COVID-19 has seen many companies come up against unprecedented challenges. This has, in turn, seen financial solutions used in new, unexpected ways to solve key business issues. One prime example is the huge increase in popularity that small, self-administered pension schemes (SSASs) have enjoyed in the past few months.
A number of key SSAS providers reported a surge in SSAS registrations in April 2020 and specialists believe that it’s down to the SSASs unique loanback feature. A SSAS can authorise loan finance back to the sponsoring employer of up to half the value of the SSAS, i.e. the total amount of cash held and the net market value of the scheme’s assets.
This gives trustees the freedom to use the funds to fulfil key business goals. With SSAS borrowing rates currently highly competitive, this remains an attractive option for those businesses needing a cash injection during turbulent times.
Potential Risk Factors
It should be noted that the loanback feature is just one element of a SSAS – albeit an attractive one – and that all aspects of the SSAS should be considered with the help of an expert adviser before making a decision about its suitability for your unique situation and financial ambitions.
For example, if you have another form of collateral in your SSAS such as properties or assets, then the loanback feature may be an effective route to take. But this feature must be utilised properly in order to ensure that it represents a sound investment for the overall pension scheme and does not risk using your pension money inefficiently. In some cases, it may be more suitable to leave SSAS funds untouched and save for retirement as intended, instead choosing to fulfil business goals using alternative financial routes such as a bank loan.
The COVID-19 impact
Using pension scheme assets to support the business via loanback can be highly effective and the SSAS structure is highly sought-after in part for the control if affords member trustees over their retirement income. While the loan cannot be used to save the business from going under, it will prove a valuable cost-efficient way to fund ongoing business growth and provide liquidity during these unstable economic times.
In addition, when a loanback takes place the company is required to pay interest to the SSAS, providing further benefits in the form of these interest payments, representing a cost-effective source of capital.
This is especially pertinent due to the current economic situation and the threats to pension savings. As reported in Elite Business Magazine, “interest rate cuts and new government-backed bond-buying programmes have reduced the income pension funds earn from their fixed-income investments.” This low-yielding environment means that regularly re-evaluating pension arrangements with your financial adviser and negotiating the most effective outcomes is even more important.
One in 10 UK workers have paused their pension contributions since the onset of the pandemic due to the financial pressure of essential spending and the impact of furlough or redundancy. Any break in pension contributions can hit the long-term pension pot hard, and it is essential to keep long-term pension value and saving adequate retirement provisions as key priorities. This means we all need to leverage the best opportunities available to take control of our retirement income.
The Finer Details
If you are considering taking out a loan using your SSAS, we recommend taking expert financial advice to ensure that all the necessary admin is complete. One key box to tick is ensuring that the loan qualifies as a loan and is a fully authorised payment, otherwise you risk exposing yourself to tax charges. It’s also important to be aware of the factors it must fulfil to qualify as an authorised loan, such as interest rates of at least 1 per cent above the current bank base rate. Sound financial advice will ensure that you are fully aware of all the possibilities and the risks associated with your decision.
For more information about any of the above and a full explanation on how the SSAS loanback feature works, contact our expert practitioners today.