Recent weeks have seen many businesses using any means available to secure funding to survive the coronavirus crisis. From Bounce Back loans to the ‘furlough’ scheme, millions of companies across the UK have been looking for ways to raise capital to stay afloat.
One method of funding that has seen a spike in popularity in recent weeks is the ‘loan-back’ feature of Small, Self-Administered Pension Schemes (SSAS). Indeed, a leading SSAS expert told FT Adviser that SSAS registrations in the first ten days of April alone were almost eight times higher than figures reported for January.
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 has a sponsoring employer. This means it can lend money to your business. You can borrow up to 50% of the value of your SSAS, as long as you have sufficient pension funds.
Accessing a loan from your pension can be a good way to free up money, whether for business expansion or, in the current climate, to provide a much-needed capital injection.
If you hold a SSAS, you will often find that arranging a SSAS loan requires less underwriting than applying for a bank loan. And, it’s likely that the interest rate will be lower.
The rules surrounding SSAS loans are strict. If you don’t meet certain conditions, then additional tax charges apply and so it’s important to be aware of these.
A SSAS loan must satisfy five specific tests:
1. A maximum loan amount of 50%
You can only borrow up to 50% of the net value of your pension. For example, if your pension is worth £800,000, you can borrow up to £400,000.
2. The loan must be secured as a first charge
Any loan made to the sponsoring employer must be secured as a first charge. Even though the asset does not need to be owned by the sponsoring employer, the security used must be of at least equal value to the amount that you borrow at the time of the loan.
Company premises are often used as an asset as commercial property tends to be the most efficient form of security. Note that you can use your business premises only if the valuation proves sufficient, and the premises have no other charges against them.
It’s important to bear in mind that if your business defaults on the loan, the security (in this example, the commercial property) will be sold to provide the cash to repay the loan. This could have a severely detrimental effect on your business.
3. The lending must be on a commercial rate
The interest rate of a SSAS 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. This 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
Your SSAS loan can only be taken over a term of up to five years.
If at the end of this term, the outstanding balance has not been paid (for example, because the sponsoring employer experienced 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.
Tax charges could apply if you don’t meet these conditions
An SSAS loan will fail to qualify as a loan if:
- It fails to meet any of these five tests
- You do not document a loan-back properly
- The correct securities are not in place.
Instead, the loan becomes an unauthorised payment on which tax charges apply.
Tax charges could have a negative impact on 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 an SSAS should be carefully considered rather than purely establishing a scheme just to create a loan.
Bear in mind also, that structuring an SSAS loan could take longer than you might think. 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 many other ways – and no money can be paid into the SSAS until it has been registered by HMRC.
Get in touch
Getting the right advice is crucial if you want to use the SSAS loan-back facility. If you need advice, speak to your Black Swan financial planner, email firstname.lastname@example.org or call 020 3828 8100.
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.