Small self-administered schemes (Ssas) often get tarnished by those trying to use them for scams, but they have great flexibility as a pension vehicle when used correctly.
Ssas have numerous powerful options that many other pensions do not. Pooled investments for a small group of connected people can mean bigger and better buying power for both investments and commercial property. But one of the special powers that a Ssas has is the ability to lend money to its sponsoring employer. These are called loan backs, or authorised employer loans in HMRC terminology.
When a Ssas is established it needs to have a sponsoring employer, although all the members are not required to work for this employer. This makes it possible for a small firm to have a pension scheme that could have significant funds brought in from family members, as well as the executive team.
Technically, they don’t need to be family members, but as the funds are usually invested as a whole there really needs to be some connection and common goal between the members in the scheme.
In the current economic climate, even financially sound companies may find it difficult to arrange finance via the traditional route of their local bank. However, it is possible for a Ssas to make a loan to its sponsoring employer called a loan back. This can be of great benefit to an employer, especially as the interest rate charged need only be 1 per cent over the average base rate of the six main UK clearing banks.
Even if a Ssas is not already in place, it may be a reason for consolidating existing personal pensions or self-invested personal pensions (Sipps) into a Ssas to allow an immediate loan back of up to 50 per cent of the fund value.
It should be noted that since HMRC changed the way in which Ssas are registered, there can be a delay in setting up a new Ssas, so this may not be the quick fix it used to be. But because HMRC is taking a greater interest in the establishment of Ssas, the change will remove the temptation of scammers to use these to gain access to people pension funds. Currently, the establishment of a new Ssas can take up to six months, but by the same token it can also be quicker than this.
There are strict conditions that need to be adhered to if the loan is to be treated as an authorised employer payment and avoid any adverse tax consequences. There is no point in doing a loan back if any of these conditions can’t be met: the tax charges could completely wipe out any benefit of a Ssas and even result in deregistration should the issues be that significant. This is why a loan back should never be used to prop up a failing business, because not only could the company fail but the pension could be lost with it.