Pension Backed Loans In UK

Last post: Nov 16, 2012

There are many investment and credit options available in the UK that are linked to personal pensions and pension funds, both public and private. The two most obvious examples are the pension loan, and pension backed loans in the UK.

There are many investment and credit options available in the UK that are linked to personal pensions and pension funds, both public and private. The two most obvious examples are the pension loan, and pension backed loans in the UK. Given the confusion over which options are which, and the furore currently surrounding certain pension loan options, explanations and clarifications are definitely in order. This article reviews the pension lending sector to help you understand your options and know what to avoid.


1. Pension Loans

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An option which has increased in popularity since the credit crunch is the 'pension loan'. This loan allows customers to borrow up to half the value of their pension at a certain rate of interest. Repayments will occur over the lifetime of the loan, and when the pension matures, the lump sum makes up for the rest owed. In other words, money is borrowed with the pension acting as not only collateral, but a source of repayment when the pension reaches maturity. The important point though is: money is not drawn down from the pension until the borrower is legally entitled to do so.

While this loan has been popular for those with debts and poor credit records, The Financial Services Authority has recently highlighted the dangers in using such an important financial asset as security and losing the pension lump sum. Many companies offering and promoting pension loans are now under investigation, and many financial experts are saying that this type of loan makes a very poor decision.


2. Occupational Pension Scheme Loan

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The second option has more limited applicability. To qualify the applicant needs to have their own company and have a transferable pension. What happens is:

  1. As Director of your own company you set up an Occupational Pension Scheme for that company with you as the trustee and as a member
  2. Transfer your existing pension into this scheme
  3. As Trustee of the pension you can then make a business loan (NOT a personal loan) to your business. It must be at commercial rates (e.g, 6%) and it can't be more than 35% of your pension with a maximum term of 5 years. Interest only is also an option
  4. Your business is then liable to repay this loan and must do so under the terms of the loan. The good news for your pension is that it has just invested in an asset with a commercially beneficial rate of return (e.g. 6% as per our example above)
  5. The balance of the pension fund not used for this loan is invested in diversified assets

There have been many firms in the market recently offering you the ability to take a loan FROM your pension early and these use highly questionable methods. At Choice Loans we have investigated this market thoroughly and are very confident that the only loans you want to get involved with to avoid a hefty HMRC fine are those mentioned above. For more information, call us on 01494 410125 or complete our Enquiry form and we will contact you.


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