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Firms urged to clear pension shortfalls with loan

Companies with pension sch-emes in deficit should borrow cash to pay off the shortfall now rather than pay the MFR minimum contribution, according to actuarial firm First Actuarial.

The firm says merely paying the minimum required each month will be more expensive, allowing the debt to accrue in much the same way as a credit card debt.

Director Alan Smith says that a pension scheme with a £500,000 deficit would take 15 years to pay it off at the minimum £36,000 a year after tax relief.

But taking out a loan of £350,000 and investing this in the pension scheme would clear the deficit after 30 per cent tax relief is added. Assuming an interest rate of base rate plus 2 per cent – currently making 6.75 per cent – would result in loan repayments of £33,000 a year, saving £45,000 over the term.

Smith says: “Finance directors are likely to be among those who act rationally when dealing with their personal finances so why on earth do they throw these principles away when funding their company pension schemes””There is a viable alter-native to just paying the minimum and watching the deficit magnify and this is to borrow money to make good the deficit.”

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