One of the unique advantages of a Small Self-Administered Scheme (SSAS) is its ability to lend money back to a sponsoring employer, subject to HMRC rules. For many business owners, this can provide an alternative source of funding while directing interest payments into their pension rather than to a bank. This case study shows how Jerry and Joanne used their SSAS to support the cash flow needs of their seasonal business, demonstrating how the right pension structure can benefit both the company and their long-term retirement planning.
The Challenge
Jerry and Joanne own Surf and Turf Ltd, a seasonal business that experiences significant cash flow pressures during the winter months. Although customer demand is at its highest during the summer, stock needs to be purchased well in advance to ensure the business is fully prepared for the season.
Like many seasonal businesses, this creates a funding gap during quieter periods of the year. Traditionally, this might be addressed through an overdraft or other bank borrowing, often resulting in higher interest costs and the need for personal guarantees from the directors.
The Solution
Rather than relying on conventional bank finance, Jerry and Joanne established a Small Self-Administered Scheme (SSAS), bringing together their existing pension savings of £250,000.
Under the HMRC rules governing loans to connected companies, the SSAS was able to lend up to 50% of its assets back to Surf and Turf Ltd. The loan was secured by a first charge over the assets of the business and structured in accordance with the legislative requirements.
Instead of paying interest to a bank, Surf and Turf Ltd repays the loan to the SSAS through equal annual repayments of capital and interest. This allows the business to access the funding it needs while generating investment returns within the pension scheme.
The Outcome
By using a SSAS loan, Jerry and Joanne achieved several important benefits:
- Interest payments are made into their pension scheme rather than to a bank.
- The pension fund receives a commercial return in a tax-efficient environment.
- The business gains access to funding without the need for personal guarantees.
- Cash flow is supported during the period when it is needed most.
Understanding SSAS Loan Rules
The loan made to Surf and Turf Ltd was structured in accordance with the legislation governing loans from a Small Self-Administered Scheme (SSAS). While SSAS lending can be an effective way of providing finance to a business, the rules depend on whether the borrowing company is connected to the members of the pension scheme.
Loans to Connected Companies
A company is generally regarded as connected where it is controlled by the members of the SSAS or by persons connected with those members. Because these arrangements could otherwise be used to provide unrestricted access to pension funds, HMRC imposes a number of conditions.
Where a SSAS lends to a connected company:
- The loan must be repaid within five years.
- The loan cannot exceed 50% of the net value of the SSAS immediately before the loan is made.
- The interest rate must be commercial, fixed at the outset and at least 1% above the prevailing Bank of England base rate.
- Capital and interest must be repaid in equal annual instalments throughout the term of the loan.
- The loan must be secured by a first legal charge over assets with a value at least equal to the total capital and interest due over the life of the loan.
These conditions are designed to ensure that the pension scheme is making a genuine commercial investment while protecting the interests of all scheme members.
Loans to Companies That Are Not Connected
Different rules apply where the borrowing company is not connected to the members of the SSAS.
There are generally no specific legislative restrictions on either the amount that can be lent or the terms of the loan where it is a genuine arms-length borrower.
Although these loans are not subject to the same restrictions, they should still be made on commercial terms and represent an appropriate investment for the pension scheme.
Why Businesses Consider SSAS Loans
Many businesses rely on overdrafts and commercial lending to manage working capital and seasonal fluctuations in cash flow. These facilities can be expensive and often require directors to provide personal guarantees.
A SSAS loan can provide an alternative source of finance. Rather than paying interest to a bank, the borrowing company pays interest into the pension scheme, helping to build retirement savings while providing the business with access to funding.
Every SSAS loan must be carefully structured to ensure it complies with HMRC legislation while supporting the commercial objectives of both the business and the pension scheme. The right advice at the outset helps ensure the arrangement is appropriate, compliant and aligned with the client’s wider financial planning.
For financial advisers and professional introducers, Day Cooper Day provides the specialist SSAS expertise needed to support clients considering this type of arrangement. Whether you’re exploring a potential opportunity or have a specific case in mind, we’re always happy to discuss how a SSAS loan could work in practice.
If you’re a business owner reading this, speak to your financial adviser about whether a SSAS loan could be suitable for your circumstances. If your adviser would like specialist SSAS support, we’d be delighted to work alongside them.
