SSAS Pensions

by on 22·03·2016

For the advisor, it can be sometimes difficult to encourage owners of small businesses to make provision for their own retirement using a pension fund. On the one hand, the pension fund is not only a tax efficient way to build up a retirement fund for the business owner and family, but it is also a place that protects their accumulated assets from business creditors in times of economic downturn.

On the other hand, business owners are sometimes reluctant to commit capital to a pension fund for the longer term and would prefer to retain control of such capital for purposes of running their business. In such circumstances, there might be an acceptable compromise, by utilising a unique lending facility that is available through Small Self -Administered Schemes (SSAS). A business owner might be willing and able to make a substantial tax relievable lump sum pension contribution, in the knowledge that some or even all of these funds could be lent back to their business.

The SSAS loan back facility is an effective way for business owners to retain some control over funds that have accumulated within their pension fund over time. The SSAS is able to lend funds back to the sponsoring business (usually a trading company) for commercial purposes. In some cases, a loan of up to 50% of the net value of the pension fund might be possible. In return, loan interest and capital is repaid to the SSAS and this represents a tax free return for the pension fund. The loan interest repayments are also an allowable business expense for tax purposes for the borrower.

Given the tax advantages of the lending arrangement, there are however a number of HMRC conditions that must be satisfied in order for the loan to qualify as a tax exempt employer loan. A breach can create tax charges, which can be penal in certain situations.

For example, the SSAS Trustees must take a first legal charge over a suitable asset (the security) in order to underpin the loan. The asset is usually offered by the business (as the borrower), but other willing parties may be able to provide the security. 

Identifying suitable security is often a major factor for the Advisor to contend with and the lack of sufficient security can often be a deal breaker for their clients. Furthermore, different SSAS Providers are likely to adopt a risk based approach in order to determine whether the security is deemed acceptable. SSAS Providers will be looking for good quality security such as commercial property, although other assets, such as plant & machinery or other equipment for the business, is sometimes considered.

For example, many SSAS Providers will not accept residential property as suitable security, as there is a potential risk of creating tax charges. Should the loan default and the security is called in, the pension fund will effectively own the residential property, which is a taxable investment, under HMRC pension rules.

The security will need to have sufficient value in relation to the loan amount and this will mean that the value of the asset will need to be determined by an independent market valuation from an accountant, chartered surveyor or other qualified person, depending on the nature of the asset. HMRC say the valuation must be at least equal to the value of the loan plus interest, but a prudent lender will restrict this further, depending on the nature of the secured asset. For example, it may be prudent to lend up to 70% of the value of commercial property.

The SSAS loan will need to satisfy HMRC conditions in the following areas;

• Security
• Interest rate
• Term of loan
• Amount of loan
• Repayment terms
• Sponsoring employer
• Solvency of the sponsoring employer

However, despite the level of regulation, it is an important source of alternative finance for the business owner to consider.

The SSAS loan back facility provides an additional tax planning opportunity for the advisor and it should be seen as a short to medium term facility to help developing businesses, rather than a means to support a failing business. It can also be used by businesses already producing healthy profits, whereby a lump sum pension contribution is made to the pension fund and then loaned back to the business in order to retain cash within the business.

It is important for the advisor to select a SSAS Provider who has expertise in this specialised field and with careful planning, the SSAS loan back solution can provide good returns for the pension fund, but at the same time, give business owners a greater degree of control over their capital.