SIPP & SSAS investment rules

SIPP rules vs SSAS rules: the single HMRC investment standard

Small-self-administered schemes (SSASs) and self-invested personal pensions (SIPPs) are covered by the same set of HM Revenue and Customs (HMRC) investment rules as every other type of pension scheme.

Any investment held before 6 April 2006 is still subject to the rules in force when it was entered into and is not affected by the post-6 April 2006 new rules unless there's a change to the original terms.

Borrowing by pension trustees: when and how it’s allowed

Trustees of pension schemes can borrow money, provided it is used to benefit the pension scheme. The scheme may borrow an amount up to the equivalent of 50% of the net value of the fund prior to the borrowing taking place.

HMRC Pensions Tax Manual - PTM12400: Investments: borrowing

Property investment rules: what SIPP/SSAS can buy

There are many advantages in a pension scheme owning property or land, including: 

• No Capital Gains Tax liability when the property is sold.
• Normally there will be no Inheritance Tax liability as the property is an asset of the scheme (from April 2027, it’s the government’s intention to bring unused pension funds and death benefits within the value of an individual’s estate for inheritance tax purposes).
• The rent paid by the tenant is tax deductible as a business expense, and the rent received by the pension scheme helps to increase the retirement benefits. 

It is worth remembering that property is an illiquid asset and is likely to restrict the diversification of the fund and will need ongoing maintenance plus regular tenants to generate good returns. 

Eligible commercial property

Commercial property includes:

• hotels
• student accommodation
• care homes
• prisons
• shop
• offices
• overseas commercial property
• development land

Schemes cannot invest in:

• Any related land that is wholly or partly the garden for the building or structure.
• Any related land that is wholly or partly grounds for the residential property and which is used or intended for use for a purpose connected with the enjoyment of the building.
• Any building or structure on any such related land.
• A beach hut.
• A property that also has a residential element. For example a building where some of it is used for commercial purposes, such as a shop, with an inter-connected residential area, such as a flat. The whole property will be treated as residential as it is suitable for use as a dwelling. Different parts of a building are inter-connected if they share a common entrance and where you can move from one part to another without moving through common areas.

Residential property and taxable property

A pension scheme can't normally invest in residential property, but there are some exceptions. Examples of some of these exceptions are:

• A piece of land that is having a house built on it as long as the land and house is disposed of before it becomes habitable.
• A commercial property that is being converted to a residential property provided that the property is disposed of before it becomes habitable.
• A property that is occupied by an employee who is neither a member of the pension scheme or connected to a member of the pension scheme and is required as a condition of employment to occupy the property, for example a caretaker's flat.
• A property that is occupied by a person who is neither a member of the pension scheme or connected with a member of the pension scheme and the residential element of the property is used in connection with the commercial element as an investment of the pension scheme, for example a flat above a shop that is leased from the scheme with the shop, where the flat is occupied by the shop keeper.

HMRC Pensions Tax Manual - PTM125200:Investments: taxable property

Loans: who schemes can lend to, limits, terms and security

Loans are one way in which the pension scheme can be used to raise finance, whilst at the same time providing an investment return to the fund for the benefit of the pension scheme. 

Who they can lend to

All schemes can make loans to third parties but loans to members (or those connected to members) will be taxed as unauthorised payments. 

If the pension scheme is an occupational pension scheme, the money can also be lent to the sponsoring employer. 

If the pension scheme isn't an occupational pension scheme, the money can’t be lent to an employer that's connected to the scheme member without it being an unauthorised payment. 

How much they can lend

Under current regulations, the maximum amount that may be loaned to a sponsoring employer from a occupational pension scheme is restricted to 50% of the combined total of available cash and the net market value of all scheme assets, as assessed immediately prior to the issue of the loan.

If the pension scheme is an occupational pension scheme and the money is lent to the sponsoring employer the loan shouldn't be granted for more than five years, but under certain circumstances the loan can be extended by up to five years.

HMRC Pensions Tax Manual - PTM123000:Investments: loans

Loans over 5 years

If a loan is made to a sponsoring employer and that sponsoring employer gets into financial difficulty during the initial five-year period, the loan may be rolled over for up to a further five years. This can only be done once.

