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Why make a loan from a SIPP?

Retirement | SIPP Helpful? 3

Asked by Highwall, submitted 13 February 2012.

Open Quote i understand that a SIPP can make a loan to an individual or business so long as they are not connected.

How does this work in practice? Where is the benefit for the SIPP investor?
End Quote

Answered by Justin on 07 September 2012

Some SIPP schemes (usually the more expensive ones) allow the pension fund to make a commercial loan to third parties. There are HMRC restrictions, primarily that the person or company you loan the money to must be unconnected, e.g. they can't be a family member, business partner or associated business. And the loan must be made on commercial terms, i.e. charge an appropriate rate of interest and wherever possible secured against assets.

The key test is whether a commercial lender such as bank would make the loan and, if so, the rate of interest they'd charge. Also, loans to individuals cannot be used to acquire any type of taxable property, which obviously restricts use.

The only benefit I can think of is the possibility of securing a reasonable investment return from lending the money. But the costs of the SIPP scheme itself and associated legal fees for the loan paperwork will eat into the margin. Plus there's the risk that the borrower will default.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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