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.
Trustees of pension schemes can borrow money, provided it is used to benefit the pension scheme.
This money can be used by the Scheme Trustees for any benefit but it is usually used to enable the Trustees to:
This money can be borrowed from any of the following:
If the money is borrowed from a connected party (see later), the loan has to be made on commercial terms.
The maximum amount that the Trustees can borrow is 50% of the current value of the scheme. 100% of scheme assets plus any scheme borrowings can be used to buy an asset. This means that the scheme could buy an asset worth 150% of the current value of the scheme.
The 50% limit is the total amount that a scheme can borrow. There is no separate limit for any associated costs involved in the purchase of the asset e.g. VAT.
The maximum amount that the Trustees can borrow is 50% of the current value of the scheme less any outstanding loans. The current value of the scheme can't include the current value of any existing borrowings.
The current value of the registered pension scheme is £300,000 with outstanding borrowings of £50,000.
The maximum amount of additional borrowings can't be more than £75,000. Calculations are below:
(Current value - existing loan) x 50% - existing loan = Allowed borrowing
(£300,000 - £50,000) = £250,000
£250,000 x 50% = £125,000
£125,000 - £50,000 = £75,000
There are many advantages in a pension scheme owning property or land, including:
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.
Commercial property, including:
A pension scheme can't invest in residential property. This includes:
A pension scheme can't normally invest in residential property, but there are some exceptions. Examples of some of these exceptions are:
Loans to the employer is 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. No loans can be paid to a scheme member or anybody connected to the scheme member.
If the pension scheme is an occupational pension scheme the money can be lent to the sponsoring employer or a third party. The third party can't be a member or anybody connected to a member. If the pension scheme isn't an occupational pension scheme the money can only be lent to a third party. A scheme that isn't an occupational pension scheme can't lend any money to an employer that's connected to the scheme member.
Up to 50% of the market value of the scheme can be used.
If the pension scheme is an occupatioal pension and the money is lent to the sponsoring employer the loan shouldn't be granted for more than 5 years, but under certain circumstances the loan can be extended by up to 5 years.
If a loan is made to a sponsoring employer and that sponsoring employer gets into financial difficulty during the initial 5 year period, the loan may be rolled over for up to a further 5 years. This can only be done once.
Any loan made by a registered pension scheme to:
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.
A loan made by a registered pension scheme to a person/company connected with the person who is, or has been, a sponsoring employer will not result in an unauthorised payment in relation to the person who is, or has been, a sponsoring employer. This is provided the loan meets the same conditions as for loans to sponsoring employers generally (see PTM123200).
The amount of the loan has to be secured throughout the term as a first charge on any asset owned by the person borrowing the money. This asset must be worth at least the same as the amount being lent plus the value of all the interest due over the term of the policy. If the asset that is being used as security is replaced by a new asset, the value of the new asset has to be at least equal to the value of the outstanding loan, including interest. In practice the security is likely to be a property.
The minimum interest rate a scheme can charge 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%:
All loans have to be repaid in equal instalments of capital and interest for each complete year of the loan.
A pension scheme can purchase shares in any company, regardless of whether or not they are listed on a recognised stock exchange. An occupational pension scheme is however restricted in the amount of shares that it can purchase in the sponsoring employer or employers.
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.
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 taken into account.
Transactions between connected parties are not prohibited but if they do not take place on commercial, or 'arm’s length', terms, they are may give rise to an unauthorised payment. Where the transaction is done on a commercial basis and any valuations are made by suitably qualified valuers, this will reduce the chance that the transaction will be an unauthorised payment with the consequent tax charges.
A company is connected with a person if that person has control of it, or if that person and the persons connected with them together have control of it.
In relation to an occupational pension scheme this means the employer, whose employees benefit from the scheme.
This is a normal commercial transaction that is done at the market rate between two or more parties.
Any transaction between connected parties has to be made at an arms length. If it's not done at arms length and as a result of this the member financially benefits the difference between the actual value and the arms length value will be taxed as an unauthorised payment. Scheme trustees should ensure that when a connected party transaction happens that they obtain an independent valuation and ensure that the market value is paid.
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.
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.
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 an 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:
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.