An under-utilised and less well-known option available to Self-Administered Schemes is the ability to lend money to a Sponsoring Employer.
A Sponsoring Employer is usually the company that an individual (or individuals) will be directors and shareholders of, and which is involved in the setup and operation of a SSAS.
The SSAS can lend 50% of its value to the company, subject to certain criteria set out by HM Revenue & Customs. It can provide an affordable, straightforward mechanism to access monies with the added benefit that the repayments are made back to the individuals’ pension scheme, rather than a third party.
A simple example should help to illustrate this.
Let’s assume two individuals, John and Margaret have existing pension schemes worth £100,000 and £150,000 respectively.
A SSAS is established and they arrange to transfer those existing pension benefits into the scheme. The money is placed into a Bank Account set up as part of the SSAS.
As Trustees of the SSAS, John and Margaret are able to authorise a loan of 50% of the Scheme value to their company, which acts as a Sponsoring Employer.
The loan is subject to a legal agreement that requires it to meet HMRC rules:
- The term is for a maximum of 5 years (although it can be rolled over at the end of the term);
- Interest charged must be at least 1% above base rate;
- Repayments must be by equal instalments of capital and interest;
- Plus the first charge on assets equal to the loan plus interest must be given.
On successful operation of the loan, and full repayment, the security is then released at the end of the term.
Security can take a number of forms. For example, it doesn’t have to be commercial property, but could be any assets of suitable value that are owned either by the company, or by any other party willing to offer them as security.
It can be worth exploring what assets may be held by the company, or related individuals, to determine whether they can meet the requirements necessary to grant the loan.
In that way, individuals may find that they have access to a source of funding where they may not otherwise qualify for Government support, or where they would prefer the idea of repaying, essentially, themselves through their pension scheme.