The Pension freedoms

Radical changes to pension rules that come in to force in April mean savers will be able to access their pension pot with more flexibility and will not be required to buy an annuity. As a result, demand is expected to increase for rewarding but secure investment opportunities that can offer both an income while continuing to grow. Peer to peer lending could be a secure and higher growth option for some.

What is Peer to peer lending?

Peer to peer lending is one of the fastest growing markets in the UK and by the end of 2014 had facilitated over £2.1bn worth of loans, a 50 per cent increase in size since 2013^1..In simple terms, Peer to peer lenders connect individual borrowers or companies, with investors who are looking for not only for market beating returns but whom also want to know where they are investing their money. The Peer to peer model cuts out the banking middle-man, meaning that investors get  interest rates between 4 per cent and 15 per cent. This paired with the fact that the industry and providers are now regulated by the Financial Conduct Authority means it is a credible and appetizing option for investors downtrodden by low interest rates.

Saving for your pension through Peer to peer lending

Peer to peer lending could be an option for some to make more of their retirement savings pre-retirement while maintaining important tax benefits. You can invest in Peer to peer through a SIPP (Self-invested personal pension plan). However, only some providers allow you to do this – the key reason being is that you can only invest in a secured loans through a SIPP. The main benefit of saving for your pension in this way is that the high interest rate you earn on your investment can be applied directly back into your pension, building not only your long-term capital but also by topping-up your regular contributions.

Using Peer to peer lending to generate a regular income in retirement

The growth of P2P has coincided with the fact that many people are expected to access more of their pension as a lump sum, however it is also expected that the majority still want a regular income while staying invested. Peer to peer lending can crucially offer people all three options.

1. As a regular income

You can preserve your capital investment and use the regular monthly interest payments as an income or part of your income depending on how much you have invested or how much income you want!

2. As a lump sum drawdown facility

Most Peer to peer lenders offer a Secondary market facility, this means at any time you can sell your loan to another investor and take your cash back.

3. To preserve your capital

Regardless of whether you take an income from your interest payments you will always preserve your initial level of investment.

Risks

The risks of Peer to peer lending are often misunderstood. They are very different from those associated with the Stock Market, where your investment can either lose some or all of its value or gain value. Peer to peer lending guarantees an interest rate and your return will not go above that or below that.

However, there is the risk of default – this means that if a borrower defaults on their loan you could be at risk of losing all of your investment. There are ways of mitigating this risk: Firstly, look at if the loan you are investing in is secured – this means that the borrower has offered an asset such as a house to guarantee the loan and that the provider will seize that asset to reinstate your investment. Secondly, contact the provider or visit their website to understand their borrower vetting process, if this is rigorous it significantly lowers the likelihood that the borrower won’t be able to keep up their payments.

What should you look for in a P2P platform?

Following the growth of the P2P lending industry, there are a wealth of new P2P platforms and what they offer can vary. You should always look to see if the provider is a member of the P2PFA, this is the government recognised industry body which has clear standards and quality. It is also key that you look into interest rates which can easily range from 4 per cent to 15 per cent and are not always directly related to risk.

Kevin Caley, Managing Director and Co-founder of ThinCats, comments on P2P: an alternative retirement income

 “There are many options available to people approaching retirement and it’s important they seek appropriate advice. However, the Pension reforms paired with the low interest rate environment will vastly increase  the retire savvy investor’s appetite for Peer to peer lending, peer-to-peer lending is a credible and flexible option for retirees that offers market beating returns. Our interest rate has averaged at 10 per cent over the last four years and our defaults are less than 1 per cent.”