Are IFISAs an affordable alternative to SIPPs?

Peer-to-peer inves­tors can use an Innovative Finance ISA (IFISA) or in some cases a self-invested personal pension to earn returns on their P2P loans tax-free.

But in most cases, an IFISA may be a more affordable route.

Here are the main differences between the tax wrappers for P2P investors.

Minimum investment

Investors can set up an IFISA with as little as £100 and you can use up to £20,000 of your ISA allowance per financial year.

While the annual pen­sion contribution allow­ance is more generous at £40,000, Neil Faulkner of P2P analyst 4th Way warns that SIPP P2P investors may need £50,000 to £100,000 to start with.

Read more: Special report on SIPPs

Choice

There are around 40 P2P lending and crowd bond platforms that will let in­vestors open an IFISA.

This covers a variety of loans such as consumer, business and property finance.

In contrast, only a hand­ful of P2P lenders provide P2P pensions in the form of SIPPs or small self-ad­ministered schemes. These include Ablrate, Crowd­Property and Proplend.

SIPP provider Morgan Lloyd is the main firm working with P2P lenders but others have steered clear due to worries over connected party rules, where platforms need to be sure that investors aren’t also benefiting from loans they are backing.

Read more: £781m invested in IFISAs during first year of pandemic

A SIPP provider also has to hold more capital to reflect non-standard assets, which Brian Bennis, of pensions website SIPPclub, says has become a deterrent.

“The market for P2P in a SIPP collapsed in 2016 when the FCA changed the capital adequacy rules for SIPP operators,” he said.

IFISA providers have no such restrictions.

Demand

There is nothing stopping an investor holding a general P2P investment account to put towards their retirement savings but demand appears to be stronger for IFISAs rather than SIPPS.

Brian Bartaby of Proplend said only around 15 per cent of the platform’s loanbook comes through its pension product.

Read more: SIPP holders face additional charge for P2P investments

Faulkner cites platforms who report that few people are interested in P2P lending through their SIPP wrappers.

“Most likely, this is because it’s a group within a niche: the very wealthy who also happen to want to do P2P lending,” he said.

“IFISAs come at no ad­ditional cost, no additional lengthy due diligence and with relatively little additional red-tape when compared to ordinary P2P lending accounts.”