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Loanback lifeline

Considered defunct, thanks to the credit crisis, small self-administered pension schemes have seen a resurgence in popularity, providing small businesses with a lifeline. In an economic climate where borrowing remains difficult, company directors can use their SSAS to borrow up to half their pension pot and repay it at an interest level of 1.5 per cent – well below the level that banks are charging.

When pension simplification came into force in 2006, the alignment of rules meant SSASs quickly took a back seat to the rise of the Sipp. However, these days, the main remaining feature of the SSAS, its loanback facility, has pushed the product to the fore of a lot of advisers’ minds.

In 2006, the Government decided to set SSAS loanback rates at 1 per cent over base rate, down from 3 per cent. It may have seemed generous at the time but little did the Government know how generous – never imagining a world in which there was a 0.5 per cent rate.

Nathan Bridgeman, director of pension consultancy Talbot & Muir, says his firm is seeing a marked increase in interest in SSASs in recent months, attributing it entirely to the scheme’s loanback facility.

Premier Pension Services head of self-invested pensions Nigel Manley says his firm is also seeing an increase in interest in SSAS loanbacks.

As UK base rates were much higher in 2006, the 1 per cent above base rate level of interest repayment was not quite as attractive as it is today, Bridgeman notes. Even if smaller companies can get funding from banks these days, the interest being charged is closer to 10 per cent and many seeking finance have to jump through hoops to get loan approvals.

Bridgeman says the advantage for SSAS trustees is that they know the business so they do not have to contend with a bank loan manager who does not understand.

Under the scheme rules, an SSAS, which can have up to 11 members, can loan money to a connected party. This means the directors of a firm can use the pension to loan money to the company. Sipp rules also allow loanbacks but these can only be to unconnected parties.

In addition to the minimum interest repayment rate, the loan cannot exceed 50 per cent of the net market value of the scheme at the date the loan is made. To qualify for the loan, there must be collateral at least equal in value to the face value of the loan, including any interest.

The most commonly used asset is the property of the business itself. According to the rules, a loan to a sponsoring employer must be for a commercially acceptable purpose and the terms of the loan must be in writing. All members of the SSAS must approve all aspects of any loan before it can be made.

With billions still sitting in SSASs despite the drop-off in new schemes set up since 2006, there remain a fair number of people that can take advantage of the loan- back facility. Manley says that while product providers, mainly the big insurers, left this area of the market, there does remain a hard core group of SSASs still around with solid fund levels.

He believes there must be around 25,000 still in existence, pointing out that his firm alone has 1,300 SSASs worth an estimated £750m. Bridgeman also notes that anyone with an occupational pension pot of £25,000 or higher could also look to move to an SSAS and access the loanback facility.

Manley says that while the loanbacks could help tide a business over in a difficult time, he is saddened that the economic situation has forced the issue, enabling pension schemes to offer funding that banks should be providing.

With the Government becoming a part-owner in many of the UK’s biggest lending institutions in recent months, it is ironic that the loan rate in SSASs, set by the Government, is now their biggest competitor. This makes it difficult for the Government to change the loanback rate on SSASs without being criticised for having a vested interest in the matter. After all, such action could easily be construed as the Government changing pension rules to simply make their own investment in banks more profitable. It may not be what the Government foresaw when it set out the SSAS rules but it is likely that it will have to live with it for some time.

While a low interest rate loan during a tough economic climate is appealing to the company itself, there are also benefits to the actual pension pot. Although the minimum repayment is 1.5 per cent, scheme members can choose to pay a higher rate of interest, giving their pension scheme an added boost at a time when returns as well as loans are hard to achieve.

Hargreaves Lansdown head of pensions research Tom McPhail says that if the loan was paid back at, say, 5 per cent, it could still be lower than many could get from a bank, if they could get a loan at all, and it would offer a decent return to the scheme. “Better than gilts but not perhaps as good as some corporate bonds – it’s an interesting benchmark to judge it against,” he says.

With interest on the rise in loanbacks, advisers still need to be cautious. McPhail says that as with anything in pensions, questions as to suitability and prudence should be asked before any company took such an approach. “There are situations when the extra money could be useful to a business but it is doubling your risks by putting your pension assets into the business,” he notes.

Manley says: “It is hardly surprising in the difficult financial climate that small, owner-managed businesses would look at it but I would be a little cautious that these decisions are not being made out of desperation.”

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