How to borrow from one's pension

  • Outline the pitfalls of a member taking a loan from a Sipp
  • Describe the conditions for a loan from a Ssas to a sponsoring employer
  • Describe the challenges associated with repaying a loan

Also worth noting is that the definition of a loan includes loan guarantees. Therefore, a Sipp cannot be used as collateral for a loan. 

Sipp - loans to ‘unconnected parties’

There is a bit more scope, at least as far as the rules are concerned, for a personal pension to make a loan to a person or company that is not connected to the member. This is not listed as an unauthorised payment in legislation.

In practical terms, an ‘unconnected party’ could be, for example, someone like a friend, colleague or maybe a business partner.

However, it is quite possible that most pension providers will not have come across this, given it is arguably not a situation that takes place too often in real life.

The friend is more likely to look to other sources, or the client would be more likely to use non-pension funds. 

Therefore, if a client did want to go down that route, they would need to find a provider comfortable with facilitating it. They would almost certainly be looking at the more bespoke (and costly) end of the Sipp market for this.

Also, taking a detached, commercial view, a reasonable member might be unwilling to lend money to a third party from their pension, potentially jeopardising their own financial security in retirement. 

Then again, during a period of low investment returns, that might seem like a way of making returns above current cash interest rates.

Ssas - loans to a sponsoring employer

The biggest scope for pension loans comes with an occupational pension scheme such as a Ssas, and this is the area we will focus on most in this article.

Despite a sponsoring employer being ‘connected’ to the scheme, pensions legislation allows a Ssas to make loans to the sponsoring employer.

This is a big selling point of a Ssas, and employer loans are something that occur relatively frequently (note that a loan from an occupational pension scheme to a member is still an unauthorised payment).

For a loan from a Ssas to a sponsoring employer to be an authorised payment, it must meet five conditions. These relate to:

  • The amount of the loan
  • The term of the loan
  • The interest rate
  • The repayment terms
  • The security

If a loan fails on one of these conditions, there will be an unauthorised payment. However, the amount of the unauthorised payment is not the value of the loan. 

Instead, it depends on which condition is not met, and each condition has its own calculation in terms of attributing a value to the unauthorised payment.

If two or more conditions are not met, the amount of the unauthorised payment is determined by whichever failed condition produces the highest unauthorised payment.

Let’s look at these conditions in a bit more detail.

Amount of loan