Can my pension scheme make a loan?
An occupational pension scheme that is a registered pension scheme can make a loan to the sponsoring employer or any party unconnected to the member. Any loan to a sponsoring employer should be secured and made on a commercial basis. There are five tests that are used to determine if a loan to an employer is on a commercial basis.
- The loan must be secured as a first charge on an asset of equal value.
- The loan must have a commercial interest rate (at least 1% above high street bank rates).
- The repayment period must not be longer than five years.
- The amount loaned must not be more than 50% of the net value of the scheme’s funds.
- Repayment of the loan must be in equal annual instalments of both capital and interest.
However, if any loans from a registered pension scheme are made to the member or a connected party they will be subject to a tax charge on pension loan payments.
If your pension scheme is not an occupational pension scheme, there will be no sponsoring employer. Therefore any loans made by the scheme to an employer which is connected to the member will attract a tax charge on the member.
To find out whether or not your scheme is an occupational scheme, you should contact your scheme administrator.
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