HMRC Pensions Tax Manual - PTM123200:Investments: loans: loans to sponsoring employers

Loans to a scheme member or somebody connected to the member

Any loan made by a registered pension scheme to:

• a person who is, or has been, a scheme member, or
• a person/company connected with the person who is, or has been, a scheme member

will result in an unauthorised payment equal to the amount of the loan; the charge will be 40% of the amount of the unauthorised payment. In addition to this, if the amount of the unauthorised payment exceeds 25% of the fund value there will also be a scheme payments surcharge of 15% bringing the total tax charge to 55%. A scheme sanction charge of 40% of the chargeable amount may also be levied on the scheme administrator.

If a registered pension scheme gives a loan to someone who is not a member and not a sponsoring employer linked to the scheme, but that person is connected to someone who is or was a member or sponsoring employer, the loan is treated as if it was made for the benefit of the member or sponsoring employer.  (see HMRC Pensions Tax Manual - PTM123200:Investments: loans: loans to sponsoring employers).

HMRC Pension Tax Manual - PTM123300: Loans to members and connected parties

Security requirements

If an occupational pension scheme lends money to a sponsoring employer: 

• The loan must be secured for the entire term with a first legal charge on an asset owned by the employer or another person.
• When the loan is made, the security must be worth at least the full amount of the loan plus interest.
• No other lender can have a higher claim on that asset than the pension scheme.
• If the security asset is replaced, the new asset must be worth at least the lower of: 
  • the market value of the old asset, or
  • the outstanding loan amount (including interest). 

HMRC Pensions Tax Manual - PTM123200:Investments: loans: loans to sponsoring employers).

What interest must be charged?

All loans made by registered pension schemes to sponsoring employers is calculated using the average of the base lending rates of the following 6 banks plus 1%, rounded up to the nearest multiple of ¼%:

• The Bank of Scotland plc
• Barclays Bank plc
• HSBC plc
• Lloyds Bank plc
• National Westminster Bank plc
• The Royal Bank of Scotland plc

All loans must to be repaid in equal instalments of capital and interest for each complete year of the loan.

Shares and equities: employer‑related investment limits

A pension scheme can purchase shares in any company, regardless of whether they are listed on a recognised stock exchange. An occupational pension scheme is however restricted in the value of shares that it can purchase in the sponsoring employer or employers.

Employer‑related investment cap

Up to 5% of the fund value can be held in shares of the employer or an associated company.

The Trustees can buy shares in more than one sponsoring employer of the scheme providing that at the time the shares are bought the market value of the shares is less than 20% of total value of the scheme.

There is no restriction on the maximum percentage of shares that can be held in one company.

For example, a scheme could potentially own 100% of the shares of a company provided that the amount being invested is less than 5% of the fund value mentioned above.

Treatment of pre‑6 April 2006 holdings

If an occupational pension scheme held shares in a sponsoring employer before 6 April 2006 the shares can continue to be held.

If, however, the scheme buys shares in a sponsoring employer after 6 April 2006 the 5% limit will apply and the total value of shares including the value of the shares held prior to 6 April 2006 will have to be considered.

HMRC Pensions Tax Manual - PTM122000: Investments: shares and equities

What is the limit on the shares in the sponsoring employer for a personal pension scheme?

A personal pension scheme doesn't have a sponsoring employer, therefore the 5% limit that there is for occupational pension schemes doesn't apply.

Connected party transactions and arm’s‑length requirements

When a registered pension scheme buys an asset from, or sells an asset to, a sponsoring employer, a member, or any connected party, the transaction must be priced at a level that would reasonably be expected between independent parties acting at arm’s length.

If the scheme pays more than the asset’s market value when buying, or accepts less than market value when selling, the difference between the actual price and the arm’s‑length price will be treated as an unauthorised payment.

HMRC Pensions Tax Manual - PTM121000 - Investments: essential principles - HMRC internal manual - GOV.UK

Other considerations

Personal use of assets: when “use” triggers unauthorised payments

HMRC has stated that any non-commercial use of an asset by a member or an associate of a member will create an unauthorised payment charge on the member

Tax charges: unauthorised payments and scheme sanction charge

Unauthorised payment

Where an unauthorised payment is made to a member or an employer the tax charge will be 40% of the amount of the unauthorised payment.

Scheme sanction charge

The scheme administrator will be liable to a scheme sanction charge on all charges except where the assets used to provide the benefit is not a wasting asset. The amount of the scheme sanction charge is 40% of the scheme chargeable payment. 

However, where the member or sponsoring employer has been subject to unauthorised payments charge and has paid the tax due, a deduction will be made to the amount of the scheme sanction charge.

The amount of the deduction is the lesser of:

• 25% of the amount of the scheme chargeable payment, and
• the actual amount of tax paid by the member or employer on an unauthorised payment.