Despite various Government initiatives, demand for loans from businesses of all sizes still massively outstrips what the banks are prepared to lend, giving you the opportunity to earn 10 per cent lending money from your SIPP or SSAS.
If You’re Uncertain Which Way The Stockmarket Will Move Next And You’d Like To Earn 10 Per Cent, Consider Becoming A Lender Instead Of An Investor
You Could Earn 10 Per Cent On Your SIPP Or SSAS Money
Unable to obtain finance through traditional sources as a result of continuing bank lending restrictions, many businesses may often be willing, and indeed be able to afford to pay well above average interest rates to secure the funding they need.
It’s possible to earn an average of 10 per cent on your SIPP or SSAS money lending to businesses.
Lending opens up a significant opportunity for you to earn a high interest rate for your SIPP, without the volatility and uncertainty that accompanies stockmarket investment. Whilst lending money is not without risk, you can protect your loan in a number of ways, including taking charges on suitable assets that could be sold in the event the business doesn’t meet its obligations under your loan agreement.
When a business borrows directly from a SIPP, many of the associated initial and on-going costs levied by banks can be avoided. This enables the business to pay a higher interest rate to your SIPP, without necessarily increasing its overall outlay. It effectively means your SIPP could profit at the banks’ expense.
Borrowing directly from a SIPP also enables a business to protect itself against ever-changing bank lending policy. Many businesses have suffered severe financial consequences as a result of banks randomly demanding that loans be restructured or repaid, even though the business has maintained its obligations exactly as agreed when the loan was taken out.
Three Ways To Earn 10 Per Cent Lending Your SIPP Or SSAS Money
A legally drafted, fully enforceable loan agreement, enabling your SIPP to lend money to a good quality business, could bring a predictable 10 per cent to your SIPP. This could be important as you build your SIPP fund, and possibly even more so when you reach retirement and need to draw a consistent level of income on which to live.
1. Loan Notes And Corporate Bonds
A well-established method for larger businesses to attract tranches of money for specific business purposes is through the issuing of Loan Notes and Corporate Bonds. These are usually arranged for a fixed term at a fixed interest rate. The average interest rate is around 10 per cent, though some pay a bit more than this.
Loan Notes and Corporate Bonds are similar to other methods of lending money from your SIPP. You’re lending your money to a business, in return for a contractually agreed interest rate, over a specific number of years. Your loan is usually protected with additional security, often a first legal charge on property.
The better promoters of Loan Notes and Corporate Bonds have usually produced high quality due diligence information to support their offers. Whilst it’s nice to see glossy brochures quoting attractive interest rates, these are not what you should rely upon. You need to see the same level of detail as you would if you were granting any sort of loan, ensuring that at least some of it has been produced by authorities independent of the promoter.
SIPPclub features a few Loan Notes And Corporate Bonds in our Invest area.
My wife and I each made a modest cash loan for a one year term. Six months later, our half yearly interest was paid into our bank account, exactly as promised. I had no hesitation in making a more substantial loan from my pension, over a five year term. Each loan pays in excess of 10 per cent.
2. Peer-To-Peer Lending
A typical interest rate currently being achieved by people lending their cash and SIPP money to businesses on peer-to-peer platforms is around 10 per cent. Some loans have been granted at a much higher rate. Many of the platforms have secondary markets, allowing you to trade your loans before they mature, and these can sometimes be sold at a premium.
In 2014, £1.74 billion was lent in the alternative finance market. A large proportion of this was lent to businesses through peer-to-peer platforms. But despite this being a very big number with peer-to-peer lending growing exponentially, it represents a tiny fraction of overall lending to businesses.
In the same way your SIPP can grant a loan to one business, your SIPP can grant part of a loan to a business. This is most effectively achieved through a peer-to-peer platform. Your interest rate is most commonly set via an auction. The lowest winning bids are accepted, ensuring the business borrows at the most competitive rate.
Each platform carries out a certain level of due diligence on the businesses featured. But that shouldn’t stop you undertaking your own research. After all, businesses can fail either in part or totally, not only putting your interest payments at risk, but also your loan capital too. Some loans offer further protection by way of additional asset security, and a few platforms have set up provision funds to cover defaulted interest payments.
Further information can be found on our Peer-To-Peer page.
Assetz Capital offers a simple website to manage funds and allow you to generate far greater returns for very low risk. In my three years, I've averaged over 10 per cent return after less than 0.5 per cent lost due to borrowers defaulting.
Dr Tony Robinson
3. Third Party Loans
Most Third Party Loans are typically charged at an average interest rate of 10 per cent, for a period of between four to six years. They can be arranged on an interest only or capital and interest basis. The highest rate we’ve seen is 16 per cent, borrowed by a large national concern. The terms are negotiated directly between you and the business and are subject to your SIPP operator being happy with the deal.
Finding businesses to which you could lend your SIPP money can be quite easy. Within your personal and business networks, you could well find some high quality, profitable businesses struggling to borrow money. In addition, it might be worth letting your accountant and solicitor know you’re willing to support their clients with a SIPP loan.
Whilst your risk could be reduced if you’re lending to businesses with whom you’re familiar, or those known to your professional advisers, it doesn’t remove your need to carry out thorough due diligence. This includes studying the Business Plan, checking the financial documents and running credit checks on the business and its key people.
You can reduce risk further by taking charges on suitable assets and securing relevant personal and director guarantees. It’s not uncommon to insist the key people within the business take out life cover and critical illness cover, just as banks might require them to do in support of a loan.
You can pretty much lend to any trading business, subject to the connected party rule. This prevents you from lending money to a business with which you’re connected, either because you work in the business or control it, or a close relative of yours is involved in the business. Break this rule and HMRC gets very cross, hitting your SIPP with an unauthorised payment charge of 55 per cent. Your SIPP operator could be fined too for letting it happen, and it'll probably pass that charge onto you!
Full details about Third Party Loans can be found in our Lend area.
The £60,000 SIPP loan I've granted to a very good local business is doing nicely with my financial support. I receive interest of 10 per cent, repayable over six years on a capital and interest basis.
Brian Bennis, Founder SIPPclub
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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