SIPPs: The golden egg
Lucrative SIPP money will remain elusive until the peer-to-peer lending market matures, reports Hannah Gannage-Stewart
While peer-to-peer lending platforms have proven to be a highly stable means of investment for many years now, often outperforming the returns on more traditional investments, the industry remains disenfranchised when it comes to certain core investment schemes.
In particular, self-invested personal pensions (SIPPs), which offer flexible investment options in a tax-free pension ‘wrapper’. In theory, these could be readily available on P2P platforms, but in practice they are few and far between.
This is in part because of a reticence on the behalf of P2P platforms to deal with some of the more complex rules, such as the connected party rules, which mean SIPP investors cannot lend to a ‘connected person’, such as a spouse or close relative.
Inadvertently, lending to a connected person is seen as a greater risk in P2P but there are ways to mitigate that risk, such as the use of loan pools. It is also the lender’s responsibility, not the platform’s, to avoid lending to connected persons, so adequately communicating that requirement would mitigate the risk to the platform.
However, even if a platform were happy to navigate the regulatory requirements, and a few are, the greater barrier to SIPP money entering the P2P market is demand.
There is little awareness of P2P among SIPP investors and there is little will among SIPP administrators, who facilitate these products, to educate investors on the potential benefits of diversifying into P2P.
While there are vast sums of money tied up in pension funds, they are also the domain of traditional finance and bringing that money into the P2P space, while not impossible, is a challenge.
Despite the challenges, P2P property lending platform Kuflink announced it had launched a SIPP pool earlier this year. It is one of very few P2P platforms to offer investments within a SIPP wrapper.
Kuflink chief executive Narinder Khattoare says having built up a pool of loans running into tens of millions of pounds to secure the pensions against, he is seeing growing traction from high-net-worth investors who want to diversify into P2P.
“I can’t say there’s a huge demand out there,” he says, but “at the moment, we’ve got about three or four people that have come in and put in sizeable chunks of money. There’s one individual in particular who has put several hundred thousand pounds into it and she’s told us there’s another half a million to follow.”
He says other investors stand to invest millions in the platform’s SIPP, so while it may be a small number of investors that take up the opportunity, the funds deposited can be substantial.
However, Kuflink’s journey to that point demonstrates why many P2P lenders have opted to steer clear. Khattoare says it took a long time, from initially considering SIPPs, to launching the SIPP pool.
Kuflink had to build up the loan pool, build up a team of people that understand the market and build a rapport with the SIPP provider Morgan Lloyd.
The latter can be one of the biggest challenges for P2P lenders in this space, as the tax-free SIPP wrapper can only be offered via one of a few administrators, and they are not always keen to connect investors with P2P platforms.
Morgan Lloyd is one of the biggest SIPP administrators to work with P2P lenders, although there are others – Westerby Trustee Services is on Proplend’s roster alongside Morgan Lloyd, for example.
But it is not easy for P2P platforms to forge that partnership. Usually, it will be driven by the investors, and as few of the high-net-worth, generally sophisticated, investors that make up the SIPP-invested demographic are P2P literate, this is an infrequent occurrence.
Read more: Are IFISAs an affordable alternative to SIPPs?
Neil Faulkner, chief executive and head of research at 4th Way explains that administrators often do not see the due diligence involved in P2P as worthwhile. “It’s a lot of work when you’re not even sure how many of your investors are actually interested in it,” he explains.
Faulkner says Morgan Lloyd classes P2P as a “niche” investment class, so while they do facilitate SIPPs invested in P2P platforms, they are clearly still not looking at widespread demand.
“They’re willing to take the chance and put in the effort and become known in that space, as it might attract a niche investment,” he adds, but says that the cost of managing such “niche” investments, due to the increased due diligence, is far higher than with a standard investment.
“You’re talking about a cost of £1,500 a year or so, as a flat fee just for having a SIPP. You need to be investing at least £100,000 pounds if you’re investing in things like P2P lending through a SIPP because they are much more expensive.”
Read more: SIPP holders face additional charge for P2P investments
That said, Faulkner blames that cost on the archaic attitudes of traditional financial industries. While P2P did see some major collapses early on its inception, Faulkner points out that the market has proved itself to be “incredibly stable” and have “resoundingly positive overall returns for investors” in more recent years.
“You can look at decades where it doesn’t matter how bad recessions have been, they still managed to stay in the plus,” he says.
Crowd Property chief executive Mike Bristow has got SIPP money on the platform’s books but is clear that it will take a major change of attitude among both investors and administrators for SIPP money to enter the market in any meaningful way.
“The only way that the market would shift in my view, is if there were fundamental SIPP pension holder demand to say ‘I need an alternative asset class, such as P2P’,” Bristow asserts. “Then if a few of those large SIPP providers made a play on that as a differentiating factor, pensions transfers started flooding towards them because of that access into alternative asset classes, therefore more and more SIPP providers would need to open those asset classes up in their offering as well.”
Most P2P platforms prefer to offer ISAs, which unlike SIPPs are relatively easy for investors to transfer.
“It’s actually incredibly difficult to move a SIPP,” Bristow explains. “Obviously, you can take cash out of your ISA at any point, whether you put it back in or not, or just take it out, that’s totally up to you. But pension money, once it’s in, it’s in, right until you reach a certain age.”
There are pros and cons to that. On the one hand, it is difficult to attract the SIPP money in the first place, but on the other hand it is sticky once it is in. Providing the investor does not choose to endure the difficulty of moving it, it is a large, reliable, longstanding investment.
“I think, everyone thought the pension market was the golden goose with the golden egg, but the fact is it’s probably not because it’s just so difficult to get that client on board,” Bristow adds. “Whereas ISA money is much easier to get your hands on because, you know, if you’ve got an ISA, wherever it is, whether it’s stocks and shares or cash or whatever, you’re in control of that, and you can move it quite quickly.”
Relendex had considered entering the SIPP market, but executive chairman Paul Sonabend explains that after consideration, it has decided not to. “None of it makes any commercial sense,” he says. “Why create a whole new layer of intermediaries and associated fees when investors already have the IFISA tax advantage and can lend directly?”
It seems that, while SIPPs are still a while off becoming a mainstay of the P2P offering, any movement in that trend would be a clear marker of maturity in the P2P market. A trend towards more SIPP money coming into the market would signify greater trust in the platforms among administrators and a greater comprehension of P2P among sophisticated investors.
Meanwhile, a few early movers may be making their mark but an industry-wide drive to attract SIPP money looks unlikely while the gatekeepers remain content, as it remains profitable to offer primarily traditional investments.