Written by Chris Torney
The reforms of the UK’s pension system introduced in 2015 were prompted to a large extent by problems in the annuity market.
Prior to the changes, most people who reached retirement were effectively forced to use most or all of their pension funds to buy an annuity – a type of insurance product which pays a monthly income for life.
The main attraction of annuities has always been that the income they pay is guaranteed: there is no chance that the money can run out before the customer dies. But in the wake of the financial crisis of 2008, annuity rates declined sharply. As a result, thousands of people found themselves with little choice but to cash in their pensions in return for relatively meagre levels of income.
The freedoms brought in by the coalition government in April 2015 mean that retirees now have much more choice about how to use their pensions to provide the income they need in retirement. It is now easier to leave money invested in the stock market while making regular withdrawals to cover living expenses – an option known as drawdown.
Individuals can now also take 25% of their money out of their pensions tax-free for use in other investments without facing the punitive tax charges that were part of the pre-2015 rules.
These alternative options mean that pension savings have the opportunity to continue to grow even after retirement: a factor that has become increasingly important given the significant rises in life expectancy in recent decades.
But with this potential growth comes, as ever, an element of risk: by staying invested in shares, for example, there is a chance that the value of your capital could go down as well as up. And another possible downside of drawdown is that the investor takes too much income in the early years and thereby runs out of money at some point later on.
So, it is hardly surprising that a number of alternative forms of investing have become popular since the pension reforms were introduced.
Peer-to-peer lending is one investment option that has a lot to offer retirees who are happy to take on some additional risk compared to cash or bonds but with less risk and volatility than investing in shares. In recent years, P2P investing has emerged as an additional source of income for retirees and for those considering drawdown or buying a guaranteed income through an annuity. Typically, P2P lending tends to offer higher rates of return than offered in the current annuities market with the benefit of preserving capital in the event of death.
FOLK2FOLK is one P2P platform, that specialises in local secured lending, allowing investors to earn annual interest of either 5.5% or 6.5%* by lending sums of £20,000 or more to small, local businesses and entrepreneurs. In many cases with P2P investors, lending is helping to provide an additional source of income during their retirement to support their lifestyle.
The capital you lend is at risk, but bear in mind that these loans are secured against property owned by UK business borrowers. Funds can also be diversified across many borrowers in £20,000+ chunks – so if you lend £100,000, this could be spread across five borrowers of your choice depending on the availability of loan opportunities at the time of investing.
Lending through FOLK2FOLK also means that you can preserve your capital for future generations or partners: while interest is paid out monthly, your original capital is repaid at the end of the term, which can be up to five years depending on loan term.
Alternatively, by investing through the FOLK2FOLK platform, however, £20,000 would return interest of between £1,100 and £1,300 a year for up to five years* – and crucially, your capital would not be eroded, provided your borrowers repaid their loans. This can give investors greater flexibility to reinvest their capital later if things change and allow capital to be passed on within their inheritance set up which is not the case when buying an annuity.
A numbers comparison
By way of comparison, a 65-year-old who is considering buying a basic flat-rate annuity. At today’s rates**, £20,000 would generate a guaranteed annual income of £1,036 for life but you wouldn’t be able to pass this income or capital on to a partner or family in the event of a death.
For a £100,000 sum, the annuity would generate £5,181 a year as opposed to £5,500-£6,500 through FOLK2FOLK*.
And £250,000 would provide annual income of between £13,750 and £16,250 via FOLK2FOLK* compared with the £12,953 – and no return of capital – available from the annuity.
For more information about joining the local lending movement at FOLK2FOLK please visit - https://www.folk2folk.com/investing
* At current FOLK2FOLK interest rates and assuming you are fully invested for the period
** https://www.hl.co.uk/pensions/annuities/annuity-best-buy-rates Based on male, 65, buying single-life flat-rate annuity with no guarantee. £100,000=£5,181 pa at time of writing (August 25).