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P2P Pensions Guide
Most people benefit from automatic tax breaks on peer-to-peer lending as explained in our guide: How Is Peer-to-Peer Lending Taxed?
However, not everyone does, which can make lending through a pension attractive. And there are other advantages to lending in a pension.
There are also cons though, so here's everything you need to know:
The main benefits of using P2P pensions
The key benefit to wrapping your loans up in a pension is that you won't pay any taxes at all on your interest and profits. Whereas you might do so outside of a tax-wrapper like a pension. (Read about that here.)
The other main benefit is that you could lend lots of money across several P2P lending sites in a tax-efficient way immediately. If you compare that to IFISAs, you can only open one of those per year and each IFISA is usually provided by just one P2P lending site, and therefore your lending is restricted to that P2P lending site only. It therefore takes several years to spread your money across lots of different IFISAs.
Another potential benefit of P2P pensions
Not only do we pay no taxes on lending profits, but the amount we put into a pension also, for most of us, reduces our income tax bills for that year.
You will still need to pay delayed income tax when you start paying yourself an income from your pension in your older age. However, you can generally expect this to work out cheaper, due to your income in retirement normally being a lot lower and therefore your tax rate is lower.
In addition, when you reach the specified age for your policy (usually around 55) you can usually take 25% of your pot tax free. This means that you will effectively never be taxed on a portion of the income you earn.
Other benefits to using P2P pensions
It's very rare to be charged capital gains tax on your peer-to-peer lending profits, but one thing is for sure: it'll never happen to you in a pension.
Finally, you're saved from shipping your tax statement to HM Revenue & Customs. You don't have to declare any interest or gains you make through your pension.
Special rule for P2P property loans
If you are lending through a pension and your P2P loans are property loans, there can be a small tax-fly in the ointment. If a property needs to be repossessed because a borrower won't pay, it's possible there'll be a tax charge inside the pension.
However, Brian Bennis of SIPPclub told us:
“Generally speaking, P2P platforms that have been approved to accept pension money employ the services of an independent security trustee. In the event of a default, the property is repossessed by the security trustee. Once sold, cash is returned to the P2P platform for repayment to the pension scheme, avoiding the risk that taxable property will lend up in the pension.”
The cost of P2P pensions
Individual lenders like you and me will always pay P2P lending companies a share of the proceeds earned from the borrower. (Read There's No Such Thing As “No Lender Fee”.)
You'll pay those costs regardless of whether you wrap your loans in a P2P pension to reduce your taxes.
But on top of that the pension itself will cost you extra money, because it comes with its own charges. If those charges are high enough, they will completely wipe out any savings you make from any extra tax advantages you have gained.
Currently all the pensions allowing P2P lending are not especially cheap, making it less attractive unless you're lending large sums.
The higher your personal income tax rate, and the lower the pension charges, the more likely you are to grow a bigger pot in a P2P pension.
The risks of using P2P pensions
There are risks in wrapping your savings and investments in a pension. That's any pension, not just P2P pensions.
The key risks of using a pension are:
- You can transfer to another pension, but you can't get your money out of pensions altogether until your 50s or 60s.
- You don’t know what rules the government will change after you’ve put money in. The government constantly changes pension rules and some of the changes have been pretty severe over the years.
- As an example, it's only since April 2015 that we have been allowed, on reaching the right age, to withdraw all our pension at once. (Whether that's a sensible policy is up for debate!) You can take a quarter of the pot tax free and the rest at your income tax rate. This flexibility could easily be taken away again at some time in the future.
- The government might decide that you'll now be taxed more than before on your pension income, and you won't be able to dodge it.
If you need more flexibility then you might prefer to shift your existing P2P loans into a P2P ISA, called an IFISA. IFISAs are an alternative way to lend completely tax free, and you'll be able to access your money quickly.
Restrictions on P2P pensions
You won't be able to lend to all P2P lending companies through pensions.
You're not allowed to lend to any people or businesses you're connected with through a pension (although for one form of pension, called a SSAS, you can lend to your own business). Nor can you do so if you're connected with any of the key people at a business you want to lend to. If you do, HM Revenue & Customs could could come down on you with severe penalties.
While the rules weren't made to trap P2P lending, sticking strictly to the rules, pension providers are currently being careful about allowing automated lending.
Compare P2P pensions
If you read this article on SIPPs and SSASs, two forms of pension, you'll learn about how those pensions work with P2P lending and you can compare pensions that offer P2P lending through a new online service from SIPPclub.
In addition, the latest information we have is you can still lend through:
Read more on taxes:
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