Roger Howman, Sovereign’s SSAS Director, explains how a unique pension scheme is providing liquidity to SMEs amid the economic chaos the COVID-19 Pandemic has caused.
“Cash is king” – a phrase entrepreneurs and owner/directors of small and medium-sized businesses (SMEs) in the UK will be very familiar with, since it is often seen as the lifeblood of their business.
The serious economic problems created by the coronavirus pandemic have struck at the very heart of the UK economy with HMRC statistics revealing that, in order to survive, 986,000 businesses have registered for the UK government’s Job Retention Scheme (Furlough), protecting eight million workers and costing £11.1 billion*.
As confirmed by our colleagues in Sovereign Insurance Services, the Business Interruption Clauses within insurance policies have proved to be ineffective, with coronavirus-related claims generally being excluded.
HMRC data confirms that there were 5.9 million SMEs in the UK at the start of 2019. On 19 May 2020, just 40,564 Coronavirus Business Interruption Loan Scheme (CBILS) payments had been approved*.
It is no surprise then that many of those SME owner/directors who have Small Self-Administered Scheme (SSAS) pension funds are now looking at how they can inject cash into their business at a critical time.
What is a SSAS?
A SSAS is often considered the most flexible of all pension schemes. It is a UK-Registered Pension Scheme that is typically established by an SME for the provision of retirement benefits for its owners and directors. It has fewer than 12 members, all of whom act as trustees and all of whom control investment strategy.
There is no list of permitted investments but investment in certain assets – notably residential property – incurs punitive tax charges. However a SSAS is a good tool for investing in commercial property and many schemes have been established to buy the trading premises of the SME. This can provide much needed liquidity to energise the business and realise potential.
The feature that really makes a SSAS stand apart from any other UK-Registered Pension Scheme is that the legislation permits it to loan money to the establishing SME, or any other employer that has formally been joined to the scheme (generally one that the member(s) control).
This ‘Authorised Employer Loan’ facility has sparked a recent rise in the number of enquiries about SSAS, as businesses look to use private pension provision to assist cash flow rather than the emergency lending facilities set up by the UK government.
The loan facility works in a very similar way to a commercial mortgage, with the SSAS lending up to 50% of its Net Asset Value to the employer in return for a first legal charge over an asset (or assets) of equal value. The maximum term is five years and a commercial rate of interest must be charged.
Risk v. reward
Most entrepreneurs will be familiar with risk and reward and an Authorised Employer Loan is certainly not for the faint-hearted – punitive tax charges of at least 55% will be incurred if it fails any one of HMRC’s five ‘key tests’ during the loan term. However the prospect of paying loan interest back into their own pension schemes, rather than to the government, is proving to be a sufficient incentive for many.
When it comes to SSAS trustee and administration services, Sovereign SSAS Trustees Ltd is able to call upon decades of experience and is very well placed to provide guidance on how this type of pension arrangement can assist businesses in the UK.