Pension Loan – Borrowing Against A Pension In The UK

Table of Contents

In this guide we explain pension loans in the UK and whether you can borrow against your pension.

Borrowing against a pension in the UK is possible, however HMRC has laid out some clear rules around who can do so and under what conditions. These can also depend on whether it’s a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). 

We’ll cover the rules around pension loans for both SIPPs and SSAS plans and general factors you should consider if you’re thinking about borrowing against your pension. 

Click below to skip ahead to the section most relevant to you or read on for our full pensions loan guide.

Written by a finance professional.

This article is written by Alex King ACA who is a Chartered Accountant, and has been reviewed by Dominic Durdle FCCA who is a Chartered Certified Accountant. Although this article is written by a qualified professional you should seek individual advice if you’re unsure of your options or financial position. We recommend Unbiased, who will connect you to a regulated financial advisor, including a no-fee initial consultation.

First, Some Pensions Basics

Before we get into the SASS and SIPP borrowing rules, first let’s lay out some pensions basics. 

Many people in the UK will have either a workplace pension (sometimes called occupational pension) or a personal pension or both, in addition to potentially receiving the state pension. These are the three main types of pension in the UK.

Workplace pensions can be either defined benefit or defined contribution schemes. Defined benefit schemes pay out a retirement income based on your final salary or average salary with your employer.

The opportunity to join a defined benefit pension scheme is becoming rare in the UK as these funds tend to pay out a guaranteed income regardless of how well the fund has performed over time. In the past this has led to some pension funds running significant deficits, with some unable to pay out the pensions originally promised.

Defined contribution pensions are the most common type of workplace pension offered by employers today. Typically, your employer will contribute an amount each month and you also have the option of paying into it yourself. Small self administered schemes (SSAS) are a type of defined contribution pension for small businesses.

Personal pensions come in the form of a stakeholder pension or a self-invested personal pension (SIPP). These types of pensions are arranged by yourself and you control the contributions and what the fund invests in.

Workplace pensions and personal pensions are both types of private pensions (as opposed to the state pension). This article will focus on borrowing from a SIPP, one of the most common types of personal pension, and from a SSAS, a type of workplace (or occupational) pension.

What Is A SIPP?

A Self-Invested Personal Pension, or SIPP, is a private personal pension which you can arrange yourself, regardless of your employment. 

It functions as an investment or savings account with tax advantages, as with most other types of pension. You’ll get basic rate tax relief at source (currently 20%) and, if you’re a higher rate tax payer, you can apply to HMRC for higher rate relief.

With a SIPP, you control what to invest in. You can choose from mutual funds, investment trusts, individual shares and Exchange Traded Funds (ETFs) as well as commercial property and other types of assets.

What Is A SSAS?

A Small Self Administered Scheme (SSAS) is a type of private workplace pension typically used by small businesses. It’s classed as a defined contribution scheme.

The scheme members are usually the owners of the business and their employees. The business itself is considered the ‘sponsored employer’ of the scheme, which is required by HMRC. A maximum of 11 people can be members of a SSAS which is why they tend to be reserved for small business owners.

SSAS pensions are considered much more flexible than most other types of pension, as they can be used to invest in or lend to the small business (the sponsored employer). There’s also much more freedom over what the pension can be invested in. 

They also still get the tax advantages seen with SIPPs, such as automatic basic rate relief. A further tax benefit for the business is that the contributions can usually be classed as business expenses and will themselves also receive corporation tax relief.

For more, read our full guide on what is a SSAS pension.

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If you’re unsure of your options or financial position you should seek professional advice. Unbiased has over 27,000 financial experts – simply enter your details and they will match you to the best financial advisor for your needs, including a no-fee initial consultation

The Role of HMRC In Pensions

HMRC is central to the principle of pensions because workplace and private pensions are tax-advantaged savings schemes with their own tax rules and legislation.

Individual circumstances apply, but generally you will get tax relief of at least 20% (the basic rate of income tax) for making contributions to your private pension. This is to encourage people to build up a fund for their retirement so that they are not solely reliant on the state pension. 

