A loan to a non-connected party, however, is permissible. Therefore, if a client wanted to lend funds from their pension to a third party, it would be permissible in theory. This could be a friend or a business connection, perhaps to help a new business get off the ground.
If it is a new venture or perhaps some form of angel investing, a client might be advised to use non-pension funds rather than a self-invested personal pension loan so that they can take an equity stake – something that would be challenging in a Sipp given the rules on non-standard investments and practical challenges around holding unlisted shares.
In practice, this type of third-party loan scenario is unlikely to crop up very often. Therefore, it might need a pension provider that operates in the more bespoke end of the market.
Strictly speaking the legislation does not require the loan to be conducted on arm’s-length terms, but if there is an independent trustee involved in running the scheme, they might be sceptical about straying too far from market terms.
Occupational pensions
A loan to the sponsoring employer of a pension scheme is expressly permitted in legislation. This applies even if the members of the scheme are directors of the employer or have some kind of controlling interest in it.
Personal pensions do not have sponsoring employers – companies can of course make employer contributions into personal pensions, but this is not sufficient to make them a sponsoring employer. An occupational scheme, however, does have one.
A small self-administered scheme is a commonly used type of pension for employer loans. These are small occupational schemes that can have no more than 11 members, and they are typically used by directors of small to medium-sized companies.
A SSAS works on a pooled basis, meaning the funds of all the members are combined within the scheme. The trustees then decide as a group how to invest. As a result, there could be several million pounds in the scheme.
The employer loan function is particularly useful for small businesses in cases where it is challenging to secure loans from more conventional lenders.
And even if an existing SSAS already has a sponsoring employer, there may be scope (depending on the scheme rules and the agreement of all trustees) to add another participating employer to which the SSAS can lend funds.
It still remains the case that the SSAS cannot lend money to the members themselves, but if a client is looking to raise capital to inject into their business, a SSAS could be a possibility.
