How to save for retirement

The peer-to-peer lending industry is booming. Figures from the Peer-to-Peer Finance Association showed that over £500m of new money was lent in the first half of 2014, with over 66,000 retail investors offering loans to individuals and small business though online platforms like Zopa. Returns can be attractive, offering the chance for both long-term capital accumulation and regular income.

 

And with plans in place to allow these investments in the new Isa (Nisa) – the Treasury says it is informally consulting with industry on the details, and will launch a public consultation later this year – many expect peer-to-peer to form an important part of some people’s retirement saving plans.

 

With UK life expectancy increasing, having a large pot of capital for retirement is of growing importance. Prudential found that someone turning 65 this year can expect an average of 20 years in retirement, and would need a pension pot of around £121,000 to receive the £15,800 average expected annual retirement income – a figure that includes the full state pension. With life expectancy likely to keep rising, the requisite pot size will grow. And Prudential’s calculations assume a post-retirement income well below what many would hope for. 

 

The loosening of drawdown restrictions in March’s Budget (coming into force next April) has boosted the appeal of pension products, according to Plutus Wealth’s Thomas Diaper. Savers will have greater flexibility over what to do with funds once they reach retirement. And the tax treatment of pensions, allowing higher rate payers to defer taxation until they are a basic rate payer in retirement, means pensions will still be the first choice for many savers. This is particularly the case for those with employers willing to contribute, says Hargreaves Lansdown’s Danny Cox. 

 

But for others, particularly those unwilling to tie capital up in a pension scheme, Nisas may be a better option. Diaper says that younger savers, for example, will typically be accruing capital for a house deposit, meaning there is little reason to lock funds in a pension scheme. Nisas allow you to withdraw money tax-free at any time. 

 

And by extension, peer-to-peer investments in a Nisa could be a particularly attractive way to save for investors with a higher risk appetite, says Diaper. With typical returns of around 5 per cent (depending on the duration of the loan) for well-established platforms like Zopa, capital growth can be on a par with some equities. And while peer-to-peer investments don’t qualify for the Financial Services Compensation Scheme, which covers up to £85,000 of your cash in the event that a bank or building society goes bust, default rates have been extremely low in recent years  – often well below 1 per cent at the leading platforms. Cox points out that established providers have a safeguard fund or insurance to help guard against capital losses.

 

And even outside the Nisa, many retirees are using peer-to-peer lending for an income stream in retirement. With returns often paid in monthly chunks of capital and interest, some expect this to provide a part-replacement for annuities. Kevin Mountford of MoneySuperMarket.com says that “we are seeing a lot of older people using these platforms. They typically put a small amount in, and then gradually build it up.” 

 

Of course, it’s naive to expect higher returns without more risk than cash, and Cox thinks default rates may increase as base rates begin to rise. But peer-to-peer platforms are building up a strong following, he says, and look set to play a part in many people’s long-term saving plans.