Is crowdfunding suitable for older investors?
Should older investors look to boost their income through crowdfunding, or are the risks simply too great? loveMONEY contributor Michelle McGagh investigates.
With savings rates plummeting and annuity rates at an all-time low, many older investors are in limbo.
Fearful of tumultuous stock markets but receiving little interest from their bank accounts, more are looking for new sources of low-risk income.
In this article, I chat to Julia Groves, founder of the UK Crowdfunding Association and head of crowdfunding at investment firm Downing, about the pros and cons of crowdfunding.
How it works: a practical example
Downing Crowd offers the chance for individuals to invest in a number of bonds; essentially an IOU when the company agrees to pay back your initial investment (capital) at a certain point in the future and pay you interest on the loan over the duration of the bond.
You can invest in a number of different companies such as solar farms, pubs and care homes. All are asset-backed
Since launch, Downing Crowd has raised over £14 million and over 800 have invested using the platform.
The crowdfunding bonds pay between 4% and 7% a year.
The latest bond has been issued by Alternate Energies, a solar project in Colchester that aims to raise £2.7 million. In return for investing in the bond for a year, investors will receive a return of 5.25%.
Should older investors benefit?
The interest paid out by the bonds – which can be invested in from just £100 - could be a way to diversify your portfolio and supplement retirement income, says Groves.
"Annuity rates are at an all-time low, bonds can offer an alternative income and capital preservation to boot, versus an annuity where you don’t get your capital back," she says.
"The bonds are not listed, so investors aren’t exposed to the highs and lows of the stock markets – this investment is uncorrelated.
"Retirees can also invest their pension savings into crowdfunded bonds as long as their pension is a self-invested personal pension (SIPP) that allows ‘non-standard investments".
These SIPPs will charge higher fees because they do due diligence and oversee a much broader range of investments, Groves points out.
"As a result, they tend to be investors with a larger pension pot, otherwise the fees wouldn’t be justified, and investors with a higher risk profile or more experience investing so they are confident investing in a range of individual bonds, so diversifying themselves rather than paying fees for a fund that diversifies for them," she says.
The risks to be aware of
The returns on the crowdfunding bonds may be enticing, but investors should understand the investments are not risk-free.
The biggest risk is that the company issuing the bond cannot pay the interest or the original capital.
Groves says you can reduce the risk of defaulting on by investing in asset-backed bonds, as Downing does.
"We sign a debenture with the borrower to say they are not allowed to borrow any other money or sell the assets – if the company fails we own all the assets," she said.
However, that doesn't mean you can't lose your money.
"If someone says they cannot pay back the interest then we move to a default interest of 12% - we go in and take over the assets and sell them…If we takeover and cannot sell the assets for more than the size of the bond [loan] then you may lose some money," says Groves.
The other concern is that the Government makes retrospective changes to the rules around the subsidies and tariffs it provides to certain renewable energy sectors.
For example, the Government subsidises renewable with ‘feed-in tariffs’ that allow the companies in turn to set a certain, and typically reliable, level of income.
Groves said any "retrospective changes from the Government could bring the income [paid to investors] down".
She added that Downing works on behalf of the investors and in their best interest, which is not always the case when companies issue bonds.
"Individual corporate bonds are exempt from some of the Financial Conduct Authority regulations, whereas bonds issued by a regulated platform are not," she said.
"In a normal corporate bond there is no one looking after the investor once the money has been invested. Downing acts as a security trustee, and charges a monitoring fee that is contingent on investors getting their capital back and interest paid in full."
Is it right for you?
On the upside, you can earn greater returns than in a savings account - and as returns are uncorrelated to the stock market it could be a way of further diversifying your portfolio.
On the downside you’re investing in companies that could fail and you could lose money.
Whether or not you invest depends very much on your individual situation – and your appetite for risk.
Not to be missed:
The best UK crowdfunding sites
Investing returns ‘beat cash over 30 years’
New IPOs: four companies you can invest in
Record fall in annuity rates leave pensioners searching for retirement income
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