There are a number of options available to businesses seeking funding, and managers should weigh up the pros and cons of each. One option is to either borrow from your pension fund, or unlock the cash by transferring a qualifying asset to the fund.
Company pension schemes are not generally permitted to make loans. One exemption to this rule is the small self-administered scheme (SSAS). A SSAS is a regulated occupational pension scheme designed for shareholder directors of limited companies, and is limited to a maximum of 11 participants (or ‘members’). A SSAS is permitted to lend money to the sponsoring employer for any trading purposes, including capital investment or the acquisition of fixed assets.
There are restrictions on loans that can be made from the SSAS, as follows:
- The pension fund cannot lend more than 50% of the value of its assets. The assets are the aggregate of the cash sums plus the net market value of other assets held by the pension scheme immediately before the loan is made.
- The loans must be secured as a ‘first charge’ on an asset of equal value to the amount of the loan. The asset charged does not have to belong to the business and the security provider does not have to be the business receiving the loan. Banks will only consider physical assets for security, including a charge on the director’s home and/or personal guarantees. A SSAS, however, is able to secure the loan against intellectual property such as patents, trademarks, designs, copyrights, databases and domain names.
- A commercial rate of interest has to be charged on the loan. The interest payment is both a taxable deduction for corporation tax purposes and tax-free income for the pension fund.
- The loan must be for a fixed term (the maximum allowable term is five years), and have normal commercial repayment terms.
Pension borrowing could also be considered to replace existing bank borrowings, as business charges and personal guarantees can be removed such that the business owner’s personal assets/non-pension assets are no longer at risk.
An alternative to borrowing from the SSAS could be to sell a qualifying asset to the pension fund, providing the business with cash. The pension fund can then lease or license the property back to the business for a fee, again providing an income stream for the pension fund. This is commonly seen with commercial property, but again, intellectual property can be considered.
No existing SSAS?
If a business is a limited company, it can create a SSAS as the ‘sponsor’, and then its members (the shareholders/directors of the limited company) can transfer funds to the SSAS.
Pension funding is not, however, for all businesses and there is an element of risk in any lending if part of the SSAS funds is to be used for this purpose. There must be a large enough pension pot available to make the arrangement viable, and the arrangement also has to be beneficial to the pension scheme with any risks mitigated as far as possible. For example, if a business is about to fail then pension funding would not be a sensible option. The pension beneficiaries must also consider their long-term position, being aware of a possible reduction in their retirement funds if the loans were to become irrecoverable.
Pensions are often overlooked by businesses as a source of funding. However, with the correct advice and management, a pension can help a business move forward in these difficult times.
Your St. James’s Place Partner will be able to advise you on which of our panel providers you would need to be referred to, given your particular circumstances for further advice in this area.
Please note that failure to keep up repayments on the loan may result in the security used being forfeited.