Pension Fund Investment Rules

Pension Fund Investment Rules - Pension Simplification Laws

What can I invest in?  Pension Fund Investment Rules

Many of the pension fund rules remain unchanged for Stocks, Shares and Cash investment after the Pension Simplification laws changed on 6 April 2006.

The basic rules that were available for pension fund investment are broadly still the same.  

However, there have been some changes with regard to your pension fund owning property.

1.  Buy Residential Property with Your Pension Fund - Pension Simplification Laws

Own Property with Your Pension  

Currently pension funds are allowed to invest in commercial property but not residential property. 

Many business owners have used this to buy premises for their business.   

Residential Property Withdrawn  

Before the new pension laws started, it was proposed and indeed it formed part of the legislation that pension funds would be allowed to invest in residential property.

The Chancellor at the time, Gordon Brown, withdrew this option in his Pre-Budget Report on 5 December 2005.

You will still not be able to use your pension fund to buy residential property.  But if you need anymore advice contact us today.

2. Property, Personal Use and Pensions - Pension Simplification Laws

Personal Use

Under the old rules before 2006, pension fund members were not allowed to benefit from any assets owned by their pension fund. 

Under the new rules that started on 6 April 2006, members may be allowed to benefit from and use investments that their pension fund has invested in under certain conditions.   

Although, it was originally proposed to be allowed, this does now not extend to residential property. 

The residential property option was withdrawn by the Chancellor, Gordon Brown on 5 December 2005.

3. Pension Fund Mortgages and Borrowing - Pension Simplification Laws

Pension Fund Mortgages

Many people may not be aware that a pension fund can take out a mortgage in its own right.

The rules before April 2006 were quite wide in that for some pension schemes up to 70% loan to value could be borrowed to buy property. 

E.g.  if you had £30,000 in your pension fund, your pension fund could take out a mortgage of £70,000 to help buy a property of £100,000.

New Pension Mortgage Rules 6 April 2006

The Government is reducing the maximum loan to value from around 70% to 50%.

Speak to an adviser today about pension fund managers and find out how to get your mortgage.

4. Loans and Borrowing Money From A Pension Fund - Pension Simplification Laws

Borrow From Your Pension Fund

Under the new rules, a pension fund can lend money to a sponsoring employer.   

E.g.  if you own or run a business your business can borrow money from your pension.   

This has to be done on a commercial basis and subject to the following rules:  

1. 1.  Your pension fund can lend to a limited company sponsoring employer (i.e.  a separate legal entity) up to 50% of the value of the pension fund.  This loan must be repaid within 5 years and have a minimum interest rate of 1% above average bank rates.   
2. 2.  The pension fund cannot lend to a pension fund member.  E.g.  It cannot make loans to self employed people as this is not a separate legal entity as is the case with a limited company.

Investing in Your Business

Under Pension Simplification Rules, after 6 April 2006,  the maximum a pension scheme can invest in 'own' company shares is:

Company Pensions Rules:

Company Pensions for Directors such as Small Self Administered Scheme SSAS and Executive pensions and normal employee company schemes can invest

• a maximum of 5% of the pension fund in one 'sponsoring' employer company and
• a maximum of 20% in a range of 'own' 'sponsoring' employer companies with no more than 5% in any one company.  

Before Pension Simplification i.e before 6 April 2006, the old rules allowed for 25% of the pension funds value in your own company's shares.  There are transitional rules that allow the continuation of the 25% holding.  If the pension fund looks to purchase more shares, the new rules above will apply.  

Personal Pensions Rules:

100% Investment Opportunity:  use all of your pension fund

Personal Pension type schemes such as Self Invested Personal Pensions are allowed to invest 100% of the pension fund in 'sponsoring' employer company shares.  This means you can use the whole of your pension fund to buy shares in your company.

This is provided the scheme was not set up as an employer's trust based scheme such as a Grouped Personal Pension Plan in which case the scheme would be deemed a Company Pension and be caught by the 5% and 20% rules.

Contact us now if you have a pension fund that you may consider converting or would like to set up a new pension scheme that would be able to buy shares in your company.  Pension loans may help get the investment opportunity you need.