There could be many reasons why a client might want to raise capital. They could be diversifying their investments into the buy-to-let market, they could be looking to inject cash into their business, or there could be a personal reason like buying a larger home.
They might have some cash savings available, or they might have an investment portfolio they could sell down. Given Isa allowances jumped to £15,000 in 2014-15 and then £20,000 in 2017-18, it is conceivable clients could have significant funds available to them in an Isa as well.
Alongside their primary residence, however, a client’s pension could well be their biggest asset, so you could find yourself fielding a query about whether it is possible to access the pension in some form.
If the client is aged 55 or over, they are old enough to withdraw funds from their pension, and they will typically be able to take 25 per cent as a tax-free lump sum.
However, they might want to leave their pension untouched for as long as possible so they can take a larger tax-free lump sum a decade or two down the line.
Furthermore, anything they take above the 25 per cent will be taxed as income.
The tax rules in some countries allow members to borrow money from their pensions, sometimes even as mortgage loans. Some countries also permit hardship loans. But pension lending is not a topic that crops up too frequently in the UK.
In this article, we will look at what you can do and, just as importantly, what you cannot do.
Personal pensions
The first point to mention is that a personal pension cannot make a loan to the member.
This is specifically identified in legislation as an unauthorised payment, which means it would attract significant tax charges for both the member and the pension scheme, and it is extremely unlikely that any trustees or scheme administrator of a personal pension would allow it.
It is unlikely that HMRC would offer any leniency either. Pension scammers in previous years would dangle the carrot of a pension loan in front of unwary members, sometimes using terms like ‘cashback’ or ‘savings advance’.
Even in cases where members were completely duped by the scammers, HMRC still pursued the members for unauthorised payment tax charges. This created a double loss where the scammers had also stolen pension funds.
The rule on loans extends to "connected parties" too. These include spouses and family members but can also include some companies and trusts depending on how closely linked the member is to them.
The legislation is also clear that a loan guarantee counts as a loan, so a member is not able to use their pension as collateral for a loan that they have taken out personally.
Using an investment portfolio as collateral is sometimes known as ‘Lombard lending’, and while this can be often done with investments in a general investment account, it cannot be done with investments in a pension – there are similar challenges with Isas.
