I read with interest the Federation of Small Business (FSB) survey of nearly 1,000 businesses.
The key message was that confidence levels are at an all-time low in certain sectors.
In the latest quarterly survey, the FSB reported that “the considerable majority, 68%, of small firms do not expect their performance to improve next quarter. Four in ten, 41%, expect it to worsen”.
Furthermore, the FSB confirmed the fall in small business confidence is particularly pronounced within certain sectors. It said small manufacturing, retail and wholesale, and construction firms had suffered 25, 27 and 56 point drops in their SBI readings respectively compared to this time last year.
So why does this matter to financial advisers and pensions?
Well, put simply, the directors of these businesses may well have existing pension plans that could open the door to a new cash injection for the company to reduce existing borrowing or enable money to be invested into new machinery, stock or sales initiatives.
It’s good to talk
Financial advisers will, in most instances, have regular dialogue with SME clients and have insight into how their business is performing. This gives them a great opportunity to explore ways to finance new projects or more effectively manage debt.
Indeed, the adviser may well have been involved in setting up the auto-enrolment arrangement that is referred to as adding strain within the report; it’d be nice to juxtapose that with a pension solution to a business problem.
The company accountant will undoubtedly be reviewing cash flow, debt, future liabilities etc with the directors, but sometimes they will forget that self-invested pensions can be a neat, tax-efficient solution for their clients.
Ways to inject cash into an SME
Small self-administered schemes (SSAS) have been around for 40 years and self-invested personal pensions (SIPPs) for 30 and they both offer the unique ability to “self invest” into companies.
The most commonly used tools of self investment are:
- SSAS Loanback to the company – for business expansion or for new business projects, and
- SIPP or SSAS purchase of the company premises – if the business owns its premises, a sale releases the proceeds to it to boost cash flow or reducing existing debt.
A variant would be the “part purchase” of the property if the pension cannot afford the entire building.
Secret to success – a review of their existing pensions
The key to piecing together a viable pension solution to boost the cash flow of the company will depend on a full detailed review of the directors existing pension plans. It never ceases to amaze me how many directors don’t know the value of their pension plans.
Many have several different pension plans set up over the years in old executive pension plans, personal pensions, old contracting out pension plans, and the occasional DB pension scheme from previous employment.
Directors are often pleased that they have made pension provision in the past when profits were good and once added together, their pension plans can become a valuable pot of money that can be used to support their company through tougher times.
Of course, the primary aim of a pension is to provide an income in retirement and directors need to balance current needs against the potential risk by loaning money or investing in property.
Most SME’s have two or more directors and their existing pension plans can be joined together to create a bigger investment pot. SSASs can accommodate up to 12 members and joint SIPPs can accommodate as many members as required. Every member’s share of the total pension pot is tracked by the SIPP or SSAS provider.
Key questions financial advisers should be asking clients every year
A simple checklist of questions we suggest advisers should be asking their SME director clients each year include:
- How is the business performing and how is the current cash flow?
- Would the business benefit from a cash injection?
- Does the company have an overdraft / other borrowing?
- Who owns the business premises?
- How much is the property worth in today’s market?
- What other pensions do the directors have in place and are their spouses employed by the company / do they have pensions?
These questions start to open the dialogue to exploring opportunities for self-investment in the company via SIPP or SSAS to give it that required cash boost.
The FSB report concludes with “business rates, spiraling labour costs and higher input prices off the back of a weaker pound are making life a misery for our small manufacturers, construction firms and retailers. Targeted intervention is desperately needed.”
Food for thought…
Jeff Steedman is head of business development at Xafinity SIPP & SSAS