SIPP & SSAS Borrowing

SIPP & SSAS Borrowing

The rules regulating the amount of money that members of small self-administered schemes (SSASs) and self invested personal pension schemes (SIPPs) can borrow changed on A-Day (6 April 2006).

Before A-Day 

Pre A-Day under a SSAS the amount that could be borrowed was based on the following formula: 

• 3 times the ordinary contribution paid by the employer (see notes below), plus
• 3 times the annual amount of basic or contractual contributions paid by the scheme members (excluding AVCs) in the tax year ending immediately before the Trustees borrowings, plus
• 45% of the market value of the assets of the scheme (see notes below).

Notes

The ordinary annual contribution means the smaller of:

• the average annual amount of contributions including special contributions (i.e. single), but excluding AVCs, paid to the scheme in the 3 scheme years immediately before the date of the borrowing, and
• the amount of the annual contributions which, within the period of 3 years immediately preceding the date of the borrowing, an actuary has advised in writing would have to be paid in order to secure the benefits provided under the scheme.

The 45% of the market value of the assets of the scheme must exclude:

Under a SIPP the amount that can be borrowed cannot be more than:

• 75% of the purchase price (including associated costs) of the property, or
• 75% of the cost of the development of a property.

After A-Day 

The maximum amount that any scheme can borrow will change to 50% of the current value of the scheme, less any outstanding loans.  100% of scheme assets plus any scheme borrowings can be used to purchase a property i.e. the scheme could buy a property worth 150% of the current value of the scheme.  This is a big change.  It may mean that after A-Day some people, especially people in existing SSASs, may not be able to borrow as much as they could before.  It is also worth noting that borrowed money does not have to be used just to buy a property, it could be used to buy other scheme assets e.g. stocks and shares.

Below are a couple of examples of how this may work.  These examples assume no investment growth.

Example 1 – an existing SSAS

A SSAS already owns the sponsoring company’s premises, but the scheme Trustees would like to build an extension when they can use the SSAS to borrow enough money.  They have not used the SSAS to borrow money before. 

The annual contribution to the scheme in each of the last 3 years has been £75,000 (all employer contribution) and the current value of the scheme is £750,000.  The Trustees would like to borrow £500,000.

The maximum amount that the scheme can borrow before A-Day is:

3 times the ordinary annual contribution paid by the employers – 
3 x £75,000 = £225,000, plus

45% of the market value of the assets of the scheme –

45% x £750,000 = £337,500

Total amount that can be borrowed is £562,500

Now let’s look at what would happen after A-Day.  Based on the fund of £750,000 the maximum amount that the SSAS could borrow will be £375,000 i.e. 50% of £750,000.

In this example the Trustees of the SSAS should really consider building their extension before A-Day.

Example 2 – an existing SIPP 

A SIPP is currently worth £800,000.  The member of the SIPP would like to purchase new company premises worth £250,000 by borrowing money but does not want to surrender any of the existing scheme assets.

Before A-Day the maximum amount that the SIPP could borrow is 75% of the value of the property, which in this example would be £187,500.

If the member decides to wait until after A-Day the maximum amount that the SIPP could borrow would be £400,000 i.e. 50% of £800,000.

In this example it is probably worth waiting until after A-Day. For some people, waiting until A-Day may not be practical, but for others it may be worth reviewing their options before A-Day in light of the different borrowing limits after A-Day.

Residential Property Barred

The tax advantages anticipated for residential property and exotica (fine wine, classic cars, stamps etc) will be effectively removed and these will be classed as prohibited investments.

It is thought the u-turn came to prevent ‘potential abuse’ from what the Government now sees as individuals gaining personal benefit by acquiring second homes.

Summary

Before thinking about buying property after A-Day it is worth noting the following:

• If the member would like to have a secured income at retirement and doesn’t have any other scheme assets they will first need to sell the property.
• At retirement, if the member would like to go down the unsecured income route until they are aged 75 they will need to make sure that they have sufficient additional assets to pay the income, or they will be forced into selling the property.
• At retirement, from age 75 the member could have an alternatively secured income.  Like unsecured income the member would have to ensure that they had enough additional money in the pension scheme to pay them an income.