Many entrepreneurs’ have a difficult relationship with pension schemes. The tax relief being at a high price for many due to loss of control and restrictions on the use of the money and the timing and form of the benefits.
There has been a relaxation of the form of the benefits through the much commentated on pension freedoms. However, the value of relief for high earners will be further eroded from April due to changes in the Annual Allowance and the Lifetime Allowance.
However, this note focuses on how an existing pension scheme could be used to provide liquidity to entrepreneurs’ business. One could describe this as being one’s own bank!
Please note we are not regulated by the FCA to provide financial advice. You should take independent financial advice before entering in to any sort of investment whether personally or through your SSAS. This note covers the tax aspects only.
Transacting with one’s pension scheme – underlying principles
It is probably best to first look at the underlying principles.
It is a common misnomer that one may not transact with one’s own pension scheme. This is plainly incorrect.
HMRC’s manual’s state:
“There is no objection in principle to a registered pension scheme entering into transactions with a member or a person/company connected with a member. However, various tax charges are imposed where any investment transactions entered into by the scheme (involving assets or liabilities) with people connected to the scheme are not on arm’s length terms”
A member of a pension scheme (and a person connected with such a member) is specifically allowed to enter in to a transaction with the Member’s pension scheme as long as:
- It takes place on market terms;
- It is not a loan, subject to one major exemption (see Authorised Employer Loan – below); and
- The transaction is not an acquisition of shares in the sponsoring employer in excess of prescribed limits .
As long as one adheres to these conditions then one is free to transact with one’s pension scheme.
Loan back to the Sponsoring Employer of the SSAS – Authorised Employer Loan
Under current rules a SSAS may lend up to 50% of its net assets to the Sponsoring Employer.
The loan can be for up to 5 years. It can in some instances be rolled over for another 5 years should you encounter difficulties repaying it.
Repayments should comprise both capital and interest and be made for each complete year of the loan.
Interest must be charged at a commercial rate. This is subject to a minimum of 1% above the average base rate of the High Street bank.
The loan must be secured by way of a priority charge over an asset of equivalent value to the loan plus interest. In reality securing a priority charge can be very difficult where there is existing charge in place. Therefore you should be looking to be able to provide a first charge over an asset.
Alternative routes – pension investment in business
One might also approach the liquidity issue from the other possible angle.
In other words, using a form of investment other than a loan
By doing so, it means that one is not constrained by the restrictive conditions that an authorized employer loan must adhere to. This might be helpful, for instance, where one does not have the ability to provide security for the loan.
It is still, of course, necessary that the investment is entered into on commercial terms.
If you have any queries then please do not hesitate to let us know.