Pensions can provide a lifeline to SMEs

Phil Clarke, technical services manager at Rowanmoor Pensions, discusses the merits of SSASs

In last month’s Budget speech, the Chancellor confirmed his support for small and medium-sized enterprises (SMEs), which is a term used to describe a company whose headcount or turnover falls within certain limits. It is generally accepted in the EU that this is a company with fewer than 250 employees, and there are about 4.8 million such enterprises in the UK.

Fast track credit complaints

The Chancellor’s aim is to provide credit for small companies that he believes are being unfairly denied credit and are “powerless to challenge the decision”. His proposal is to set up a new service to fast track credit complaints from SMEs. A new credit adjudicator will examine lending decisions to see if they are fair.

In practice, when small companies require loans they need them immediately. If they are refused, I suspect that by the time they have made a complaint and involved a credit adjudicator, whose legal powers will have been used “to enforce its judgements”, it will probably be too late. There may, however, be a quicker solution to the problem and this is where Small Self-Administered Schemes (SSASs) come into their own.

50% immediate loan

If a company sponsors a SSAS, or the directors have other pensions that can be transferred into a SSAS, an immediate loan of 50% of the net fund can be made to the company.

Low, fixed interest rate

This brings a number of advantages. The interest rate can be as low as 1% above the current base rate. The company can claim corporation tax relief on the interest payments it makes (which are paid into the scheme as investment growth) and the rate of interest is fixed for the period of the loan, which could be up to five years.

The loan must be repaid by equal annual instalments of capital and interest, because failure to do so could result in tax charges, and must be secured as a first charge against an asset, the value of which is equal to the loan and interest chargeable over the whole period. Although it can be secured against taxable moveable property (for example plant and machinery or residential property), securing the loan in this way could also result in tax charges.

Flexible choice

If the security falls below the required amount during the term due to market fluctuation, it does not have to be replaced. It is difficult to see a commercial bank offering such flexibility.
So, although SSAS loans come with some caveats, advisers have an opportunity to put clients in control of their own credit rather than rely on the banks or credit adjudicators.