Advisers have seen more of their small, self-administered pension scheme clients turn to loanbacks as companies start to feel the pinch.
Ssas provider Seabridge Ssas said there had been a record level of loanbacks being issued as the cost of living and rising energy bills started to take hold.
According to the provider, it issued 36 per cent more loanbacks in Q3 than it did in Q2.
A Ssas can provide loan finance back to a connected business, up to 50 per cent of the total amount of cash held and the net market value of the scheme’s assets. This cash injection may look attractive in an economic downturn.
HM Revenue & Customs rules state loans made to the sponsoring employer will qualify as an authorised payment as long as five key tests are met, including: a five-year maximum term; interest rates must be at least 1 per cent above the current bank base rate; and the loan cannot be more than 50 per cent of the Ssas’ net assets.
Accessing a loan from a pension can be a good way for clients to free up money, whether for business expansion or, in the current climate, to provide a capital injection.
Gavin Wood, a chartered financial planner and head of private clients at Beckett Financial Services, said advisers may have seen an uptick in loanback requests recently because business owner clients would always "bet on their own business ventures" rather than trust stock markets or other asset classes.
He added: “While, in general, they appreciate the need to diversify, almost every successful entrepreneur considers themselves to be the ‘best investment’ out there and a way to have more control over their investment risk.”
Using these funds to help the business, while at the same time paying a commercial rate of interest on the loan into the pension scheme, has given greater returns than simply holding cash within the Ssas, Wood said.
“The ability to set the interest rate at a competitive but commercial level is attractive from a Ssas investment return perspective.
“It is also very attractive for business owners to effectively pay themselves interest on loans rather than ‘waste’ the money to a third-party lender.”
Nathan Bridgeman, director at Seabridge Ssas, said loanbacks were underused but could be beneficial when used properly.
“With corporation tax going up they are even more attractive as repayments are a deductible business expense thus reducing corporation tax,” he said.
“With interest rates set to increase we are seeing an increase in company directors locking into low fixed rates for the next five years.
“We have seen a substantial increase in company directors refinancing debt with banks now to benefit from a lower interest rate and to also shore up their balance sheets.”
Will this trend continue?
Wood said loanbacks would always be an attractive option for individuals who are both business owners and Ssas members.
“Why wouldn't someone want to obtain competitively priced finance for their business while at the same time ensuring all debt servicing costs remain within their own beneficial interest rather than go to a third-party lender?,” he said.
“As long as the need for the loan back is sound, robust and not putting the business or pension scheme at risk, I can see no reason for advisers to dissuade clients from continuing to use the loan back facility.”
But Bridgeman warned individuals must take care to choose a scheme administrator and professional trustee with a clean track record and technical expertise.
He said people should look for “a scheme administrator with skin in the game” that takes the liability rather than a “practitioner or consultant that will transact without putting their neck on the block”.
amy.austin@ft.com
