Pensions Simplification: Scheme borrowing

20 October 2004

Registered pension schemes to borrow up to 50% of their assets for investment purposes after 6/4/06, but does this relate to the gross or net value of the fund?

The Finance Act 2004, in its Pensions Simplification section, includes a provision allowing registered pension schemes to borrow up to 50% of their assets for investment purposes.

There is considerable confusion, however, over whether the 50% limit applies to the gross or net value of the fund. The corresponding existing rule for small self-administered schemes applies to a scheme’s net assets, i.e. after deducting any existing loans, and it was generally understood that the same approach would be followed under Pensions Simplification. However, it seems that the legislation was not actually drafted in this way and it seems to allow borrowing based on the gross value of the fund.

To illustrate, if a member has a fund of £100,000, then it may borrow £50,000 representing 50% of the original fund. This means that, for example, the member’s fund could buy a property costing up to £150,000.

If the borrowing limit is based on the net asset value then that represents the maximum permitted borrowing. However, if the borrowing limit is based on the gross asset value then the scheme can now borrow a further £25,000, i.e. half of the borrowing. And when that has been done it can then borrow a further £12,500, etc.

It seems that the Inland Revenue is aware of the confusion and will shortly be making an announcement to clarify the position for once and for all. It is expected that the Inland Revenue will confirm that the 50% figure will be based on the scheme’s net assets.