Types of Pension
There were two types of pension in which investors could control the investments and lend via ThinCats; both were only available from approved pension providers.
SIPP (Self Invested Personal Pension)
A Self Invested Personal Pension is a government approved scheme which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC). Like other pension schemes, there are tax rebates available on contributions; income received from investments is not taxed, and growth is free from capital gains taxes. There are limits on the maximum contributions that can be made, and the total size that your pension can reach. In return, you are usually unable to withdraw money from the pension before you are 55 years old. More details can be found here .
There are a wide of variety of SIPPs available on the market, with very different features and costs, and it is important that you research carefully before choosing. Many SIPPs do not permit you to invest in all the different types of investments permitted by the government, and are often restricted to investment funds and certain types of shares as opposed to, for example, direct lending like ThinCats. Many SIPPs which do provide wider access will only accept clients with a regulated financial adviser.
You may have a defined benefit pension already from your current or previous employer (more details available here). It is possible to start your SIPP by transferring this pension rather than contributing new cash. However, whether this is right for you is a complex decision and you should not do so without taking advice from a regulated financial adviser.
Lastly, SIPPs are regulated by the Financial Conduct Authority and you have access to the Financial Ombudsman in the case of a complaint which cannot be resolved with your provider.
SSAS (Small Self-Administered Scheme)
A Small Self-Administered Scheme is a type of occupational pension scheme, usually established by company directors for a limited number of specific employees. They are more lightly regulated than SIPPs, not being subject to the Financial Conduct Authority nor the Financial Ombudsman. The general principles governing tax relief, maximum contributions and permissible investments are similar to SIPPs.
They can be attractive to small company owners as tax relief is available on company contributions, and they can also lend to the company sponsoring the scheme which a SIPP cannot. More details are available here.
The Tax Implications
- Under the current legislation if you are a relevant UK individual resident your contribution may quality for tax relief at the rate you pay. There are limits on the maximum contributions that you can make – more details available here.
- Income received from investments is untaxed in the pension. This is particularly important for direct lending, as most, if not all, of the return on your lending will be interest payments and so otherwise be subject to income tax. Gains on your investments are not subject to capital gains tax either.
The following risks should be read in addition to those associated with direct lending.
- In exchange for the valuable tax benefits of your pension, you cannot normally access your assets before you are 55, so you need to be careful only to contribute money that you are certain you will not need back before then.
- If the value of your pension exceeds the maximum lifetime allowance before you access it, you will be subject to additional tax charges . You need to consider carefully how much your pension might grow when planning your contributions to avoid this happening.
- There are several restrictions on what investments you can make in your pension. A number of these affect loans which can be made on the ThinCats platform and are explained in more detail here. If you do breach these restrictions, additional tax charges will apply. It is your responsibility to ensure that your lending adheres to these restrictions.
Restrictions on Lending
- HMRC restricts the types of lending that you can undertake from a pension. Detailed guidance is available here.
- Some of the more important restrictions are: you cannot lend to a ‘connected person’ like a spouse or close relative (or company ‘controlled’ by a connected person); or lend to purchase residential property.
- Failure to observe these restrictions will result in substantive tax charges to your pension, as well as penalties for your pension provider.
- It is very important to note that many pension providers do not permit the full flexibility potentially offered in the detailed HMRC rules. For instance, it is possible in principle to lend against a residential property conversion up until the point it becomes ‘fit for dwelling’, so you could potentially lend and attempt to sell the loan on the secondary market before the property became ‘fit for dwelling’. Since you cannot guarantee that you could sell a loan part on the secondary market, this would be in a practice a risky approach to take.
- Accordingly, most pension providers will further restrict your lending more narrowly than the HMRC guidelines to ensure that they are not breached and for instance, prohibit any lending involving residential property. So, it is fundamental that you consult and make yourself fully aware of your own provider’s rules as well as the tax regulations before bidding for loans.
- You will control the lending from your account, so it is your responsibility to ensure that any lending is within relevant restrictions both from HMRC and your own provider.