City Trustees - part of Mattioli Woods



News and Media

27 June 2014

Loanbacks from a SSAS

Although many IFA clients have strong business models and are achieving healthy profits, they frequently require additional liquidity in order for their business to develop. Those who do meet with their bank manager and manage to hurdle the ever-increasing criteria required to be approved for funding, are then faced with interest rates that are better associated with credit cards or payday loan companies, rather than being business or long-term private client centric.

The role of a SSAS

In some cases, the use of directors' pension benefits to establish a SSAS (small self-administered scheme) could be an option. This type of pension scheme can lend money to a sponsoring employer at a commercial rate.

A SSAS is able to lend half of its value to a sponsoring employer, and with the average age of a director being 58, many may have considerable pension funds which have been built up over the years. If these funds are combined, there could be a substantial amount of money available for lending purposes.

These loans, known as a loanbacks, are useful in assisting the development of a business but are also efficient when a company is already producing healthy profits. A lump sum contribution can be made to the pension scheme and then loaned back to the business in order to retain the cash within the company. This creates a corporation tax saving. It should also be noted that any interest paid to the pension scheme will also reduce profits, creating future corporation tax savings.

Terms

The terms of a loanback are relatively straightforward when compared with the reams of small print associated with a high-street loan, and set up costs are also not unreasonable.  Security is needed to cover the loan. The maximum term of the loan is five years with repayment on at least an annual capital and interest basis. Therefore this vehicle should be seen as a short to medium-term funding solution and not an open-ended debt source.

As well as the advantages outlined above, a loanback can provide an excellent return for the pension scheme as well, certainly over and above what can be provided in cash.

Additional planning opportunity for the IFA

It is important for clients to know that there are alternative sources of finance available, but appropriate planning is required before considering such a proposal, which is an additional avenue of advice for an IFA.

In essence, a loanback is the type of short-term facility which is great for assisting a business to develop, but care does need to be taken in order to avoid it being used incorrectly to support a failing business model.

Arrears in repayments from the sponsoring employer could be treated as an unauthorised payment by HM Revenue & Customs, incurring tax charges for the pension scheme and the company.

City Trustees

City Trustees is a specialist pension provider committed and focused on the fully bespoke self-invested pension market, distributing its products exclusively via independent financial advisers, wealth managers and other intermediaries.

City Trustees is a well-established business, which also benefits from the strength of being owned by leading pension provider Mattioli Woods plc. Core to its product offering is a professional and personalised service. For IFAs, City Trustees operates a free technical helpline for support with pension challenges. Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk today.

 

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City Trustees is a trading name of Mattioli Woods plc. For news updates on the Group, please visit our central News & Media on the Group website.