Loans can also be granted to unconnected third parties, whether that be another business or an individual. It is important that the borrower in each case is not connected to the pension fund (or any of its members) in any way, otherwise the loan will result in penal tax charges – of up to 70%! This option has become more popular, in recent years, as clients seek to make their cash assets work harder during times of poor deposit interest rates – with some Trustees, for example, granting loans to third party property developers in return for a premium rate of interest.
The strict rules which exist for loans to the scheme sponsoring employer do not apply to unconnected third parties as the arrangement is deemed to automatically be on market terms.
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