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Can You use Your Pension Fund as a Bank?

HMRC allow Invested Regulated Occupational Schemes to make loans to a sponsoring company or, more unusually, to a genuine third party. Any potential loan must be considered to be a genuine investment that is prudent, secure and on a commercial basis.

There are five main conditions that need to be met when loaning to the sponsoring employer:

  1. Security

The loan must be secured by means of a first legal charge over an appropriate asset that is at least equal to the loan value plus the applicable interest for the entire term of the loan. It will be necessary to provide Taylor Patterson with an independent Open Market Valuation of the asset (if applicable) to be used as security and this charge needs to be registered at Companies House.

  1. Interest Rate

The loan must have an interest rate of at least 1% above the average of the base lending rates of the six high street banks. The average being rounded up to 0.25%. This rate is published on the HM Revenue & Customs website . We would recommend that the interest is fixed throughout the term and as long as the interest rate meets the requirements on the date the loan is granted, it can be applied throughout.

  1. Term

The term can be for a maximum of five years. The term should also reflect the purpose of the borrowing.

  1. Amount

The maximum amount that can be lent by a Pension Scheme is 50% of the net market value of the Pension Fund. Existing loans will need to be deducted from this figure. This limit is applied at the point the loan is taken and is not re-tested at any later date.

  1. Repayment

Loans must be repaid in equal instalments of capital and interest on an annual basis (at least) so that the loan is fully repaid by the end of the term.

Any breach of the above can lead to unauthorised payment charges. It should be noted that loans cannot be made to Scheme Members and their relatives, to connected parties that do not participate in the Pension Scheme or partnerships in which Scheme members and/or relatives are Partners.

Case Study Example

Fred Leather is a director of the family business “Sofas to Go” along with his brother Simon. The business was set up by their father Joe Leather.

Fred and Simon’s wives are both in the scheme and employed by the business. They were brought into the scheme in order for the company to make new contributions to utilise the annual allowance and they want to reduce their corporation tax bill.

The company is in profit and they are looking to expand but they need finance to open a new store which they will then lease. They are looking to borrow £250,000 and have spoken to their bank who have stated that they will lend the funds, however, it will involve refinancing some existing debt and changing their overdraft facilities. They are therefore looking for an alternative source of finance.

Joe (at 74) has retired from the business. He is currently drawing a pension of £50,000 gross per annum from the scheme. The assets allocated to him amount to £510,000. The rest is predominantly allocated equally between Simon and Fred, with small amounts allocated to their wives.

The rent on the store is £70,000 per annum and the mortgage is only £11,000 per annum. Therefore, the liquidity to pay Joe’s pension is not an issue.

The scheme assets are made up of:

Furniture Store £750,000.00
Mortgage on the store (£150,000.00)
Cash £25,000.00
Investment Portfolio £300,000.00
Total Value £925,000.00

The trustees can therefore grant a loan to the principal employer of £250,000, secured against another store the company owns (the existing furniture store). To finance this, they will liquidate some of their investment portfolio.

Therefore, the maximum loan that can be made in this scenario would be calculated as 50% of £925,000, equaling £462,500. This is all within the maximum 50% loanback facility HMRC will allow.

If you are considering raising finance involving your company and want to explore the options available to you using a pension, for further information, please contact Kerry Houghton, Business Development Manager on 01772 550614 or alternatively Kerry.Houghton@taypat.co.uk.

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