Navigating the SSAS Pension Loan Back facility and the different roles members can play.

The popularity of Small Self-Administered Schemes (SSAS) has been back on the rise among business owners and directors looking to gain greater control over their retirement savings.

SSAS offer huge flexibility and control for their members and are not only vastly underrated, but also sadly often misunderstood. The fact is, compared to a SIPP, which is often restricted by the parameters and constraints of the SIPP Provider, SSAS offers greater control over all aspects of the scheme, which is such an advantage. However, some complexities do exist. SSAS members can play between two and four roles at any one time, as they will be Trustees and may also be directors and shareholders. It is therefore vital to understand which role or roles they should play when considering transactions, particularly those that relate to connected parties.

By allowing the founder or associated employer to borrow money from their SSAS for commercial purposes, the Loan Back provides one of the unique benefits of a SSAS, as it offers an alternative to small business loans.

For the company, it means being able to avoid the lengthy wait involved with the credit controllers at major banks for SME lending, whilst for the directors it means interest payments on the borrowing effectively go straight into another branch of their own wealth. In addition, the company is also allowed to make SME loans payments which are classified as “investment returns”, meaning they are on top of any annual allowance contributions the members enjoy.

For the trustees/members, the SSAS Loan Back provides a secured fixed interest yield, so this income could provide the liquidity to cover regular member pension payments.

Whilst it sounds like an attractive commercial option, for a Loan Back to be a secure and sensible investment, there are in fact multiple criteria and parameters which need to be satisfied. Some of these are legislative, to prevent the payment to the employer being treated as unauthorized, which would bring with it considerable tax implications. As such, SSAS Loan Back rules include:

• A maximum of 50% of the net scheme value can be loaned back
• The term cannot exceed five years
• Interest and capital should be repaid over the term of the loan in equal instalments, as happens with a small business loan.
• Security should also be by way of first charge

There are however areas that contain variables:

• The rate of interest
• What asset(s) are offered as security
• The maintenance of the loan over the term

Let’s take each variable in turn.

The rate of interest

A minimum of bank lending base rate plus 1% is required, but setting that rate is where members playing different roles may have differing views.

In order to minimise the liability of the company, a director/shareholder may prefer to set the interest rate at the lower end of the scale, whilst a member who is not a company shareholder might prefer a higher rate of interest to see a better return on investment.

However, given both parties also play the role of SSAS Trustee, they should offer the Loan Back on terms of the borrower’s choosing because of the fiduciary responsibilities they hold to their members’ best interests. After all, the company can choose to accept or decline the trustees’ offer.

In practice, the defined rate of interest will be a compromise between all parties. Pre-A Day, HMRC often accepted base rate plus 3% without hesitation, however these days there is no such implied acceptance criteria. In practice, the rate of interest compromise is met through duplicating an offer from a 3^rd party lender on the same terms, on the basis that it reflects fair market value.

The choice of asset secured on the borrowing.

As mentioned earlier, this must be a first charge and must also be proven to be of sufficient value to cover the borrowing and interest combined over the full term.

Again, if a trustee has a personal interest in the asset, they might be less likely to offer it as security, or they might be more inclined to call in that security in the event of a default.

The maintenance of the loan over the term

The third area in which members should be conscious of their trustee role, is in the event of the borrower defaulting on one or more repayments.

A trustee who is a director may be inclined to allow a late or missed payment or two, but in doing so they would be forgetting or breaching their fiduciary responsibilities. If allowed to worsen, such a situation may see the full effects of default, including the calling in of security, come to pass.

It is in these three illustrated situations that the role of an independent trustee becomes valuable, in reminding others of their trustee role, and pointing out how conflicts of interests must be managed and avoided.

Ultimately of course, it is only the Treasury that will benefit from trustees not complying with the loan documentation and maintaining the commercial terms between the SSAS and the employer, through unauthorised payment tax penalties.

In conclusion, provided each member recognises and respects their role as SSAS trustee, a Loan Back is a unique feature that, like an SME loan, can provide finance to the company, but also be of great commercial benefit to both the SSAS (and its members) and the participating employer.