answer is yes, but this is a complex area of finance and not a decision to be taken lightly. Here’s a guide to help you determine if using your pension to fund your business could be a viable option.

How can pensions be used to fund a business?

Pension-led funding allows business owners or directors to finance their business using their pension funds through either of the following two types of pension:

1. Small self-administered schemes (SSAS)

An SSAS is a type of occupational pension scheme usually established by company directors. It offers more flexibility than standard pensions and allows for specific investments, including in your own business. For example, an SSAS can lend money back to the sponsoring employer or purchase commercial property that your business then rents.

2. Self-invested personal pensions (SIPPs)

A SIPP is an individual pension plan that provides you with control over how your funds are invested. Although you typically cannot lend money directly to your own company through a SIPP, you can use it to purchase commercial property and lease it back to your business.

Pension-led funding options

The funding options available via your pension include the following:

Commercial loan

Your business can take out a commercial loan from your pension. This option is only possible with an SSAS and with the approval of the trustee or trustees. Using this method, the business borrows money from the pension and repays it with interest. You can utilise the borrowed funds for your business in any way you choose.

Purchase of intellectual property

The pension fund (either an SSAS or SIPPs) can buy a business’s intellectual property (such[JC1]  as patents, trademarks, designs, or copyrights) and lease it back to the business at a commercial rate. If your business expands, the value of your intellectual property will increase, meaning your pension pot will grow.

Purchase of commercial property

A SIPP or SSAS can purchase commercial property. If you don’t already own your business premises, you can use your pension to help buy a property for your business to operate from. Alternatively, if you already own your business premises, your pension can buy the property and then lease it back to your business.

What are the benefits of using a pension to fund your business?

Using a pension to fund your business can be attractive for several reasons:

• Access to capital – your pension could contain substantial funds that can be released to support business growth without relying on banks.
• Keep control – instead of handing over equity to external investors, you can finance your business independently.
• Tax advantages – pensions enjoy generous tax reliefs, and some pension-led arrangements permit tax-efficient investment into your business.
• Property ownership – purchasing commercial premises through your pension means your business pays rent to your pension instead of an external landlord, enhancing your retirement savings.

What are the risks of using a pension to fund your business?

Although the idea might seem attractive, there are important factors to consider:

• Risk to retirement savings – pensions are meant to offer financial security in later life. Using your pension funds for business links your retirement income to your company’s success. If the business encounters difficulties, you may lose both your capital and your pension.
• Complex rules – pensions are heavily regulated. Not all investments are allowed, and violating HMRC rules can lead to hefty tax penalties.
• Illiquidity – investing pension funds in property or your own business might make your pension less flexible and harder to access.

Professional advice is essential as these arrangements are complex, and errors can be costly. You’ll need guidance from regulated financial advisers and pension specialists.

When might it be suitable to use a pension to fund your business?

Using your pension to finance your business might be appropriate if:

• You’ve accumulated significant pension savings and wish to diversify how they’re invested.
• You’re seeking to purchase or rent commercial premises for your business.
• You’re comfortable with higher levels of risk and understand the potential impact on your retirement.
• You’re working with professional advisers who can ensure compliance with all pension rules.

It is generally not appropriate if you have limited pension savings, are nearing retirement, or cannot afford to take on extra risk.

Final thoughts

Although you can use your pension to fund your business, it’s a decision that requires careful consideration. While there are potential advantages, such as tax benefits and direct access to capital, the risks to your retirement savings can be considerable.

Before choosing this route, consult a professional adviser and consider all options. In many cases, refinancing, commercial loans, or other funding choices might provide a safer and more flexible solution.