Since April 2016 there has been a lot of industry excitement resulting from the launch of the Innovate Finance ISA (IFISA), while investing through Self Invested Personal Pensions (SIPPs) has largely been forgotten about. Hargreaves Lansdown estimates that one million people in the UK have a SIPP, offering investors the ability to self-select investments, while receiving the tax benefits of a pension. With over £150 billion of assets sitting within SIPPs, it would seem an obvious ambition for the P2P industry to target the SIPP market. There has been some progress with P2P platforms advertising that it is possible to invest through a SIPP wrapper, however uptake has been slow with no major SIPP providers accepting P2P investments.
Notably, RateSetter advertises investing through a SIPP as an option when getting started on the platform.
To offer investing through a SIPP, RateSetter has teamed up with four SIPP operators who are willing to accept RateSetter investments into their schemes. Investors are required to open a SIPP account with one of the four providers listed below and then invest similarly to how they would with a normal RateSetter account.
It’s worth noting that investors can open as many SIPPs as they want providing they adhere to the overall investment restrictions. That said, the inconvenience of opening multiple SIPPS to accommodate P2P investments may be a stumbling block for investors.
As of April 2016, the FTAdviser reported that RateSetter had 50 active SIPPs open on the platform, amounting to around £3 million in assets.
The mainstream SIPP providers (Standard Life 170,000 accounts and Hargreaves Lansdown 150,000) have not accepted P2P as an asset class. The question remains: why are smaller SIPP providers accepting P2P and not the main providers?
SIPP providers operate under HMRC guidance and have established operating polices, including investment eligibility. These include the below.
Eligible SIPP investments
|Collective Investment Funds||Stocks and Shares||Other Investments|
|Unit trusts||Individual UK equities||Cash and deposit|
|Investment trusts||Overseas equities, e.g: US or European shares||Traded endowment plans|
|OEICS (Open Ended Investment Companies)||UK gilts||Commercial property and land|
|ETFs (Exchange Traded Funds)||Bonds and other fixed interest securities||Loans|
|Insurance company funds and their range of funds run by other managers||Futures and options|
|PIBS - Permanent interest bearing shares|
Source: Hargreaves Lansdown
There are further restrictions that apply to lending within a SIPP which impact P2P. The HMRC states that loans cannot be made from a pension scheme to another scheme member or a person connected to a pension member. A ‘connected member’ is considered a spouse, relative or civil partner.
This ‘connected member’ rule exists to prohibit connected individuals benefiting from tax breaks when transferring assets. Speaking to the FTAdviser in April 16, Ceri Williams, Head of Investor Operations at RateSetter said, ‘The legislation was “perfectly sensible” to prevent abuse of tax incentives, but because the rule was created more than a decade ago, before the P2P sector was established, it was now looking strained.’
Connected members is easy to identify when lenders manually select borrowers on platforms such as LendInvest or ThinCats. However, when lending through the larger platforms, such as RateSetter and Zopa, the lender has no visibility over the borrower. This issue is further exacerbated when applied to all members of the same scheme, particularly with larger schemes.
As a result of the ‘connected members’ rule, P2P lending has not been made available through mainstream SIPP providers. It’s not worth the risk to the operator or to its members. More innovate providers have concluded that this legislation is not fulfilling the function it initially intended and therefore deemed it not a problem.
There are further issues when considering lending to fund residential property investments. Essentially, investing in residential buy-to-let property or any other residential property investment is not allowed through a SIPP. The only way to invest in residential property through a SIPP is via a residential property fund. Again, as visibility of the borrower is often unknown, this presents a further problem.
What are the options?
Firstly, a change in legislation to update the current prohibitive rules would propel the industry forward. The rules laid out 10 years ago were clearly created with good faith in mind, but these rules are perhaps now dated. So far there has been no word from HMRC on whether these rules will be altered to accommodate direct P2P investing.
Similar to residential property funds, investing through some kind of fund structure could be a similar approach adopted by the P2P industry; BondMason, who operates an investment vehicle which invests client money into a portfolio of P2P loans, is currently targeting the SIPP market with this belief. BondMason has teamed up with the same innovate SIPP providers as the aforementioned P2P platforms and has further launched a SIPP service to help administrators gain comfort in P2P. SIPP administrators can use the BondMason SIPP service to view their client’s investments and general activities. Only time will tell whether the larger SIPP players will adopt the BondMason offering.
The current structure of the large P2P platforms where lenders have no visibility over their borrowers makes it impossible for SIPP providers to know if one member is lending to another member or ‘connected member’. Change in legislation allowing SIPP administrators to accept P2P would propel the industry forward while investors could benefit form the risk-adjusted stable returns P2P can offer. Discussions between SIPP operators, P2P Platforms and the HMRC are ongoing, however there is no sign of progress. Similar to investing in residential property funds as a means of accessing otherwise ineligible assets through a SIPP, we may see a flurry of P2P focused funds similar to the BondMason offering.