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Peer to peer lending 'potentially attractive' to SIPP investors with government support, experts say

Lifting restrictions preventing private pension holders from investing in peer-to-peer lending could open up a "potentially attractive" new market for savers, according to pension law experts at Pinsent Masons, the law firm behind Out-Law.com.19 Apr 2016

Last week, Money Marketing reported that the UK Treasury had asked "senior industry figures" to make the case for peer to peer lending using funds from a self-invested personal pension (SIPP). It is examining whether the 'connected party' rules, which impose tax penalties on loans of this sort from a pension fund, discourage SIPP holders from investing in peer to peer loans, according to the report.

At least one SIPP provider now allows its customers to invest in peer-to-peer lending. However, it is the responsibility of the customer to "actively manage" their own investments in order to maximise returns and minimise risk, and to ensure that they comply with the connected party rules.

"Current HMRC [HM Revenue and Customs] rules do not prohibit SIPPs from entering into peer to peer lending, but they do present significant hurdles," said pensions expert Simon Laight of Pinsent Masons. "It is difficult to structure a P2P proposition in a manner that will not fall foul of HMRC's current restrictions on connected party transactions, and direct and indirect investment in residential property."

"In theory, it ought to be possible to overcome these hurdles through a carefully structured and controlled lending process for SIPPs. However, the extra controls and processes that would have to be built in to the system to navigate the restrictions mean that a significant market in this area has not yet developed," he said.

A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested from the full range of investments approved by the UK government and tax authorities. Contributions to a SIPP count towards an individual's annual allowance for tax purposes, while benefits paid out by a SIPP count towards an individual's lifetime allowance.

Investments made by or loans made from a SIPP must be genuine, to a third party on an arm's length basis and at a market rate, in order to comply with HMRC rules. Loans to other scheme members or connected parties could be classed as unauthorised payments, giving rise to a potential tax charge of up to 55% or other sanctions. Investments in residential property are subject to the same penalties, unless that investment is as part of a residential property fund or other "genuine, diverse commercial vehicle".

Banking expert Victoria Baker of Pinsent Masons said that merely acting to change the rules in this area would not itself be sufficient to encourage greater investment in peer to peer lending by SIPPs.

"A change in legislation may help to unlock the floodgates, but SIPP providers may remain reluctant to allow their customers to make such investments given the relative infancy of the market and the lack of safeguards if a P2P platform fails," she said. "As things stand, investments made on P2P platforms are not covered by the Financial Services Compensation Scheme, and many providers have had their fingers burnt in the past with investments that have gone wrong."

Editor's note 17/05/16 This story has been updated to correct a mis-statement of the regulatory position regarding SIPPs. We apologise for the error.