Can I borrow money from my company pension scheme?

Many small companies continue to find it hard to obtain finance and although interest rates are at an all-time low, lending rates (where you can find them) remain stubbornly high so it would useful to find another source of funds.

Owner-managed limited companies can look to use their pension funds to help the company grow. In particular, SSASs (Small Self Administered Schemes) are a popular choice for directors’ pensions and the good news is that HMRC allow these schemes to make loans to ‘sponsoring’ employers.

There are some conditions. Loans must be for investment growth, they cannot be used to prop-up an ailing business or cash flow. They are limited to five years or less and must not be more than 50% of the assets of the pension scheme.

A commercial interest rate must be charged of at least 1% over average bank base rates and security by way of a first charge is required over company assets. Repayments must be made at least every year in equal installments. The loan can usually be renewed once only.

A SSAS receives all the benefits of any other pension scheme but has more flexibility. Many companies hold business premises as a main asset. Because of their specialist nature they are not the cheapest pension option but the exclusive feature of ‘loan back’ could be very attractive.

This compares with SIPPs (Self Invested Personal Pensions) which are similar in nature, but loan backs are not permitted. A SIPP is held by one person but they can join together with another to buy a commercial property. A SSAS however can have up to 10 members of the same company giving more flexibility especially where family members are involved in the business.

Pensions have always been one of the most effective forms of tax planning for businesses but many are reluctant to make contributions in fear of having the funds ‘locked away’ for many years. As you can see from the above, where there is an investment need, the availability of a loan-back from the pension scheme makes saving for the future (and saving tax) a much more realistic prospect for all.

For more details on company pensions and possibilities available to your business contact Malcolm Smith at your local Burgis & Bullock office on 0845 177 5500 or using the online form.

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