Peer-to-peer (P2P) lending has been quickly growing in popularity over the last few years, attracting investors who want more control over their returns and the ability to invest with an amount of their choice.
As well as recently becoming a method of saving for retirement with the world’s first P2P lending SIPP (Self Invested Personal Pension) being launched in 2015, P2P lending has become a more common investment option for people in retirement. New pension freedoms came into force in April 2015 allowing individuals to make their own decisions about what to do with their private pension savings, with the ability to take 100% of the fund as cash, rather than being able to take a quarter and having to buy an annuity with the rest as in the past. Pension withdrawals may be subject to tax, depending on individual circumstances.
This has meant many in retirement are looking for ways to invest their money that will provide greater returns than annuities and savings accounts with an acceptable risk profile. P2P lending is becoming more popular with this age group – over 700,000 over-65s are considering investing despite funds invested in P2P loans not being protected by the Financial Services Compensation Scheme. This means that investment in peer-to-peer loans is as likely as investing in shares and bonds, showing that P2P lending is becoming a more mainstream option alongside traditional investment products.
The drop in the interest rates of one-year Pensioner Bonds in January has also prompted retired savers to look elsewhere for a better rate. The bonds from the government savings bank NS&I went on sale in January 2015 for a fixed term of one year with an interest rate of 2.8%. However, the interest rate was cut to 1.45% when the fixed terms ended in January 2016, and other bonds or savings accounts haven’t matched the initial 2.8% that was offered.
Peer-to-peer lending is higher risk than saving with a bank but typically lower risk than investing on the stock market. Investors should be aware that their capital is at risk in both circumstances. When investing for five years you could earn around 5-6% depending on the platform.
So with more choice over how to invest for income in retirement and the availability of the P2P ISA this year, P2P lending may be an option to consider to potentially increase your returns. Money security is especially important at retirement age, so it is recommended to combine P2P lending with lower risk options such as annuities, which pay a guaranteed monthly income. By doing this, you could increase the amount you earn from your savings, receive higher monthly repayments and have more freedom to withdraw your money.