Allocating pension funds to private companies
12 March 2019
Promoted editorial from Rockpool - Capital at risk. This guide is intended for investment professionals only.
Doing more for your clients
Do you have wealthy clients with substantial pension savings and an appetite for higher returns? If so, helping them find out about private company investing could demonstrate your commitment to better service. Some of your clients may face potential lifetime allowance charges. For others, a pension may now be the preferred route to pass on wealth to the next generation. If so, investing in private companies through a Self Invested Personal Pension (SIPP) could be of real interest and worth exploring further.
Why private companies?
Private companies can find it hard to attract investment even with a track record of profits and growth. As a result, investors can often secure highly attractive terms for direct investment. As well as the opportunity for enhanced returns, investment in private companies means adding an asset class that is not closely correlated to the traditional asset classes held in most pensions. By using pensions savings held in a SIPP to invest in private companies, your clients can achieve greater overall portfolio diversity.
Selecting the investment strategy
Both lending and equity investments may be suitable for a SIPP. Selecting the right strategy depends on an individual client’s investment priority and attitude to risk. Lending has the benefits of a fixed term, with interest rates of 7% to 10% per annum paid tax free (some loans also share in the upside of the borrower’s growth). Equity investment offers the potential for capital growth of around three times over 3 to 5 years.
A new route to non-standard assets
Most SIPP providers have given up on non-standard assets. Those still in the market are demanding higher charges. The problem for SIPP providers in accepting non-standard assets is the requirement to undertake ‘enough’ due diligence on the investment. The recent Berkeley Burke versus FOS judgement has highlighted the risk for SIPP providers. For most, the work and risk around accepting non-standard assets is no longer worth taking on. There is however a new choice when it comes to investing in private companies. Instead of the SIPP provider becoming an investment specialist and undertaking the level of due diligence required to approve an investment into a private company, the investment specialist who arranges the investment and undertakes the due diligence as a core part of their process becomes the SIPP provider. This is exactly what Rockpool Investments, a specialist in arranging private company investments, has done. Since 2011, Rockpool Investments has been offering its network of high net worth and sophisticated investors access to a flow of opportunities to invest in private companies.
Since 2018, Rockpool Investments has also been approved to operate the Rockpool Personal Pension (the Rockpool SIPP). As the Trustee, Operator and Administrator of this HMRC registered pension scheme, Rockpool can offer your clients the opportunity to allocate a portion of their pensions savings to private companies.
The Rockpool SIPP has very low charges. The only cost is an annual fee of £250 plus VAT if any of the funds held in the member’s scheme are in drawdown. There are no fees for transfers in or out or for making investments. Investment choice is restricted to investments that Rockpool arranges and no other investments are accepted into the SIPP. The Rockpool SIPP can be held in addition to any other pensions that the client has open, provided that it can be funded by a minimum cash transfer of £100,000.
Understanding the risks
It is important to remember that pensions are primarily there to ensure income in retirement, so this must be the first consideration. Private company investments are illiquid and cannot be readily realised for pension benefits. For this reason, private company investing is likely to be appropriate for investors who do not require income from the pension in the short and medium term.
Clients facing lifetime allowance charges
Private company investing with pension funds can be particularly attractive for those clients who are near or over the lifetime allowance.
Think of £1 in a pension pot that is above the lifetime allowance. Do nothing and 55p of it will be payable to HMRC. Invest it in higher risk / higher return investments and consider the range of outcomes. If the investment hits the typical target return, the £1 turns into £3, and the client has 90p of extra value net of the lifetime allowance charge (£1-55p = 45p compared to £3-165p = 135p). At the other end of the scale, the investment could be lost but the client would only lose 45p net of the lifetime allowance. If the £1 is invested across a portfolio of 10 investments, the client builds extra net value even if the investments have a high failure rate.
Using pension for intergenerational planning
For some of your wealthier clients it is likely that their pension is no longer the go to place for receiving an income. In fact, it can act more as a trust for the next generation because of the current favourable tax treatment. An example of this is where the pension holder dies before the age of 75, the beneficiaries may receive the value of the pension without any tax liability. If using pension savings is part of your clients’ strategy for passing on wealth, the addition of assets with potential for higher returns should be considered to ensure that the wealth is not eroded.
Hopefully this guide has given you an overview of an alternative choice for investment via pension savings for your clients. If you would like to find out more, please contact us on 0203 8548 100 or email firstname.lastname@example.org
For investment professionals only. Capital is at risk there is no guarantee of any return. Private company investments are illiquid and this means that investments may not be able to be sold when the client wishes to do so. None of the above constitutes tax advice. Specialist tax advice should be sought. Tax benefits depend on personal circumstances and on rules and regulations. All of these could change removing the expected tax benefits.
Capital as Risk. For investment professionals only. Regulated and authorised by the Financial Conduct Authority.