In simple terms, peer to peer lending connects individuals or companies looking to borrow money with investors who would like to invest it, usually over the medium to long term. On average interest rates are between 4% and 15% which makes peer to peer lending an appealing option for savers stifled by record low interest rates. One of the unique advantages of peer to peer lending is that as well as being used to preserve and grow capital it can also be used to provide a regular monthly income. This is made up of the capital and interest payments received each month from the business or individual you have lent to. A SIPP is very similar to a pension but there is one key difference. A SIPP gives you much greater choice about where you invest your pension whereas a traditional pension will limit your options to the providers fund selection. This means you can maintain a tax efficient way of saving into your pension but have greater freedom about where it is invested.
1. How/where would you start if you wanted to invest your P2P loan in a SIPP?
Do your research. As with any investment make enquiries into what you are investing and what each provider offers. Some providers focus on personal loans whilst others on property or business loans. Any provider worth their salt will be a member of the P2PFA and regularly publish performance statistics on their website. The P2PFA has a useful video explaining what peer to peer lending is http://p2pfa.info/.
2. What is the minimum/maximum amount you can invest in a SIPP?
There doesn’t tend to be a minimum amount you can invest through a SIPP, but it all depends on which firm you ask to manage it. However, it is important to compare the fees that you’ll be charged for managing or administrating your SIPP.
3. What are the benefits of investing your P2P loan in a SIPP?
Investing in Peer to peer through a SIPP means get the same tax relief that comes with a traditional pension whilst also getting access to higher interest rates than offered by most pension funds or high street savings options. Additionally, if you are looking to preserve your capital and take a monthly income peer to peer enables you to do this.
4. How can you take an income from a peer to peer lending through a SIPP?
Peer to peer lending means you get your capital repayment from the borrower each month plus the agreed interest payment. You can either take both as monthly income or preserve your capital by just taking the interest payment as an income.
5. What are the main risks of this type of investment?
Peer to peer lending is very different from investing in the stock market which can go up or down. With peer to peer lending the interest rate you agree to at the start of the investment will remain the same until the loan term is over. It is important to recognise that if a borrower defaults you could lose all of your investment. You can spread your investment over a number of loans and look at whether the peer to peer provider offers secured loans. Secured loans mean that the borrower provides security so in the event they cannot make repayments their security can be called upon to repay the lender.
6. Is P2P investment in a SIPP just for the sophisticated investor?
SIPPs are generally considered to only be suitable for those who feel confident choosing and managing their own investments. And as with all investments if you do not feel confident seek advice or don’t invest in it.
7. What words of wisdom would you give to an investor?
P2P is a comparatively new asset class but has shown a reliable growth pattern over the past five years as well as low default rates. The P2P Finance Association is the trade body which controls standards and the FCA also regulate the industry too. I’m a big believer in getting different points of view, so I’d recommend before any investment speaking to as many people as possible before investing in anything. ThinCats have an online lender forum packed full of people who have been investing through peer to peer.
8. What does the risk and return profile of a typical P2P SIPP look like?
Loans on the ThinCats platform are currently returning an average of 10% gross interest. With % interest determined on each loan where the risk is reflected in the interest rate it attracts through the auction process. All loans are available to the SIPP and therefore it is up to the lender to determine the level of risk they wish to take. You must also factor in the additional tax relief that come with a pension.
9. What are the charges/fees involved in peer to peer lending?
This varies depending on the provider but as a ThinCats lender it costs
Nothing to join or transact on the ThinCats website. As previously mentioned though, it is important you check the SIPP provider’s management and administration charges.
Kevin Caley, Managing Director and Co-Founder of ThinCats comments:
“Low interest rates have in the most hit those who are saving for the long term hardest but new pension rules have provided more options for people to invest their pension savings where they see fit and take a more flexible approach to taking an income. An increasingly popular way of investing for retirement is through a SIPP. SIPPs allow people to maintain all the tax benefits of a traditional pension plan but give allow a wider range of investment options, including peer to peer lending.
One of the unique advantages of peer to peer lending in a SIPP is that as well as being used to preserve and grow capital it can also be used to provide a regular monthly income. This is made up of the capital and interest payments received each month from the business or individual you have lent to.”
ThinCats is a peer to peer lender founded in 2011, under Kevin Caley, Peter Brown and Paul Meier. ThinCats connects experienced investors with established UK business borrowers and provides a real alternative for investors and for businesses that need funding. Investors registering on the platform are able to bid directly on UK businesses, all of which have been vetted by ThinCats’ sponsors, who each have local, industry specific and banking expertise. The network is expertly placed to meet the needs of anyone managing an investment portfolio (including individuals, pension fund managers and companies with cash deposits), and provide direct access to the low risk market sector traditionally occupied by high street banks.
The personal lending/borrowing experience at ThinCats is underpinned by a minimum loan size of £1,000. This was deliberately designed to interest serious investors able to carefully consider the businesses they choose to lend to. Now, more than 4 years later less experienced investors are benefiting from that expertise and intensive ‘crowd due diligence’.