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How To Earn Your P2P Interest Tax Free
In the past year, SIPPclub has been working with a number of the P2P platforms to enable them to accept SIPP money.
This is good news, for it enables you to earn your interest tax free.
Compared to lending money personally, the effect of earning interest tax-free is significant.
With the new pension freedoms in place from April 2015, it means you don’t have to worry about losing control of your money. You can maximise tax relief on pension contributions now knowing that, once you reach age 55, you can withdraw the full value of your pension fund, including all your tax-free interest, from P2P lending.
The first 25% you draw is tax free and the balance is taxable at your marginal rate of income tax.
Whilst you have the comfort of knowing you could get your hands on your money if you need it, it probably makes sense to leave the money invested. For even once you’ve retired and drawn your tax-free cash, you can continue to lend on P2P platforms to generate your retirement income.
Compared to current annuity rates, the interest you could earn from P2P lending is often higher. And because you remain in control of your pension fund, you have the flexibility to make changes to your income, whereas normally, an annuity is fixed at outset.
Not all P2P lenders accept SIPP money
As pensions are regulated by both the Financial Conduct Authority and HMRC, a significant volume of work has to be undertaken before a P2P platform can accept SIPP money.
Some platforms are structured in such a way that it’s not possible for them to meet the pension rules. Others, however, are willing to amend their processes so they can accept SIPP money.
Typically, SIPPs can only lend money to businesses. So those P2P platforms that focus on lending money to individuals cannot easily accept SIPP money.
It’s also an HMRC rule that you must know which business you’re lending to in order to ensure you have no connection with the business, either because you work for the business in a controlling capacity or you own it, or a relative of yours does so. As a result, it’s not possible to lend your SIPP money on any platform that allows automated lending. You have to be able to select loans yourself to ensure HMRC doesn’t impose a hefty fine if you lend to a connected party.
A list of those platforms that have been approved to accept SIPP money can be seen on SIPPclub’s general page on P2P lending. Other platforms are currently going through the due diligence process and should be featured shortly.
Not all SIPP operators allow P2P lending
Each SIPP operator decides what sort of assets it allows in its SIPP. The majority restrict their SIPPs to stockmarket assets only, which are regarded by the regulator as ‘standard assets’.
P2P lending is classed as a ‘non-standard asset’. Even though there are quite a number of SIPP operators that are happy to hold non-standard assets, as P2P lending is relatively new, most SIPP operators will not currently allow it.
Despite the fact that P2P platforms are regulated by the Financial Conduct Authority, P2P lending isn’t covered by the Financial Services Compensation Scheme. As a result, the few SIPP operators who allow P2P lending tend only to allow their affluent clients to lend on P2P platforms.
SIPPclub has been working with a long-standing and well-respected SIPP operator to create a SIPP that does allow P2P lending. It’s aimed at affluent people who want to take control of the money in their SIPP. It’s called EvolutionSIPP and the qualifying criteria are set out on this page.
SIPPclub provides affluent people with information and insight into how a SIPP can be used outside of the stockmarket, and how to extract the best value from cash investments. SIPPclub’s information revolves around specific asset classes and activities, including:
- Granting business loans directly or via P2P platforms.
- High performing real estate in strong markets.
- How to invest your own pension fund into your business to finance its growth.
- How to invest in property to earn tax-free rent and capital growth.