RPSM07300070 - Scheme Administrator Pages: Investments: Can a registered pension scheme make a loan?

Can a registered pension scheme make a loan?

A registered pension scheme may make a loan to the sponsoring employer or any party unconnected to the member. There are 5 tests that are used to determine if a loan to an employer is on a commercial basis (see RPSM07103050).

1. The loan must be secured as a first charge on an asset of equal value.
2. The loan must have a commercial interest rate (at least 1% above high street bank rates).
3. The repayment period must not be longer than 5 years.
4. The amount loaned must not be more than half the value of the scheme’s funds.
5. Repayment of the loan must be in equal annual instalments.

The scheme administrator should ensure that each test is met in accordance with the guidance at RPSM07103050 onwards which also explains how the unauthorised payment is calculated.

Where an unauthorised payment is made, the scheme administrator must report it on the Registered Pension Scheme Event Report form.

If an occupational scheme is set up by a sole trader or a partnership and the sole trader or any partner is a member of the scheme then any loan to the employer will also be a loan to a member and an unauthorised payment will arise.

Loan rollovers

Where an employer is having genuine difficulties making repayments and there is an amount of capital or interest outstanding at the end of the loan period, the scheme administrator may agree that the loan period may be extended and the loan repayment date to be postponed or “rolled over” once for a period up to a further 5 years starting from the standard repayment date.

Further information on rollovers of loans can be found at RPSM07103160.

Loans to employers made before 6 April 2006

Providing that there are no changes to the repayment terms made to a loan advanced prior to 6 April 2006, the loan will be subject to the rules in existence prior to 6 April 2006.

If after the 6 April 2006 there is a change in the repayment terms of a loan taken out before that date, any amount owing (including interest) will be subject to the new rules.

The rules for rollovers of loans taken out before 6 April 2006 are covered at RPSM07103200.