Use Pension Funds to Secure a Loan?

Choc69

Is it legal to use pension funds to secure a loan? I'm receiving conflicting information - Pension Options UK say yes it is possible to secure a loan using the pension pot as a security, and after 10 years the pension pot would be signed back to me. However an IFA told me they hadn't heard of this. Does anyone know? Thanks

dtsazza

I'm not an expert on this, but I believe the short answer is "no".

(The long answer is something like "yes, only if the loan is beneficial to the pension investment itself" - and you'd have to get your pension provider to OK it anyway, which is very unlikely. Dunston or other posters can doubtless provide the full story.)

Would Pension Options UK stand to make any money off you, by any chance?

Usually when pension funds are misused in this way, it's the pension holder that faces a hefty tax penalty from HMRC, which the company that benefited gets the benefit scot-free. I've heard of it happening a few times with nonconformant foreign pension transfers.

McKneff

Not just the short answer, the definitive answer is 'No'

You cannot access your pension till, under todays legislation, until you are aged 55 and then you can only get 25% as a lump sum and the rest to be used for a pension.

Pensions are for your retirement, they aren't a savings account which you can dip in and out of.

Debt_Free_Chick

One of the conditions of tax registered pension schemes is that you can not assign your pension rights. By putting up a pension as security, that's "assigning" it so it's definitely not allowed.

dunstonh

It is possible to have a loan on the pension as long as the loan is for the benefit of the pension. Not for paying yourself the money. The latter being where many of the scams are today. The valid reason is say a commercial property which needs further money. However, that is within the pension.

It is not possible to assign your pension to a lender. So, they cannot accept it as security.

thenudeone

You do not own the assets in your pension. The trustees of the pension arrangement do. They wouldn't allow the funds to be used as security for a loan.

You are not allowed to benefit from assets held in your pension, which is why SIPPs cannot invest in domestic property (unless as part of a genuine business over £1m), any tangible movable property (wine, race horses, cars, speed boats, or whatever) or any unlisted company in which you are a director or hold a significant interest.

There are numerous reasons why rules like this are in place.

The tax benefits of pensions are given to encourage saving for retirement so that the state is less likely to have to pay to keep you. If you can put the pension at risk for your own benefit now, the state may have to pay for your basic needs in retirement anyway.

Another reason is that otherwise it would be possible to avoid income tax altogether

Eg:
A 50% taxpayer invests £100k gross in his pension (which is left in the bank).
If he hadn't put the money in a pension, he would only have net income after tax of £50k.
He borrows £100k from a bank using the £100k pension assets as security.
He doesn't keep up repayments. The bank calls in the security. The £100k in the pension fund is handed to the bank to settle the loan.
The taxpayer has managed to turn what would have been £50k of after-tax income into £100k cash and effectively avoid paying income tax on that £100k.

So obviously, it's not allowed.

System

You can surely take an unsecured loan on anything if the lender is willing to take the risk?
I might meet a man in a pub and tell him I am due to inherit a million pounds from a rich aunt, so he might agree to lend me a fiver.

jamesd

The catch here is in that word "assign" which implies that it is not really secured on the pension but transferring control of the money to them at the start. They can then invest it with those they are working with who can make you pay for whatever money has been advanced to you by taking high charges or even just stealing all of the money.