Zopa, Funding Circle, RateSetter: why peer-to-peer lending is a better way to fund your retirement
Some retired people are using peer-to-peer lending sites like Zopa as an alternative to getting an annuity.
Have you ever thought of lending money to other people and living off the interest? Probably not, but some retirees have.
It can be hard to get a decent, reliable income when you stop working or reduce your hours of employment, especially if you also want to hold on to your hard-earned pot of money and perhaps pass it on to your family when you die. Annuities, income drawdown and similar plans just don't appeal to lots of people, or don't quite meet their needs.
Some investors recommend you buy a portfolio of shares and live off the proceeds. However, choosing individual stock market investments is a business best left to those who know how to value companies, and so that excludes most people.
Here's where Zopa comes in
For those who have saved a substantial amount outside of pensions, or perhaps in addition to a pension, there is a newer idea.
The idea is simply to get your retirement income from peer-to-peer lenders like Zopa. We've explained how these work before, but in short it is individuals lending to and borrowing from each other. Borrowers can get better loan rates than at the banks, and you, as an individual lending your savings, can achieve a better interest rate than you would get in savings at the bank.
5.2% per year after tax
In seven years, I have rarely seen the returns for Zopa lenders go below 6% per year and it has often been 7% or 8%. By my calculation the average return since launch is 6.7% and that is even after deducting fees and losses from borrowers who fail to meet repayments.
Most retirees will pay tax on that at 20%, so that means Zopa lenders could get post-tax returns of around 4.5% to 6.5% per year, with an average return of between 5.2% and 5.4%, if Zopa's very short history were to repeat itself precisely.
A change in the amount of bad debts or in interest rates could easily lead to different returns, however – for better or worse. The owner, Giles Andrews, claimed in response to a recent critical article that Zopa has the safest loan book in the country “by far”, with a default rate of less than 1%. The old, traditional lenders suffer much higher bad debt.
It beats a typical annuity
Average annuity rates are currently just slightly higher at 5.6%, according to Moneyfacts, but that is still before deducting tax, which could reduce a pensioner's take to 4.5%.
In addition, Zopa lenders should get their pots back to access for themselves in later years if they need a boost, or to pass what's left to their heirs. That is not something that most people who are currently retired are able to do, since they have traded their pots in permanently for an annuity or are being paid a retirement income by their former employers.
Consider the potential cons too
Some of the downsides to lending your money are that this will not have been a tax efficient way to reach a retirement income when compared to some of your other options, unless you are using the 25% tax-free cash from your pension to fund your lending. You have to consider this early, before you retire, when deciding how to continue saving for your retirement. You might need to get help with the maths.
Peer-to-peer lending is also a new form of unregulated investing. That means if the whole operation fails, you lose your money without being compensated by the government through the Financial Services Compensation Scheme. Personally, I believe that with the main, established companies in the business, especially Zopa, the risk of this is small.
It's important to consider all your options and to think about using more than one way to pay your way in retirement. An annuity or other way to get an income from your retirement savings might be more appropriate in your circumstances, so do your research.
More on social lending and pensions:
Encash: a new rival for Zopa, RateSetter and Funding Circle
Annuity mess cuts average pension by 30%
Phase your pension drawdown
How to make a pensions complaint
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Comments
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Having finally emerged out of several years of penury the search for decent savings has begun in earnest. One of the things that general consensus seems to be steering towards, other than tracker funds, ISAs and certain types of pension, is P2P lending. The model looks interesting and seems to offer a decent return. What dismays me is that it takes a while to chip through the layers of commentary to get to the nub of things. Miggins I understand where you are coming from, but I don't think it is very helpful, instructive nor even constructive. The reason is this. Yes risks were taken by the, I paraphrase a little here, thieving abominations who are thieves and presumably thus abominations. The public purse (i.e. us and our children) have picked up the tab. Nevertheless you have to ask yourself why this happened. Why are there credit cards with obscene rates, how does Wonga.com get away with 4000% APR? But also where does the drive for P2P lebding come from? If I place money in the Zopa fund then I am hoping for a return on my money. I cannot however force anyone to actually take the money. Furthermore I can't fully control what they do with the funds. Banks lent money on the hope of return. They did not force people into borrowing nor could they control how it was spent. The banks failed in other ways. But please, for the sake of people such as myself looking for a bit of help in making sure their retirement isn't miserable, can we have a little more decent and honest debate.
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Hi EricClawHammer I tried to write that part too concisely in my article. When I wrote that the "whole" operation fails, I didn't mean the business model failing but more serious things like client money going missing, getting stolen, not being put in separate client accounts, or some other failure of the safeguards you quoted. Just last week one firm settled out of court for funds going missing, the FSA investigates stolen client money claims from time to time, and one of the ten biggest fines it has ever issued was £33m for failing to properly segregate client money. Neil (the article author) And Neil, just what do you think has been going on over the past few decades with the so called "regulated" financial institutions? A bigger bunch of thieving "Fagins" you would have trouble finding in any other industry. And more to the point, when the thieves are caught with their fingers nicely in the till drawer - what do the governments do? Do they get jailed, fined? No, they get bailed out with our money! I really hope that this P2P lending takes off, I really do, and I hope that the more people that dare to give it a go and trust in decent human principles allow the rates to come down and make borrowing money affordable for everyone. It is time for a massive kick in the teeth for these dogs that have been charging 20-30% APR on credit cards, burn the lot of them!
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The only thing that worries me about these P2P lenders is that when they start to become rather popular with the general public and their funding starts to hurt the real filth that operate the standard banks. Once these thieving abominations (who are nothing less than disgusting thieves) realise that people are no longer supporting them and their obnoxious greedy behaviour, they may find a way of scuttling the entire thing by taking out their own loans and then defaulting - in effect, busting these smaller companies that have dared to compete with these behemoths of greed. I hope not, as it is a very good idea, and providing everyone pitches in and a fair return is realised from a fair risk, then I see no reason why loans cannot become larger and interes repayments become smaller -everyone wins! It is about time that ordinary people got back in touch with ordinary people and cut out these thieving scum disguised as "Banks" that are no more than a doomed to fail pyramid scheme.
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19 June 2012