Diversity from the stock market, inflation-busting returns and a variety of products on offer… with all these benefits, why haven’t peer-to-peer investments become a mainstay of the self-invested personal pensions market?
For several years, peer-to-peer lending platforms have been trying to tap into the lucrative self-invested personal pension (SIPP) market. But despite offering inflation-beating returns in a tax-free wrapper, progress has been rather lacklustre to date.
A SIPP is a personal pension tax wrapper which people can pay into and use to manage their investments flexibly in a tax-free environment. They can contribute up to 100 per cent of their annual earnings, with tax relief applying on contributions of up to £40,000 per year, with no capital gains or income tax.
The concept was first introduced in 1989, but P2P platforms were only allowed access to the scheme in 2016. A number of platforms now accept P2P investments through SIPPs, including CrowdProperty, Proplend, Money&Co and Ablrate to name a few.
However, five years after P2P SIPPs were first introduced, the concept of P2P pension investing has not really gained traction. This is partly due to the many challenges that P2P firms currently face in the SIPP market.
John Dowding, technical director at SIPP administrator Morgan Lloyd, says that he has seen falling demand for P2P investments through a SIPP.
He believes that demand has dropped this year due to “uncertainty over the economy and concerns that businesses may default on lending, coupled with the coverage of the likes of Lendy”.
“In our experience interest peaked around 2018/2019 but has diminished quite considerably since this time,” he says.
Lack of demand may be one reason for P2P platforms’ limited progress into SIPP money, but is only part of the problem.
Residential property investments cannot be held within a SIPP, which means that some P2P property lending platforms are automatically excluded. Furthermore, the ‘connected parties’ rule means that SIPP investors cannot lend to a ‘connected person’ like a spouse or close relative, which is difficult to guarantee when putting money into a P2P platform that auto-diversifies investments.
And then there are sectoral challenges, such as the fact that P2P lending is labelled as a non-standard asset and relatively few independent financial advisers (IFAs) recommend P2P to their pension-planning clients.
“There was a flurry of people getting involved in SIPPs, but I think the IFA market and SIPP providers are just not getting involved,” says David Bradley-Ward, chief executive of Ablrate.
“I’m sure there is quite a lot of SIPP money around. We have quite a lot on the platform but it’s not an easy thing to do. Not many SIPP providers would allow SIPP investing into P2P loans because it’s a non-standard asset.
“It’s a niche marketplace as far as that’s concerned and with increasing trajectory of what the Financial Conduct Authority (FCA) says you can invest in, I would imagine they wouldn’t be too keen on pension money going into P2P loans in future.”
On top of this, Dowding says Morgan Lloyd has an additional charge for SIPP clients that invest in P2P to cover the extra admin and due diligence that is required.
He says the SIPP administrator offers a free SIPP where all investments are on its own platform or a low-cost SIPP where other platforms and standard assets can be held, which is charged at between £150 to £350 per annum. Meanwhile, Dowding says the standard charge for P2P investments, which is classed as a non-standard asset, is 0.35 per cent on the first £500,000 and 0.25 per cent on anything above £500,000, subject to a minimum of £1,350 per annum.
“This covers the additional admin and due diligence that is required for these types of arrangements,” he says.
“The regulatory capital and risk increases pro rata to the size of the investment hence the tiered charge.”
This effectively makes it more expensive to invest in a P2P SIPP, as it is only economically viable if a hefty investment of many thousands of pounds is being made.
Nicola Horlick, chief executive at Money&Co, blames SIPP administrators for the slow uptake of P2P SIPPs.
“The main problem is that the client has to persuade the SIPP administrator that P2P loans are a suitable investment for their SIPP and many administrators see P2P lending as high risk and will not approve an investment,” she says.
“This is the main reason why so few SIPPs have P2P loans.”
However, Gareth James, head of policy at AJ Bell, suggests this hesitation around P2P is understandable given the possible consequences if something goes wrong and the low demand for SIPP investment into this sector.
“Providers and SIPP customers face a risk of penal tax charges if the party they’re lending to holds a SIPP under the same registered pension scheme,” he says.
“Larger SIPP firms have tens, or even hundreds, of thousands of customers making this a risk which is beyond the control of the provider, as they don’t have sight of the parties to the individual loan transactions.
Read more: Which P2P platforms offer SIPPs?
“This, combined with low customer demand, is the main reason larger SIPP operators haven’t been encouraged to make P2P lending available through their pensions.”
Dowding agrees and is pessimistic for the future of the P2P SIPP market, saying take-up is “unlikely” to improve.
“On current trends, it is likely that the P2P SIPP market will continue to contract,” he says.
“The principal challenges are twofold. Firstly, to include sufficient controls to ensure that the borrower and SIPP investor are not connected, secondly to ensure that the borrower is a genuine diverse commercial vehicle. Failure to observe these requirements could have significant tax consequences.”
He goes on to say that SIPP providers have come under increasing scrutiny from the FCA around the investments that they accept and the level of due diligence that is undertaken on them.
“It is considered that the demise of Lendy for example, has seen a greater reluctance from both SIPP providers and SIPP investors to enter this market,” Dowding adds.
However, some industry stakeholders predict that take-up will improve, whether through engagement and education with advisers and SIPP providers or through the simple fact that the P2P sector is building up a strong track record – something that IFAs should take note of.
Neil Faulkner, managing director and head of research at 4thWay, says platforms have already been working on educating SIPP providers about the risk-reward profile of P2P lending platforms.
He says they need to be able to show SIPP providers how they will concretely benefit in the form of rapidly attracting more SIPP customers, while also generating awareness and interest from their own investor base.
“Take-up will improve slowly for the foreseeable future,” he says.
“When SIPP providers better get to grips with P2P lending and as platforms develop better ways to communicate with them, take-up might finally speed up.”
Karteek Patel is co-founder and chief executive of Crowdstacker, which stopped offering the ability for investments to be held within a SIPP following low demand. He says there isn’t enough interest to drive the sector to work on educating and convincing financial advisers and SIPP providers of its benefits.
“For P2P investments to become a mainstay in SIPPs the industry would have to win over financial advisers and SIPP providers, and ultimately this will be driven by customer demand,” he says.
“This demand is not yet there, customers are much keener to use P2P investing as an overall add-on to their day-to-day investing, and those seeking tax advantages utilise their ISA allowance.”
The limited progress of P2P lending tapping into the SIPP market can be shown through several challenges, from the ‘connected parties’ rule, SIPP administrators and IFAs being reticent about P2P lending and P2P itself being labelled as a non-standard asset with SIPP holders charged more for these investments, not to mention the FCA’s direction of travel for the sector.
These challenges are stalling take-up despite the obvious benefits of diversified tax-free investments which can achieve inflation-beating returns.
Yet despite the barriers, several platforms still accept investments through the tax wrapper and have received SIPP money with minimal marketing of the product.
The P2P SIPP market may not have fully taken off to date, but platforms aren’t closing the door on SIPPs just yet.
Peer2Peer Finance News understands that Kuflink is working on a SIPP product, while Property Bridges is looking into accepting SIPP investments and Lendwise chief executive Rishi Zaveri says it “makes sense to offer this in due course”.
In addition, Relendex is preparing to enter the SIPPs market a year from now through its new associated company Farringdon Portfolio.
The next generation of SIPPs couldn’t have arrived at a better time. Low interest rates and rising inflation have encouraged many investors to look at their pension portfolio with fresh eyes, and P2P lending platforms have a strong track record of delivering inflation-beating returns even during a global pandemic.
While obstacles remain, the story of P2P SIPPs is far from over.