Crowdfunding And Peer-To-Peer For SIPP And SSAS
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We're delighted to present an article written by Neil Faulkner, a director of 4thWay®, a service designed to help you make more money safely through peer-to-peer lending
At 4thWay®, we think there are five things everyone must know when investing through peer-to-peer lending. With these five strategies, I think you can strongly expect to get satisfactory, inflation-beating rewards over the medium term for the relatively low risks you're taking.
Neil Faulkner, Director, 4thWay®
1. It's Vital To Spread Your Money Across Lots Of Loans
After all, no bank or building society would take chances by just lending to a few dozen big borrowers, so why should you?
Some peer-to-peer lending websites let you choose your own borrowers to lend to. (That's important in a SIPP, since you could face severe penalties if you lend to businesses you're connected with.)
However, don't be tempted to concentrate your lending on just two dozen borrowers based on how well other borrowers with similar characteristics have done.
A lot of the patterns you observe turn out to have been either random or based on temporary circumstances that can reverse suddenly.
So spread your money around as widely and swiftly as possible across many loans and several peer-to-peer lending websites.
If you can't find enough opportunities that are unconnected with you, then you can either take more time to build your loan portfolio, spread your money across even more peer-to-peer lending websites, or divert more of your pot to other investments.
2. Lend Regularly To Lower Your Risks
Like fine wine, there are good and bad vintages of borrowers.
Borrowers who take out loans in 2015 might be flawless, while many of those who start borrowing in 2016 disappoint you. By lending regularly over several years, you can wash away the taste of any bad vintages with the good.
You don't need a constant stream of new funds to lend regularly; instead, you can re-lend loan repayments you receive. Each time you do so, you also spread your risk across more borrowers, making your portfolio even less sensitive to shocks.
3. Stick To Lower-Risk Options
The risk-reward profile of peer-to-peer lending best fits between savings accounts and the stock market. So, generally, this is where investors in this space should focus.
When seeking out lower risk, there is one risk criteria above all the rest that you look for. You need to be convinced that the peer-to-peer lending company allows you to do at least one of the following:
- Lend to very high-quality borrowers.
- Lend against property that has a valuation which is much, much higher than the total loan amount.
Without one of these two defences, you cannot rely on any other protections the peer-to-peer lending company offers you, even if it's got a fat pot of money set aside to pay bad debts.
You can even nudge your rewards up significantly without increasing the risks by bidding high and other techniques that we write about on 4thWay®.
4. Have Your Lines In The Sand
I'm sure you've all seen it when investors go a bit nuts: they buy property, shares or other investments at crazy prices, because everything has gone so smoothly for so many years that they think nothing can ever go wrong.
Then it all collapses on them. None of them saw the warning signs, because they all got too relaxed and too greedy.
Many investors in peer-to-peer loans will do this at some point, too. They'll lend at ever lower interest rates to worse and worse borrowers. When the recession comes, these investors are going to lose a lot of money.
You need to draw lines in the sand that you'll never cross no matter what experts in the papers say, since they get carried away by the euphoria and greed as easily as everyone else.
It helps when the peer-to-peer lending website itself has clear lines in the sand. Like Proplend: it's “tranche A” loans mean that your loans are secured on property that is valued at twice the size of the loan – at least.
Landbay is another example with clear lines in the sand, lending no more than 72% of the value of the property, which is all residential buy-to-let that must be earning at least 125% of the mortgage payments in rent.
5. A Little Maintenance Is Required
A website that offers safe peer-to-peer lending today might not do so tomorrow.
These aren't savings accounts. Like all investments, they require a little bit of maintenance.
Keep an eye out for warning signs that a peer-to-peer lending website you're using is slackening its standards. It might start accepting far more loan applications than it used to. You might observe that late payments are rising alarmingly quickly compared to its closest competitors. Alternatively, you might see that it is eating into its pot of money set aside to pay bad debts, if it has one.
The peer-to-peer lending websites don't usually make it easy to track everyone of these, and other, warning signs. You have to dig and ask some questions, although at 4thWay® we inform our subscribers immediately when something's flashing red.
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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.