Although millions have been invested in peer-to-peer, earning SIPP holders attractive interest rate returns, discover why many people have lost control over their investment decision through no fault of their own.
Why The Slowdown Of Peer-To-Peer In A SIPP Isn’t A Sign Of A Poor Investment
What’s Changed To Restrict Peer-To-Peer In A SIPP?
Hot of the heels of the significant changes to pensions in 2015 that resulted from pension freedoms, 2016 was another dramatic year for SIPPs. Particularly affected are SIPP holders who like to diversify part of their self-invested pension money in areas beyond the stockmarket, such as peer-to-peer lending.
By far the biggest issue was the massive hike in the capital SIPP operators are now required to hold in their businesses, in case they get into difficulty and another administrator needs to be found. It disproportionately affects SIPP operators that allow non-standard assets like peer-to-peer in their SIPPs.
The upshot of these seismic regulatory changes is that many SIPP operators have had no choice but to change the way they operate. Across the SIPP industry, a number of SIPP propositions have been varied, some quite notably, acceptable asset classes have been restricted, and SIPP fees have been increased.
The cost and administration burdens brought about by this unprecedented period of regulatory change in SIPP world have imposed immense pressure on margins. It’s no surprise that some SIPP operators have been unable to cope. Following a series of mergers and takeovers in 2016, and more worryingly failures, there are now roughly 25 per cent fewer SIPP operators currently trading. Some experts have suggested this number will contract by a similar amount in the coming year.
As some SIPP holders have been given little or no notice of these changes, if you haven’t done so already, you should ask for written confirmation from your SIPP operator as to how its coping with these changes, and more importantly, what’s in store for you and your SIPP in the near future.
If You Can’t Use A SIPP For Peer-To-Peer, Use A SSAS
You’re arguably not affected by these changes if you run your own trading limited company for you have the option to take out the other form of self-invested pension – a SSAS (small self-administered scheme). And if you don’t run your own trading limited company, you might be able to join a SSAS run by the employer of a family member, a business colleague, a friend or even someone in a common interest group like commercial property investment. Interestingly, you don’t have to work for the sponsoring company to be invited to join the SSAS.
Whilst SIPP and SSAS are governed by HMRC pension legislation, SSAS is not regulated by the Financial Conduct Authority. It means that most of the problems affecting SIPP operators are of no concern to SSAS operators, and several of them are happy to permit a wide range of peer-to-peer lending across multiple platforms. The downside of a SSAS, however, is that you’re unable to claim compensation from the Financial Services Compensation Scheme if your SSAS operator fails to deliver.
The Future For Peer-To-Peer In A SIPP
At the present time, it’s no surprise that SIPP operators are taking a little while to decide how to frame their propositions moving forward. Apart from the odd one or two that have approved just one or two peer-to-peer platforms, there are currently no SIPP operators willing to allow peer-to-peer across a wide range of platforms. It’s likely to be well into 2017 or even longer until the position changes.
It would be wrong to conclude this means this means peer-to-peer in a SIPP should be avoided. On the contrary. The Financial Conduct Authority is completing the final stages of giving full regulatory authorisation to all the peer-to-peer platforms in the UK that comply with its standards, which will enable them to offer a peer-to-peer ISA alongside their cash offerings. Government is apparently behind the expansion of the peer-to-peer sector, for it believes an active and well-regulated alternative lending sector will reduce the banks’ monopoly. And that’s no bad thing.
There’s no doubt that investing some of your SIPP money in peer-to-peer could be worth serious consideration. In addition to earning your interest tax free, it can be a lot less volatile that many stockmarket assets. And just like stockmarket assets, you can expose your money to a wide range of risk profiles, including both secured and unsecured lending.
We’ve been involved in financial services for more than 35 years. Without question, this new asset class of peer-to-peer is exciting and has the ability to provide a genuinely uncorrelated alternative to deposit-based and equity-based investment. So whether you’re a SIPP operator, a peer-to-peer platform or someone who wants to lend your SIPP or SSAS money in peer-to-peer, we’d love to hear from you.
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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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Crowdfunding And Peer-To-Peer Risk Warning
When a platform has been assessed and approved by a SIPP or SSAS operator, this does not imply that any loan or investment opportunity is endorsed in any way. A SIPP or SSAS operator's due diligence review is limited to ensuring the processes and procedures of the platform are in line with both FCA and HMRC principles. It's entirely your responsibility for carrying out your own due diligence on any loan or investment opportunity before agreeing to lend or invest your pension money on a platform. As a SIPP or SSAS operator will continually review platforms from a regulatory perspective, it's possible for a platform to become 'unapproved' if something changes.
With peer-to-peer lending, your capital is at risk if you lend to individuals and businesses. You may lose some or all of the capital lent if the borrower defaults and is unable to meet its liabilities. Historic loan default rates are not necessarily indicative of future default rates. In addition, lending is an illiquid investment, which means you may not be able to access the capital you lend for the duration of the loan period, even if the platform offers a secondary market. Investing in any business involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdfunding is generally targeted at investors who are sufficiently sophisticated to understand the risks and make their own investment decisions, based on their knowledge, experience and financial capacity. Neither crowdfunding nor peer-to-peer lending is covered by the Financial Services Compensation Scheme. The tax treatment of your investment is dependent on your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of crowdfunding investment or peer-to-peer lending, you should consult a suitably qualified independent financial adviser.