The declining use of small pension schemes is leaving millions of unused funds languished with poor returns, Sourced Capital warns.
The peer-to-peer property lender analysed data relating to the use of relevant small schemes (RSS), formerly known as small self-administered schemes (SSAS). The research revealed that trustees found these products are facing falling contributions and a lack of investment strategy.
RSS or SSAS schemes are typically used by owner-managed businesses and are a defined contribution pension scheme, created under a trust with fewer than 12 members or trustees.
The schemes allow a company to borrow money to buy land or property and can then be leased back to the company.
It also allows those in the scheme to borrow money for investments such as buying the company’s premises.
Read more: Who wants to be an IFISA millionaire?
However, Sourced Capital’s analysis of Pensions Regulator data found the number of schemes has declined by 0.7 per cent a year since 2015 and membership is falling 0.4 per cent annually.
Additionally, the platform claims through dealing with numerous investors who are also involved in these schemes that the vast majority are seeing no return and as many as 70 per cent of RSS trustees are sitting on their funds waiting for a project to materialise.
On average, the current RSS member has contributed £5,967 over the past year. Had this been invested in an Innovative Finance ISA (IFISA), they could already be looking at a return just shy of £600, Sourced Capital said.
“RSS pension schemes can be beneficial when it comes to their use within a business to borrow money for investment, but when you consider them within the wider investment picture and the returns they bring, it’s easy to see why their popularity is declining,” Stephen Moss, managing director of Sourced Capital, said.
“We know from dealing with numerous investors who are also involved in these schemes, that the vast majority are seeing no return and RSS trustees are also sitting on their funds waiting for a project to materialise but don’t have the time or experience to see it through.
“This is money that could be better invested and while remaining in bricks and mortar, an IFISA provides a much more lucrative return.”