The ‘loan-back’ feature of Small, Self-Administered Pensions (SSAS) has seen a spike in the scheme’s popularity in recent weeks as businesses look for ways to fund their way through the coronavirus crisis.
That’s the view of a leading SSAS expert who told FT Adviser that SSAS registrations in the first ten days of April alone were almost eight times higher than figures reported for January, as more people became aware of the loan-back facility.
So, how can a SSAS help? What are the rules surrounding SSAS loans? And is a SSAS right for you?
How a SSAS can help
As a SSAS is a type of company pension, it therefore has a sponsoring employer. This means it can lend money to your business. As long as you have sufficient pension funds you can borrow up to 50% of the value of your SSAS from a bank.
Accessing a loan from your pension can be a good way to free up money, whether for business expansion, to finance projects or, in the current climate, to provide much-needed capital to your business.
If you hold a SSAS, you will often find that arranging a SSAS loan requires less underwriting than applying for a bank loan. The interest rate will likely be lower too.
The rules surrounding these types of loans are strict and additional tax charges apply when certain conditions are not met. Specifically, a SSAS loan must satisfy five tests:
1. A maximum loan amount of 50%
You can only borrow up to 50% of the net value of your pension. If your pension is worth £750,000 for example, you can borrow up to £375,000.
2. The loan must be secured as a first charge
A loan to the sponsoring employer must be secured as a first charge. While the asset does not need to be owned by the sponsoring employer, at the time of the loan the security used must be of at least equal value to the amount that you borrow.
Commonly, your company premises will be used as an asset as commercial property tends to be the most efficient form of security. You can use your business premises only if the valuation proves sufficient, and the premises have no other charges against them.
Remember that, if the business defaults on the loan, the security (in this case the commercial property) will be sold to provide the cash to repay the loan. This could cause severe detriment to your business.
The asset doesn’t have to be owned by the sponsoring employer. It could be an asset you own personally, although this has its own set of associated risks.
3. Lending must be on a commercial rate
The interest rate of the loan is selected by the scheme members. It must be a ‘commercial rate’ which is defined as 1% above the Average Base Rate of the six leading high-street banks, which are:
- Bank of Scotland
The rate of interest can be fixed, which means that no recalculations need to be carried out if the rate changes, as long as the terms of the loan don’t change.
4. The loan term must be five years or less
The repayment term of the loan must be five years or less.
If, at the end of this term, the outstanding balance has not been paid due to the sponsoring employer experiencing financial difficulties, the outstanding amount plus interest can be rolled over for a further five years.
This can only be done once and will not be treated as a new loan.
5. Repayment of the loan
All loans made to a sponsoring employer must be repaid in equal instalments of capital and interest.
Beware of not meeting these conditions
If the loan fails to meet any of these five tests, you do not document a loan-back properly, and if the correct securities are not in place, the loan will not qualify as a loan. Instead, it becomes an unauthorised payment on which tax charges apply.
This could impact your business, and so it’s important that you get the right advice. This is particularly true as SSAS are not regulated by the Financial Conduct Authority. The suitability of a SSAS should be carefully considered rather than purely establishing a scheme just to create a loan.
In addition, structuring a SSAS loan can take longer than you might imagine. It can take time for HMRC to accept and register a new SSAS – particularly at a time when HMRC are supporting the UK economy in a range of other ways – and no money can be paid into the SSAS until it has been registered by HMRC.
Get in touch
The increased popularity of this type of scheme in recent weeks therefore bucks the trend of many years, when a series of scams and SSAS failures damaged their reputation.
We’re SSAS experts, so if you want professional and expert advice on whether this type of arrangement is suitable for you, please get in touch. Email firstname.lastname@example.org or call 01454 416 653.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.