How to borrow growth capital from your pension fund

There is so much happening right now in the financial sector that is affecting businesses’ ability to access funds to help them grow or diversify their offering. 

Bank lending has decreased dramatically, so businesses may find it hard to access any, or all, of the funding they might need. This is why the option of a loan-back facility has proven a very popular choice to remove or compliment bank borrowing. 

A “small self-administered scheme” (SSAS) is a pension fund owned by a business, and from which funds can be drawn on by directors who can “loan-back” an amount. Through your SSAS, you can purchase commercial property directly, but this is sometimes not favoured by the business, so the scheme rules allow the loan-back so that investment options including commercial property purchase can be facilitated. 

The “loan-back” facility applies to the “sponsoring employer” of the scheme, so it is applicable to small self-administered schemes. Note that a loan-back is not available via a SIPP, which is a personal pension with no sponsoring employer.

The maximum loan is 50 per cent of the net fund value, for a maximum term of five years, repayable in equal monthly instalments and with a first legal charge on property. 

Property does not just mean literal bricks and mortar but appropriate asset such as equipment. However, commercial property would be the ideal solution and is a popular investment for those seeking loan-back options.

There are many reasons why companies choose loan-back – and not only to invest in commercial property, buy new equipment or software or recruit new staff members. It can also be used to perhaps buy out a business partner, for cash flow, or restructuring/eliminating bank lending or existing bank debt. The options are endless.

SSAS, falling under professional administrative and trustee services, is a very specialist area of pensions advice, and therefore any business looking to go down this route should seek assistance from a SSAS expert. 

It doesn’t fall under general financial services as provided by a generic financial adviser – so business owners should think carefully about choosing a specialist who really knows the area. Without specialist advice, there are potential pitfalls. 

For instance, there are five key tests that a loan must satisfy to qualify as an authorised employer loan. These are: 

• Security 
• Interest rates 
• Term of loan 
• Maximum amount of loan
• Repayment terms

If a loan fails to meet one or more of these tests, an unauthorised payment charge will apply, which will depend on which test it failed on or if it failed on multiple tests. 

If, for example, residential property was used as security, and then the loan defaulted on, the scheme would call in the security and automatically own an unacceptable asset ie residential/taxable property, which would lead to further tax charges.  

Interest is charged at commercial rates, but at least bank base plus one per cent.

Loan-back is no doubt an effective business facility for those with SSAS and will continue to grow in popularity, certainly while bank lending situation shows no signs of improving – and as long as the right professional services are sought, businesses should consider this as a viable lending source. 

Jonathan Hovers, co-foundering director of Pool House Professional Advisers, has extensive knowledge of the SSAS and SIPP industry.

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