PensionsJun 9 2020

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
  • 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
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Approx.30min
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How to borrow from one's pension

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

A loan must not be more than 50 per cent of the net asset value of the scheme. This is assessed at the point immediately before the loan is made.

This is a one-off test. If the net asset value later drops such that the outstanding loan amount comes to more than 50 per cent, it will not create an unauthorised payment.

However, if the scheme makes a further loan, there is a further test of the 50 per cent limit. This takes into consideration outstanding loan amounts and the net asset value at that time.

If the 50 per cent limit is breached, the unauthorised payment amount will be the difference between the total value of the loan(s) and 50 per cent of the net asset value. 

Term of the loan

The term of the loan must not be longer than five years from the date of the loan. 

However, if a sponsoring employer faces financial difficulties, the legislation allows the Ssas to roll the loan over for a further five years. 

Where a rollover takes place, the terms of the original loan must stay the same. The rolled over loan will not be treated as a new loan, so it will not need to be tested against the 50 per cent limit, and any existing security can continue to be used.

If the term exceeds five years, the unauthorised payment amount is calculated by dividing the loan amount across the number of days in the term then applying that pro rata against the number of days by which the term exceeds five years.

Interest rate

The Ssas must charge interest on the loan of at least 1 per cent above a specified interest rate. This is to ensure a commercial rate of interest is being applied to the loan. 

The specified rate of interest is based on the lending rates of six leading high street banks rounded up to the nearest 0.25 per cent. 

Helpfully, HMRC publishes the rate on the following web page under the heading ‘Other Corporation Tax Self-Assessment interest rates - Interest charged on underpaid quarterly instalment payments’. 

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