If there is one thing that never changes in the pensions world, it is that things will always change! While we have seen massive alterations again recently, certain long-standing facilities do become more or indeed less fashionable depending on the economic environment and none more so than now, bearing in mind the tightening of the banks’ purses to lend and the increased cost of it.
In fact, family businesses have been struggling to obtain lending for quite some time and in many cases have been forced to request lending from smaller and challenger banks (as they have been known), usually at a relatively high cost, especially compared to what one would expect to be paying even in times when interest rates have been increasing.
As a pension provider, we have been seeing more enquires about the ability of a small self-administered scheme (SSAS) to loan money back from a pension scheme to that of its sponsoring or adhered employer. In years gone by, this has been central to the development programme of many businesses, with the use of funds from their own pension fund being provided at a commercial rate, which incidentally is 1% above the average of the base lending rates for the six leading high street banks, as set down as the minimum in the Pension Tax Manual, however, commerciality ultimately needs to be determined, dependent on the individual position.
In addition, with the complexities of the investment world still very much in clear focus, the ability for the pension fund to receive a good return that will be secured by way of first charge on a fixed asset, seems like a great deal. Furthermore, an employer looking to borrow money effectively does not have to deal with huge levels of banking bureaucracy.
So, have loanbacks come back into fashion and who is using them and when? Very simply, if profits are available, many SSASs are receiving pension contributions to reduce the relatively higher rate of corporation tax, which has jumped considerably. At the same time, cash flow is obviously a very important aspect and the ability to loan money back, after making a pension contribution (if structured correctly with the necessary securities in place) protects the beneficiaries of the pension fund and provides them with a decent return, while also allowing the business to reduce its corporation tax bill and retain most of the cash, if not all, dependent on the situation. Any interest received within the pension fund for the beneficiaries is free of tax and also offset against corporation tax. All in all, the circulation of funds here is a very useful way to use loanbacks and we are seeing increasing requests for this to be considered.
However, loanback facilities are still limited due to HMRC rules. They are for a maximum of five years and the loan amount can be no more than the capital value of the asset upon which it is secured plus the interest over the period. Complexity and multiple rules naturally follow when pension funds are used to lend, but as long as the general principles around commerciality are adhered to, the facility should work well.
Loanbacks could therefore be used a great deal more over the coming few years, as we continue to see banks recapitalise in view of the nervousness around a further banking crisis, but also due to the extension of pension contribution allowances. For many business owners, the fear of not ploughing through the lifetime allowance means a loanback could once again be a fundamental planning tool for small to medium-sized enterprises.
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All content correct at time of writing.