Because of this, withdrawals or distributions from pensions are subject to detailed HMRC rules and taxes may apply.

Borrowing from a pension is viewed sceptically by HMRC, as it can be seen as an attempt to access your pension early despite intention to repay the loan. As we’ll see below under SIPP Borrowing Rules, significant penalty charges usually apply to discourage accessing a pension (which has received tax relief) earlier than intended.

It’s important to understand that HMRC provides tax relief to encourage you to save for your retirement – it doesn’t want you to access your pension before then.

Why Borrow Against Your Pension?

Most pensions do not let you take money from them until you are at least 55 years of age. If you need access to cash before the age of 55 and don’t want to take out a personal loan, you may have wondered about borrowing against your pension.

After all, it’s usually an asset that you’ve built up over several years and is part of your wealth. 

Or, you may have thought about the possibility of taking out a loan against the value of your pension and using the cash to invest into something else.

This may sound attractive if your pension returns have been low in the past and you think you can get a higher return from investing in an asset such as residential property.

However, there are pretty strict rules designed to discourage you from investing in residential property through a pension, which can trigger significant penalties if they’re not adhered to. As we’re about to see, borrowing from your pension also comes with lots of rules and potential penalties.

SIPP Borrowing Rules – Can You Get A SIPP Loan?

You can get a SIPP loan for the purpose of increasing the value of your pension. The loan is normally used to buy assets to be held within your pension fund.

You cannot get a personal SIPP loan. That’s to say you cannot get a personal loan against the value of your pension where you receive the proceeds of the loan yourself. Any borrowing by a SIPP must be used to purchase assets to be held by the SIPP.

A SIPP loan can be used to buy commercial property – probably the most common purpose of a SIPP loan – or shares, or other assets not prohibited by HMRC or the law.

As we talked about above, there are tax incentives to encourage you to build up your pension pot for retirement. Accessing your pension before retirement (or before the age of 55 for many pension schemes), even as a loan, goes against this principle.

Essentially, HMRC doesn’t like it and will penalise you for doing so.

Borrowing From A SIPP

HMRC is clear that a loan from a pension scheme to a member, former member or a connected party is an unauthorised payment.

Therefore, HMRC applies significant penalty charges for scheme members borrowing from a SIPP or personal pension. These can, in effect, be at least 55% of the value of the loan.

This is made up by a tax of 40% on the recipient of the loan as well as a further 15% on the pension scheme administrator.

Clearly, having to pay an effective 55% tax on a loan makes it unattractive and uncompetitive for most people. HMRC may also consider de-registering the pension scheme if it deems that the scheme is making unauthorised payments.

Borrowing Against A SIPP

The rules also make it clear that using a pension as collateral for a loan, i.e. borrowing against the value of your pension, is the same as if you borrowed directly from the pension. 

Again, this counts as an unauthorised payment and attracts significant charges.

So, given the above, does it make sense to borrow from a SIPP and who would want to? 

Lending From A SIPP To An Unconnected Party

There’s an interesting exception to unauthorised payments around pension loans when it comes to SIPPs. This is where a pension member (the holder of the SIPP) lends pension funds to an unconnected party. 

A connected party essentially covers spouses, civil partners and relatives of pension scheme members, as well as their families and the spouse or civil partners of relatives. A person or company who sits outside of this scope in relation to a member of a pension scheme is an unconnected party.

This means that a pension scheme member could use their pension to loan money to a friend or business partner, or a company which the scheme member is not a director of.

In practice it’s quite rare for a pension loan to be made in this way. Few people are willing to gamble with their pension by lending to a non-relative or a company of which they have no control. 

It’s also questionable as to why someone would want to borrow from a friend’s pension, or why you would want to lend out your pension to a friend. One argument would be that the returns from doing so may be higher than the returns from more traditional investing.

In any case, finding a pension administrator who will approve a pension loan to an unconnected party would require finding specialist, and expensive, providers.

