Borrowing money from a SIPP or SSAS 4


Final Salary schemes have pretty much ceased to exist, Stakeholder Pensions never really caught on, so the majority of us have one of the following:

Personal Pension Plan – most people have or have had one of these, its the kind of scheme where your IFA comes along every year, asks you how much risk you want to take and then invests your pension in a Managed Fund or similar.

SIPPs – Self Invested Personal Pensions – these are a little more expensive but you have a lot more control and you can invest directly into Commercial Property, borrow money to buy Property and you can make loans to unconnected parties

SSAS – Small Self Administered Scheme – these are generally a little more expense than both Personal Pensions and SIPPs but you have even more control and you can lend to your own company

http://www.jameshay.co.uk are great for SIPPs and SSASs, there many other great providers too

You could have a combination of the above and its possible to transfer money between pension plans (but there is normally a fee for the transfer)

When you pay earned money into you pension you will get tax relief at either 20% or a higher rate but its limited to a maximum of your earnings.

Your employer can pay in too, maximum contributions are now £50k

http://www.hmrc.gov.uk/incometax/relief-pension.htm

You can also carry forward unused allowances

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/carry-forward.htm

SIPPs and SSASs can lend money at market rates to unconnected parties without too many restrictions a great explanation of this is given on this link

http://www.curtisbanks.co.uk/assets/downloads/guides/guide-loans.pdf

Alternatively you could use http://www.thincats.com/ or http://www.fundingcircle.com/ or I am sure there are others too

Lets say you are 40% tax payer, you pay in £100k out of earned income, the tax man gives the tax back of £40k, so you have £140k to lend, because its short term lending against assets you will probably be paid interest at 10% to 15%, thats a pretty good return (I appreciate there are risks, as there are with everything in life and of course you should always take professional advice before doing anything).

If you are a business looking for funding perhaps borrowing from a SIPP or SSAS may be the solution, it certainly seems to be catching on. But just be careful who you choose to lend to and against what assets.

steve@bicknells.net

Correction – if you pay in £60k it will be topped up by £40k to £100k if you are a 40% tax payer

4 comments

  1. Steve,

    your example says pay in £100k of earned income and the tax man pays in £40k to make it £140k. I thought it worked the other way i.e. pay in £60k of after tax income that is topped up by £40k giving £100k or else pay in £100k that is topped up by £66.7k to give £166.7k. That’s because you are paying tax at 40% on your £166.7k (which is £66.7k, ignoring the £50k cap you refer to). I do not see how the “top-up” brings it from £100k to £140k.

    Regards,

    Joe

  2. A great blog, Steve. I’ve been talking to my clients about borrowing from pension funds as an alternative to other forms of borrowing for some time.

    However, the tax relief available is actually quite a bit more generous than you’ve illustrated!

    Using your example of a 40% taxpayer, if he/she wanted to make a contribution of £10,000 from earnings, they would pay in £12,500 initially; the taxman would add £2,500 to their pension and give them a tax refund of £2,500. In actual fact their £10,000 would become £15,000.

    Your example of £100,000 invested is a bit more complicated because the 40% tax bracket isn’t big enough to cover such a large contribution. The exact amount of tax relief would depend on their total earnings.

    However, if as an example you look at someone with earnings of, say, £200,000 who wanted to contribute £100,000 to a pension it would work something like this:

    • They initially invest £140,000
    • Tax relief of £35,000 is added to the pension
    • A tax reclaim is made via self-assessment for a further refund of £43,242

    They end up with £175,000 in their pension, rather than £140,000, and in effect it’s only cost them £96,758 instead of £100,000.

    Be careful, though. That limit you mention of £50,000 a year applies to employee contributions as well as employer, so to pay in such a large amount would take some clever planning and involve using un-used allowances from previous years. All the usual health warnings apply: take independent, professional financial advice before making any decisions about matters like this.

    And in true public service broadcaster style, other SIPP and SSAS providers are available!

    Thanks for an interesting and informative blog though, Steve.

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