Could you use P2P investment as an alternative to an annuity?
By Luke O'Mahony | Thu 17 Sep 15
By Luke O'Mahony | Thu 17 Sep 15
The risk is that people either save too much or too little. Annuities provided a simple and attractive solution to that problem - an institution takes that risk on, by exchanging your pension pot for a fixed regular payment to see you through your golden years. Because the payment is guaranteed, they also remove the risk that your investments won’t perform as well as you expect over the course of your retirement.
So as an example, let’s say you had built up a pension pot of £120,000 over the course of 20 years and then annuitized resulting in an income of £10,000 per year. If your retirement lasts fewer than 12 years, of course the annuity provider will have done quite well out of the deal. However, if you live thirty or forty more years then your annuity provider would continue to pay you £10,000 annually. The annuity provider is still taking on a risk (that you live longer than it predicted), but by taking on many thousands of customers, that risk is pooled and therefore reduced.
So far so good. However, recent research from Moneyfacts.co.uk found that annual retirement income from annuities has fallen by 73% since 2000 and warns of increased danger that pensioners end up in poverty. In the Moneyfacts example, a worker who paid £100 a month into an average personal pension fund for 20 years and then bought an annuity today would receive an annual income of just £2,109. Fifteen years ago, that same worker would have received £7,748 a year.
Why are returns on annuities falling?
There are a number of reasons for falling annuity returns, but the prime culprit is low yields from UK government bonds, which make up a large part of pension funds’ holdings. This combined with other factors such as increased life expectancies, means that annuity providers now offer lower monthly or annual payments.
What’s the alternative?
Pension freedoms announced in April 2015 mean that pension savers are no longer required to buy an annuity, and can look into other investments to fund their retirement. One option is investing through peer-to-peer lending.
Peer-to-peer lenders such as RateSetter don’t provide a fixed payout for life in the same way that annuities do, but a P2P investment can provide a steady income – although capital is at risk, returns on RateSetter are far greater than cash deposits in banks and building societies and much less volatile than stocks and shares – you can see what rate you could earn with RateSetter on our product page. You can draw down capital as well as interest on a monthly basis with our three and five year products, making them useful for those who want an income from their investments.
What do you think? Have annuities had their day? Are you using investments in peer-to-peer to provide an income in retirement?
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