Crowdfunding And Peer-To-Peer For SIPP And SSAS
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Savers, and holders of SIPPs and SSASs, in search of increased returns on their money, are choosing crowdfunding as a way forward
Investors Stake £1.6 billion A Year On Crowdfunding
Crowdfunding is a simple concept. It matches people with money, with those who want money. Those who want money can be businesses. And they can be individuals.
According to information from Nesta, the charitable research organisation, last year, almost £1 billion was lent through crowdfunding. Nesta predicts this figure will increase to around £1.6 billion in 2014.
The massive increase in popularity of crowdfunding is largely due to three factors:
- Poor savings rates, which are likely to continue for the foreseeable future.
- A lack of lending appetite from the major banks.
- The mistrust of lenders, following a series of financial scandals.
Against this backdrop, it’s not surprising that people with money are willing to ‘cut out the middle man’, and engage directly with those who want access to it.
The incredible growth in this sector hasn’t gone unnoticed by the Financial Conduct Authority. As a result, it's required crowdfunding platforms to submit details of their operations, with regulation coming into force shortly. It’s likely to coincide with the Office of Fair Trading taking over responsibility for consumer credit in April.
Crowdfunding Investors Are Making 10% Per Year And More
With interest rates expected to languish for some considerable time, crowdfunding sounds like a no-brainer. But it’s a very different beast to a UK-regulated deposit account, which protects the first £85,000 of your money. You don’t get a penny protection with crowdfunding!
The biggest risk is that you can lose all your money. If the business fails to meet its targets and you've lent it money, your interest payments can be at risk. And if things go from bad to worse and the business goes bust, you can be left with nothing.
On the basis you don’t often ‘get something for nothing’, you should always carry out due diligence before you part with your hard earned money. The crowdfunding platforms perform some checks, but the amount of information they can provide varies substantially.
The chair of the UK Crowdfunding Association, Julia Groves, said: “We ask that platforms are clear about the amount of due diligence that has been undertaken on a listing. If no due diligence has been carried out, they must say so. All platforms must at least check that the information given by the business is accurate. Sometimes, if a business is very early stage, there can be hardly any information available.”
Crowdfunding Offers A Variety Of Investment Choice
With so much money flooding into crowdfunding, there are now many platforms offering a wide variety of investment options. To help you get to grips with the choice, they’ve been arranged in five categories, although you’ll find platforms that don’t easily fit into any of these.
Crowdfunding 1: Peer-To-Peer Lending
Sometimes referred to as ‘lend-to-save’, it’s arguably the longest and most well established form of crowdfunding.
Most of the platforms work through an online matching system. Having assessed an opportunity in detail and having read the due diligence thoroughly, once you’ve carried out some further independent checks, you offer to lend your money at a particular interest rate.
It usually works on a reverse auction basis. The auction remains open for a defined period of time, even if the target borrowing is raised early. Any subsequent lower bids replace the earlier higher bids until the auction closes. This ensures the borrower secures the loan at the lowest rate.
Crowdfunding 2: Equity Investment
Instead of lending money in return for a given rate of interest, your money buys you an equity stake in the business.
Just like any share-based investment, if the business is successful, the value of your share increases. But your share can fall in value. And it can disappear altogether if the business fails.
Crowdfunding in this way is being used by existing businesses to raise money. Arguably, the risk is lower than the situation where the business is a start-up, for there is often financial information and a trading history available for inspection. If, however, a start-up business makes it big, the returns for your investment can be substantial.
Crowdfunding 3: Start-Ups For Sophisticated Investors
Backed by Jon Moulton, a UK venture capitalist, Investing Zone is aimed specifically at sophisticated investors, offering equity in a huge variety of businesses.
Those wanting to invest have to prove their knowledge of the crowdfunding market by passing an online test. They also have to demonstrate they possess the right experience of investing, as well as a minimum level of income and assets.
This form of crowdfunding provides start up businesses with more than money. It enables them to tap into valuable experience from affluent investors, so that both parties stand to benefit. A little like Dragons’ Den on a group basis.
Crowdfunding 4: Green Energy Investment
Strictly speaking, this isn’t a separate area, because it’s similar in nature to crowdfunding equity investment. It’s highlighted separately though, because new platforms are emerging.
Abundance Generation not only enables you to profit to the tune of about six to eight per cent per year over a period of up to 25 years, you can also visit the projects you’re supporting. It's approved by the regulator, and you can invest with both cash and SIPP money.
Trillion Fund is another example of this form of crowdfunding. Though I’m not sure how many of its supporters will achieve the cuddly name it gives to its supporters – ‘Trillionaires’.
That said, Warren Buffett, one of the world’s richest men, invests in renewable energy, not because of some ethical belief, but because of the profits on offer. That's food for thought!
Crowdfunding 5: Asset-Based Finance
This form of crowdfunding enables small and medium-sized enterprises to unlock money tied up in their unpaid invoices.
Through an auction, investors advance between 80 and 90 per cent of the money, for a fee. Working to a plan over the coming 45 days, the business repays investors, once the invoices have been settled.
Invoice financing has been established for many years. Using crowdfunding principles, experienced investors and high net worth individuals are able to profit from this opportunity.
Crowdfunding From Your SIPP
Although it’s captured the imagination of a very large number of investors, crowdfunding from SIPPs and SSASs hasn’t really taken off. Yet.
Partly, this is due to SIPP operators being unwilling to embrace new opportunities in the face of changing regulation being introduced by the Financial Conduct Authority. And partly as a result of HMRC's connected party rule, which involves you lending money from your SIPP to a relative of yours, or to a person with whom you’re in business.
With many crowdfunding platforms permitting investment from as little as £20, it would be financially impossible to check every investment to ensure the connected party rule wasn’t being broken. The penalty is that the SIPP could suffer an unauthorised payment charge from HMRC of up to 55%. And you wouldn’t want that!
That said, some of the crowdfunding platforms do accept money from SIPPs and SSASs, though the minimum stake is very much higher, often starting at about £1,000. If you'd like further details about crowdfunding, visit our crowdfunding and peer-to-peer page.
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Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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Crowdfunding And Peer-To-Peer Risk Warning
When a platform has been assessed and approved by a SIPP or SSAS operator, this does not imply that any loan or investment opportunity is endorsed in any way. A SIPP or SSAS operator's due diligence review is limited to ensuring the processes and procedures of the platform are in line with both FCA and HMRC principles. It's entirely your responsibility for carrying out your own due diligence on any loan or investment opportunity before agreeing to lend or invest your pension money on a platform. As a SIPP or SSAS operator will continually review platforms from a regulatory perspective, it's possible for a platform to become 'unapproved' if something changes.
With peer-to-peer lending, your capital is at risk if you lend to individuals and businesses. You may lose some or all of the capital lent if the borrower defaults and is unable to meet its liabilities. Historic loan default rates are not necessarily indicative of future default rates. In addition, lending is an illiquid investment, which means you may not be able to access the capital you lend for the duration of the loan period, even if the platform offers a secondary market. Investing in any business involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdfunding is generally targeted at investors who are sufficiently sophisticated to understand the risks and make their own investment decisions, based on their knowledge, experience and financial capacity. Neither crowdfunding nor peer-to-peer lending is covered by the Financial Services Compensation Scheme. The tax treatment of your investment is dependent on your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of crowdfunding investment or peer-to-peer lending, you should consult a suitably qualified independent financial adviser.