SIPP Loans – Borrowing To Increase The Value Of Your Pension

So it’s pretty clear that borrowing directly from your pension, or obtaining a personal loan against the value of your pension, is extremely costly. It’s unlikely that any pension scheme administrators would agree to it.

But that’s not the case for getting a SIPP loan where the loan is used to purchase assets to be held within the SIPP. 

HMRC and pension law states that a personal pension scheme is able to borrow up to 50% of the net value of the fund.

This can be for any purpose “providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions”.

For example, a SIPP worth £100,000 could borrow up to £50,000. The £50,000 loan could then be used to buy commercial property which is held by the trustees of the SIPP. The SIPP receives the rental income from the commercial property and will be the beneficiary of any increase in property value over time.

There’s also nothing in the rules against loaning money to your own pension fund, so long as the loan is carried out on commercial terms. If it’s not on commercial terms then the unauthorised payment penalty charges apply. You may also be liable to pay income tax on the interest received from any loan you make to your pension fund.

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SSAS Borrowing Rules – Can You Get A SSAS Loan?

A SSAS pension cannot lend money to a member of the scheme without it counting as an unauthorised payment in the same way a SIPP loan to a member does, and will be charged penalty fees.

But, a SSAS pension can make a loan to a sponsoring employer and it doesn’t come with penalty charges from HMRC. 

There are, however, strict rules set out by HMRC to ensure that the loan is not an unauthorised payment. 

As we outlined above, a SSAS is a type of workplace pension commonly used by small businesses. They are not considered personal pensions, unlike a SIPP, and they have quite a lot of flexibility.

One of the key aspects of a SSAS is the requirement for a sponsoring employer to establish the scheme. Typically, this is the limited company owned by a small business owner who wants to set up the pension. 

We talked above about how SIPP loans cannot be made to connected parties without attracting significant penalty charges. Well, you’d think the sponsoring employer – the company that establishes the SSAS – is a connected party but the law makes an exception to this. 

This means that loans from the pension fund to the sponsoring employer are not unauthorised payments and are not required to pay penalty charges. But, there are detailed conditions that must be met for a loan to a sponsoring employer to not be considered an unauthorised payment.

SSAS Loans to a Sponsoring Employer

For a SSAS pension to lend to a sponsoring employer without being liable for penalty charges, it must meet certain criteria set out by HMRC

These cover:

  • Security
  • Interest rates
  • Term of loan
  • Maximum amount of loan
  • Repayment terms

We won’t cover the conditions required for each of these criteria here – you can read them on the HMRC website – but if they are not met then the loan will count as an unauthorised payment.

Typically, a SSAS loan is used to buy commercial property – often property already owned by the business so long as the transaction is carried out on an arm’s length basis. 

SSAS loans are not restricted to just commercial property purchases, though. A SSAS loan can be used for a range of purposes, such as business expansion, so long as the above criteria set out by HMRC are met.

Transferring a SIPP to a SSAS

You can transfer a SIPP to a SSAS pension, and then the scheme would be able to include the value of the SIPP in its fund.

This would increase the overall amount that could be lent out to the sponsored employer from the scheme. Effectively, this allows an existing SIPP to be part of a loan to a sponsored employer once it’s transferred to a SSAS.

The criteria for making a SSAS loan must still be met, as outlined above. But you should bear in mind that transferring a SIPP to a SSAS may involve lots of administration and potential legal fees, as it would be transferring a personal pension into a workplace pension.

It can be further complicated if the SIPP that’s being transferred holds property. You should speak to an independent financial advisor to discuss pension transfers such as this.

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Alternatives To Borrowing Against A Pension

There are a range of reasons you may be curious about borrowing from or against your pension. As we’ve covered, it’s not easy to do so and will likely attract very high penalty charges. 

Below we outline some of the potential alternatives to borrowing against a pension depending on your needs.

You should always seek financial advice from a regulated professional if you are unsure of your financial situation.

