Term
The loan must be for a maximum term of five years. The total amount owing (including interest) must be repaid by the loan repayment date. It is therefore entirely a matter for the trustees to decide when a loan should be repaid, subject to the five-year limit, having regard to the likelihood of paying retirement benefits at some future date.
The term doesn’t need to be determined by the member’s planned retirement date, but if there aren’t sufficient funds to pay benefits at the time they want to retire they can’t just recall the loan to be repaid.
Value
It must be no more than 50 per cent of the market value of scheme assets at the date the money is loaned to the employer. This limit is not retested subsequently if there is a fall in the value of the scheme’s assets unless the terms of the loan are changed. Any further loan advances to the employer are treated as a new loan and the 50 per cent limit is retested at that time.
Repayments
Finally, the loan must be repaid by equal instalments of capital and interest for each complete year of the loan. There is also only one opportunity for schemes to roll over a loan – that is, where there are amounts owing on the fifth anniversary – and only then for a maximum extension period of five years. This allows a loan to be extended where the sponsoring employer is having genuine difficulties making repayments, without having to find replacement security for the loan if the original security has fallen in value.
Uses of loan backs
There are a number of circumstances where such a loan back might be attractive. The minimum interest rate payable to a Ssas may be very competitive compared with interest rates available from a bank in the open market. An employer may also be otherwise unable to obtain a loan on the open market.
Another situation would be a case where a Ssas already has an authorised employer loan with an interest rate much higher than would need to be charged. It may be worth considering repaying this loan and immediately taking out a new loan at the current lower rate of interest.
The rate of interest of base plus 1 per cent is the minimum. The charging of a higher rate of interest than the minimum could provide an attractive investment for the Ssas, as well as much-needed cash for the scheme’s sponsoring employer. However, this higher rate would have to be shown as a commercial rate of interest if an unauthorised payment charge is to be avoided. As there will be a loan agreement in place, setting a rate too high could also cause problems and could lead to the company defaulting.
