Peer-to-peer lending platforms are making progress in tapping into the immense opportunities presented by the self-invested personal pensions market
Peer-to-peer lending platforms have been trying to tap into the self-invested personal pension (SIPP) market for several years. And finally – despite myriad challenges – progress is starting to be made. Over the past year, platforms such as Octopus Choice and The House Crowd have begun to offer SIPP options, joining a dynamic handful of SIPP-ready P2P lenders including CrowdProperty, Folk2Folk, Sourced Capital, Ablrate, RateSetter, Proplend and Money&Co.
‘Big three’ P2P lender RateSetter currently partners with SIPP administrator Morgan Lloyd and reports that investments held within SIPPs have performed exactly the same as other RateSetter investments, albeit while benefitting from the tax-free benefits of the SIPP wrapper.
“We have been a pioneer in offering the SIPP option to investors,” says Peter Behrens, chief commercial officer of RateSetter. “The consistent and stable characteristics of this asset class means it is becoming a more common part of people’s diversified investment portfolios, and it is natural that this should also extend to SIPP portfolios too.”
A SIPP is a personal pension tax wrapper which people can pay into and use to manage their investments. The concept was first introduced in 1989, before being reformed in the Finance Act of 2004, which officially became law in April 2006. But it wasn’t until 2016 that P2P lenders were finally admitted into the scheme. That means that for 27 years, pension savers associated SIPPs with investment funds, stocks and shares products, and property earnings. If they wanted to tempt pension savers away from these well-established norms, P2P lenders were going to have their work cut out for them.
“Having P2P as part of a SIPP is a great investment option,” says Nicola Horlick, chief executive of Money&Co. “It’s a very good secured income stream that’s perfect for pensions.”
The SIPP market is growing at a rapid pace, presenting a great opportunity for P2P platforms.
“If you look back to Financial Conduct Authority (FCA) data from 2015, under 700,000 SIPPs were sold in the UK,” says Tom Selby, a senior analyst at investment platform AJ Bell.
“This figure is now at the 950,000 mark and it seems inevitable the one million mark will be breached in the near future.”
Secondly, when you combine the tax-saving benefits of a SIPP with the relatively stable and inflation-beating returns of P2P lending, pension savers have the opportunity to supercharge their pension savings.
“P2P SIPPs convey huge tax benefits for the investor, including higher rates of return and secured investments,” says Roy Warren, managing director of Folk2Folk. “This makes them an attractive alternative to the stock market.”
Several platforms have highlighted the fact that with the current stock market volatility caused by macroeconomic conditions, P2P presents an alternative investment asset class for SIPP investors.
Stephen Moss, founder and managing director of Sourced Capital, says there has been an increase in the number of SIPP providers adding P2P to their list of available investments and this has happened over time as confidence in P2P investment has grown.
“SIPP providers are starting to understand that there are generally great returns to be made but returns that come with security in place,” he says.
And while the coronavirus pandemic has certainly slowed the progress of innovation across the financial landscape, the P2P sector is still pressing forward with its SIPP expansion plans.
Direct lending investment platform and technology provider Goji Investments will add a SIPP capability to its platform in the third quarter of this year, providing approved platforms with the ability to give their lenders the opportunity to invest via a SIPP.
“We believe this will be supportive of existing P2P offerings in the same way that offering an Innovative Finance ISA (IFISA) increases the sources of capital within their portfolio that an investor can include in P2P,” says David Genn, chief executive of Goji.
P2P has therefore made some progress into the SIPP market, but it faces many challenges, not least convincing SIPP administrators to accept P2P investments. But while new product launches are always welcome, there is a larger issue at hand. P2P is classed as a non-standard investment by the FCA, and in 2016, the City regulator introduced tighter capital adequacy rules for SIPP providers, stating that all asset types must be categorised by SIPP providers as either standard or nonstandard. This increased the capital SIPP operators were required to hold in their businesses.
Read more: Navigating the tax landscape
Brian Bennis, founder of SIPPclub, which provides free guidance and access to advice on self-invested pensions, believes the P2P SIPP market came to a virtual standstill with the introduction of these rules as they made it more expensive for SIPP providers to allow non-standard assets like P2P in their SIPPs. “Essentially, the costs imposed on SIPP operators need to revert to former levels,” Bennis says. “And advisers need to be comfortable advising on P2P.”
Brian Bartaby, founder and chief executive of Proplend, says the vast majority of SIPP administrators don’t work with P2P lending platforms and the challenge is getting them comfortable with P2P as a product.
“A lot of this is to do with platform failures and bad press,” he says.
RateSetter’s Behrens says that they would like to see P2P investments added to the FCA’s standard asset list. “The introduction of enhanced regulations in December 2019 means the P2P sector is regulated on a par with other mainstream investments, so this is now a perfectly rational thing to happen – it is the key that unlocks the P2P market to SIPP providers,” he continues. “We look forward to this happening, and it will open the way for P2P to become an important part of many people’s SIPP portfolios.”
Mike Bristow, chief executive of CrowdProperty, compares this challenge from administrators to the long-standing frustrations around independent financial advisers (IFAs) being cautious about the sector. “It’s first and foremost awareness and recognition of it as a good investment class and some SIPP pension companies think they don’t need to offer it as part of a portfolio,” he says.
However, he adds that any progress that P2P has made into the SIPP market has been thanks to a groundswell of savvy retail investors moving their pension funds into companies that allow P2P investment. “It has definitely become a more popular option,” he adds. “SIPPs is a big market.”
Other FCA rules have acted as obstacles for P2P’s progress within this sector too. The ‘connected parties’ rule means when investing in a SIPP, investors cannot lend to a ‘connected person’ like a spouse or close relative. This is difficult to guarantee if investing funds through a P2P platform that diversifies the investments across hundreds of different companies. And while most types of investment can be held within a SIPP, there is one notable exception – residential property. This can pose a challenge for certain property-backed P2P platforms.
According to David Bradley-Ward, chief executive of asset-backed P2P lender Ablrate, another crucial barrier for P2P SIPPs may be the other tax-free wrapper that P2P investors can access – the IFISA. He notes that since IFISAs were introduced in April 2016, P2P investments within SIPPs have dropped in popularity simply because IFISAs are easier and cheaper to set up. “If people are going to be investing in a tax-efficient way, they will probably do so through IFISAs,” he says.
Despite the challenges which are halting the pace of progress, Bristow says that SIPPs present a huge opportunity for both pension companies and individuals wanting to invest in P2P. He points out that pension companies have less of a fee barrier than IFAs face with standard P2P lending because they are already taking fees.
Bristow also claims a rising number of investors want to invest part of their pension portfolio in P2P and this consumer demand will cause change as pension companies will be forced to allow customers that choose to, to lend part of their SIPP in P2P.
“Otherwise they will lose customers,” he says. “The consumer demand for people with pensions to invest will drive the more progressive pension companies to allow P2P lending.
“So, the future is very bright and will definitely favour the companies which allow this because people will move their pension pots into them.”
The SIPP market presents challenges for P2P but this is an innovative sector which has become more confident in its ability to deliver strong returns for investors over the long term. Platforms have been banging on the door of the SIPP market from some time, and it’s time for the SIPP administrators to start letting them in.