  • If you need help with cash flow and you’re still paying into a pension, you may be able to reduce your contributions and therefore increase your take-home income each month
  • Consider a conventional loan – the effective interest rate will almost certainly be lower than the penalty charge for unauthorised payments to members out of a SIPP
  • For borrowing higher amounts, you may want to consider remortgaging
  • If you’re considering a pension loan to make investments that aren’t normally possible through a pension, such as buying a residential property, then you should consider how to buy property and rent it out in a tax-efficient way
  • If you’ve maximised your annual tax-advantaged pension contributions allowances, you should also consider using the maximum annual ISA allowance. This can include Stocks & Shares ISAs, Innovative Finance ISAs and Lifetime ISAs if you’re under 40

Pension Loans – Summary

Borrowing from or against your pension as a member of the pension scheme will almost certainly be considered an unauthorised payment by HMRC. This means it will involve paying significant penalty charges on the amount borrowed – 55% or more.

For most people, this means borrowing from your pension is not worthwhile. If you’re over 55, or the age at which your pension scheme allows withdrawals, then you can usually take a portion of this as cash, which has a tax-free element. If you can wait till this moment, you’ll avoid lots of penalty charges.

You can however get a SIPP loan of up to 50% of the pension’s value so long as the borrowing is used to benefit the pension fund. For example, a SIPP may be able to obtain a loan to buy commercial property as an investment to sit within the pension.

If you’re a member of a SSAS, then you can lend up to 50% of pension value to the sponsored employers so long as HMRC’s criteria are met. This is a specialist type of finance for which you should always seek professional guidance if you’re unsure.

We’ve also outlined alternatives to pension loans, such as taking out traditional loans or remortgaging if you need to borrow a sum now. You can also make use of other tax-efficient investment accounts such as ISAs to grow your assets over time and help towards your retirement.

Pensions and retirement planning can be complicated. Seek qualified advice from a professional if you want to discuss your circumstances and options.

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If you’re unsure of your options or financial position you should seek professional advice. Unbiased has over 27,000 financial experts – simply enter your details and they will match you to the best financial advisor for your needs, including a no-fee initial consultation
Find qualified, independent and regulated finance professionals.
If you’re unsure of your options or financial position you should seek professional advice. Unbiased has over 27,000 financial experts – simply enter your details and they will match you to the best financial advisor for your needs, including a no-fee initial consultation

Pension Loan FAQs

Can I Get A Loan Against My Pension?

As a pension member you cannot get a loan against your pension without significant penalty charges being levied by HMRC, as it is viewed by HMRC as an unauthorised payment.

Can I Borrow From My Pension?

You cannot borrow directly from your pension as a member of a private pension scheme without having to pay significant penalty charges to HMRC – usually at least 55% of the value of the loan.

Can I Get A SIPP Loan?

Yes, your SIPP can borrow money so long as the borrowing is used for the benefit of the pension. For example, taking out a loan to fund the purchase of assets, such as commercial property, to increase the value of your pension.

How Much Can My SIPP Borrow?

Any private pension, such as a SIPP or SSAS, can borrow up to 50% of the value of the pension. It can borrow from any source, including members of the pension scheme.

Can I Get A SSAS Loan?

Yes, SSAS pensions are able to lend out money from the pension fund as well as borrow money. SSAS funds can only lend money to the ‘sponsored employer’ and the criteria laid out by HMRC must be met so that the loan does not count as an unauthorised payment.

Can you use your pension as security for a loan UK?

No, you cannot use your pension as security for a personal loan in the UK without having to pay large penalties to HMRC. Your pension scheme administrator is also extremely unlikely to facilitate it. But, your pension fund is able to borrow money in its own right. You can apply for a pension loan within a SIPP or SSAS pension so long as the funds are used to benefit the pension scheme, such as to purchase commercial property.

Can I take a loan from my pension fund UK?

No, you cannot borrow money from your pension fund in the UK. It is classed as an ‘unauthorised payment’ by HMRC and you will be charged significant penalty fees of up to 55% of the value of the ‘loan’. HMRC may also de-register your pension scheme administrator if they facilitate a loan from your pension to you.

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