Income in Retirement
It’s been a tough 8 years for savers, with a historically low base rate returning little to nothing on cash held in savings accounts. Bank of England figures show that the average base rate from 1975-2008 was 8.6%, between 2009-2015 it dropped to 0.5%, a fall of 95%.
One of the hardest hit groups have been the retired. Before we entered this prolonged period of low interest rates, those in retirement could supplement their pension income by investing a cash lump sum into a bank savings account paying 5-6%+ interest pa. However, those days have well and truly gone and it has left many people with a tough decision to make: seek out riskier investments for better returns, or drawdown capital.
Neither option is very appealing, with concerns about length and cost of living as well as a strong desire to help out the next generation and leave something to their children.
Peer to Peer (P2P) lending is becoming an increasingly popular way to invest for income in retirement and supplement pension income. P2P lending works by circumventing the traditional banking model and matching businesses and individuals that want to borrow money with those that want to lend it. By receiving their interest direct from the borrower, lenders (investors) receive a much higher return on their money and borrowers gain access to much needed sources of funding. It’s a win-win for both parties.
As a lender you receive a fixed income for a fixed period of time, with capital and interest being returned to you over that same period, or monthly interest payments and the capital as a single payment at the end of the loan term. Loans can return from 4%-15% p.a. gross after fees but before bad debt and taxes.
As of April 2014 the P2P lending industry has been regulated by the Financial Conduct Authority (FCA). However, it is not covered by the Financial Services Compensation Scheme (FSCS), the government guarantee of up to £85,000 on your savings within a bank, so your capital is at risk if the borrower defaults on their loan.
However, there are a number of ways to mitigate the risk.
- Diversification; P2P lending brings together a number of lenders who lend to a single borrower meaning that you can lend smaller amounts into a larger number of loans thereby diversifying your risk.
- Provision Funds; Those P2P lending platforms offering unsecured loans will usually operate a provision fund to compensate those who have lent into loans that default, this is commonly about 2% of total funds lent out via the platform.
- Traditional Security; As well as unsecured lending to individuals and businesses, some P2P lending platforms offer loans secured against an asset, for example property. Loans are supported by a 1st legal charge over the property which is registered at the Land Registry. In the case of a borrower default, the asset can be repossessed and sold in order to repay the lenders their capital.
As with all investments, it is never wise to put all your eggs in one basket and so putting your entire life savings into one unsecured P2P loan may not be the most sensible approach. But as a way to get access to income in retirement and a way to protect capital, P2P lending supported by real security is worth a look.
Visit our Lender Benefits page to learn more about how you can Invest & Earn 5-10% pa* with Proplend. Or visit our Loan Investments page to view loans available for immediate investment on our Proplend Loan Exchange (PLE).