THE credit crunch has been impacting on our personal and business lives for some time now and one of the areas where the impact has been felt has been in financial Institutions, mainly banks, changing the terms of existing lending facilities or, in some cases, not lending at all for potentially excellent business opportunities.
This has had a major impact on individuals and businesses taking advantage of opportunities as they come along.
Your pension fund, either a self-invested personal pension (SIPP) or your small self-administered scheme (SSAS) could help plug the gap
.
Historically, one of the key attractions of an SSAS was the ability of the trustees to grant a loan to the principal employer. The purpose of the loan must be for genuine commercial reasons and be prudent for the trustees to grant. The loan is a relatively straightforward access to funding for a business, with repayments being made to the pension scheme increasing the value of the fund.
Subject to certain criteria, loans to sponsoring employers may still be an attractive means of combining the aims of the business and the pension fund. In addition, loans to third parties may be used to generate opportunities for higher returns for pension scheme trustees.
There are of course important aspects to consider when loans are made to sponsoring employers.
• Loans are limited to 50 per cent of the net assets of the pension scheme.
• The loan must be secured with a first charge of an asset equal in value to the face value of the loan including the total interest to the end of the term. Interest rate must be set a minimum rate of 1 per cent or above bank base rate.
• Loans cannot be for a period longer than five years. It is possible to roll over the outstanding capital and interest owed at the end of the term for a further period of five years.
• The loan needs to be repaid in equal instalments of capital and interest for each year of the loan. Interest only loans are therefore not possible.
SIPPS or SSAS can lend monies to third parties provided the loan is prudent, secure and on a commercial basis. In theory, it is possible for a loan to a third party to be up to 100 per cent of the scheme asset but this has to be balanced against the variability of such an investment. The trustees of the scheme must consider any proposal, giving their duty of care to the scheme members and beneficiaries. It is also important to point out that SIPPS cannot lend to any party that is connected to the scheme, member whether it is an individual or company.
As always, consult an IFA if considering any loan.
