There are various situations where a client may be looking to raise funds, whether it is making a one-off property investment, paying for a large family event or injecting cash into a business.
This is particularly true under the current Covid-19 conditions where, for some clients, the more traditional sources of income, such as employment and investments, are possibly at lower levels than in previous years.
Pensions are of course one potential source of funds.
Clients aged 55 or over can access lump sums either through tax-free cash or UFPLS and receive income in the form of drawdown, annuities and defined benefit scheme pensions.
Clients who are under 55, however, and those who are unwilling to take pension benefits for planning reasons, may enquire instead whether there is any possibility to borrow money from their pensions.
This happens elsewhere in the world, with some pension schemes in the USA and Australia able to make loans to members in certain situations, usually linked to significant financial hardship.
However, loans tend not to enter the standard discourse on pensions and financial planning in the UK.
So, in this article, we will be looking at if, when and how clients can take loans from their pensions, particularly with regard to self-invested personal pensions (Sipp) and small self-administered schemes (Ssas).
We will also be looking at the potential pitfalls and tax charges that might apply, given this is an area fraught with complexity.
Sipp - loans to the member or to a ‘connected party’
Firstly, let’s look at whether a client can take a loan direct from their Sipp.
The legislation is clear that a loan from a personal pension scheme to a member is an unauthorised payment. This means it would incur tax charges of at least 40 per cent of the value of the loan. The tax charges would fall on the member personally.
If a scheme were willingly allowing unauthorised payments of this nature, it would invite unwanted scrutiny from HMRC.
And if HMRC perceived there to be systematic abuse of the pensions tax regime, it has the power to de-register a pension, which would have a significant impact on all members of the scheme.
Therefore, it is unlikely that any reputable provider or administrator would agree to facilitate loans to a member.
It is important to note that this rule applies not only to members but also to persons or companies ‘connected’ to the member.
For the definition of ‘connected’, the pensions legislation points you in the direction of section 993 Income Tax Act 2007. This is too lengthy to reproduce in full, but in broad terms it means spouses, civil partners and relatives.
(It also extends to relatives of spouses and civil partners as well as spouses and civil partners of relatives). Connected companies are those that the member is a director of.