Since April 2016, investors have been able to shield gains from peer-to-peer (P2P) lending from the taxman in the innovative finance Isas (IF Isas). And while it has taken a while for most P2P platforms to win the necessary approvals from HM Revenue & Customs and the Financial Conduct Authority (FCA) to offer IF Isas, these products are finally beginning to take off, with several launched since the start of the new tax year. However, the same can’t be said for P2P investments through self-invested personal pensions (Sipps). For a number of reasons, both the availability and take-up of these products have been glacial.
Investors have been able to access P2P investments via Sipps since 2014. The first platform to offer P2P loans via a Sipp was ThinCats, a lender to small business, which teamed up with investment portal SippClub and pensions administrator Greyfriars in June 2014 to allow “sophisticated investors” to put money into their loans. However, since then, only a handful of platforms have followed suit. This testifies to the fact that adding direct P2P investments to your Sipp – as opposed to buying investment trusts that invest in P2P loans – is not straightforward.
First, HM Revenue & Customs rules do not allow loans from a pension to be made to a member of the scheme, a person or company connected to a member of the scheme (eg, a spouse or other relative), or anyone connected to a scheme employer. This would not be a problem if you could specify who you lend your money to, but on many P2P platforms, loans are pooled, so you don’t know who’s getting the money.
Second, lending to fund residential property is not allowed (although lending to fund commercial property is) and doing so would incur a penalty tax charge. So if a Sipp lends money to somebody to buy residential property, this might have severe tax consequences.
“Adding direct P2P investments to a Sipp is not simple”
Third, the P2P industry is still considered relatively immature and the risks associated with the failure of a platform to be difficult to understand. Hence many Sipp providers – especially low cost providers – would prefer to avoid taking on risks they don’t understand.
Despite this, some specialist providers of Sipps and small self-administered schemes (SSAS) – occupational pension schemes set up to provide retirement benefits for company directors or key staff at small firms – have been willing to offer P2P. For example, SippClub’s Evolution Sipp, operated by Greyfriars, offered access to a fairly wide number of P2P platforms (albeit with a relatively high minimum investment and fees). But late last year, Greyfriars announced that it would not allow any new P2P investments.
So the choice today is limited. Many P2P Sipps are single-asset Sipps, where you can only hold investments on that platform. They also tend to have relatively high fees or high minimum investments and often require you to be referred through a financial adviser.
Of the three big platforms – Zopa, Funding Circle and Ratesetter – only Ratesetter currently offers investors the choice of investing via a Sipp (through London & Colonial and Westerby, as well as a SSAS through Whitehall and, for overseas investors, a QROPS through through Concept Group). Alternative energy platform Abundance has launched a Sipp, in conjunction with administrator Gaudi. Commercial-property lending platform Proplend offers a Sipp through Westerby and a SSAS through Whitehall. Assetz Capital, Bond Mason, Capital Stackers, Crowdproperty, Crowdstacker, Money & Co and UK Bond Network are among other providers that say they offer some kind of Sipp option.
Overall, it’s clear this part of the market is immature and so investors need to think very carefully. For example, it appears that if you are already drawing an income from your Sipp or plan to do so soon, a spike in bad debts could prove an administrative headache. Once a Sipp is crystallised (ie, you begin drawing benefits), you are not allowed to transfer only part of the Sipp to a new provider – you can only transfer the lot. If a loan goes into default, it could take several years before it’s recovered or written off, depending on how the platform operates. In that case, it seems that the investor might be unable to transfer their crystallised Sipp elsewhere while they wait for this to be completed. So most investors might be wise to wait until these problems have been tested and more mainstream P2P Sipps are available.