Pensions that fuel the firm

FOR MANY small businesses - even those not up against the wall - the increased caution of the banks has led to great financing problems.

However, the frustrated entrepreneur does have an alternative to battling with bank managers. Money a self-employed individual or owner-manager sets aside for a pension need not simply be left there: it can be made to work for the business.

Self-invested pension plans (SIPPs) for individuals, and small self-administered schemes (SSAS), for groups of up to 11, have been around for some time but have become popular in the past five years, says Ian Hammond, managing director and actuary of James Hay Pension Trustees, a provider of advice on setting up an SSAS.

Aimed predominantly at the controlling directors of small businesses, an SSAS involves the members of the scheme becoming its trustees - along with a pensioneer trustee authorised by the Inland Revenue to provide technical input.

There are three main benefits. First, the pension scheme can lend money back to the company, provided the scheme has been running for more than two years. Up to 50 per cent of the fund can be lent in this way at a rate 3 per cent above the base rate. Although the loan need not be secured, it must be for a specific purpose, such as developing a computer system, rather than simply working capital.

Second, the fund can purchase commercial property. This is particularly useful for companies short of cash, since the scheme can buy a property and lease it back to the company. The fund may borrow up to three times the ordinary contribution (the average of the total company contributions in the previous three years) and up to 45 per cent of the value of the fund.

The third advantage is more obscure. The pension scheme can buy shares in the company, thus putting cash into the business. It cannot buy shares from a member of the company, but it can obtain them from a third party or from a new issue.

The conditions for SIPPs are similar. These schemes have received a boost from UCB Bank, a subsidiary of Compagnie Bancaire, France's fourth-largest bank. It has agreed to provide a loan facility for individuals who want to buy commercial property through Destiny, the SIPP run by Personal Pension Management. UCB will lend the difference between the price of the property and the amount contributed from the pension fund's assets. The maximum loan will be 70 per cent of the asking price.

Two factors - the cheapness of property and the Maxwell affair - are stirring up interest in the SIPP concept, says Francis Moore, a director of PPM.

'One of the great benefits of a SIPP is that it allows individuals to buy office space, then pay their rent into their own pension plans and enjoy tax-free growth,' he said.

In addition, the misappropriation of assets of the Maxwell pension funds had led to greater interest in security.

But a word of caution is due. Such schemes are not subject to DSS regulations limiting self-investment to 5 per cent of the fund, on the grounds that the participants are actively involved in running the business and should know what they are doing.

'These sorts of things are not for pension schemes where there are staff involved. They are only for owner-managers, controlling directors, very often family- owned businesses,' Mr Hammond said.