For a lot of savers, investors and peer-to-peer lenders, getting a regular income from their capital is important. This is particularly the case for people in retirement who need to use the money they have saved up over the course of their working lives to cover their day-to-day living expenses.
If you need your cash to generate monthly payments, this can have a significant bearing on what you do with it. Until recently, most of those who reached retirement used their pensions to buy an annuity – legislation meant they generally had no other option.
The move away from annuities
The attraction of annuities is that they pay a guaranteed monthly income for the rest of the holder’s life – as such they are about as low-risk an option as it’s possible to have. But since the financial crisis, annuity rates have been pretty low and retirees have felt increasingly frustrated at being forced to use them.
As a result, this year reforms were introduced giving savers more freedom over how they use their pensions to provide for old age. Now, for example, it is easier to leave pensions invested in stocks and shares while taking a regular income – a process known as drawdown. This means that older people can, in theory, still benefit from investment growth over the course of their retirement. Given that people will typically live for a couple of decades after they stop work, this growth is both important and necessary.
Pension freedom pitfalls
But there can be issues with this kind of approach as well: investors who take too much risk (or who are unlucky) could see the value of their holdings fall. As a result, they could end up able to take less income, or even running out of money entirely.
Another problem is taking too high a level of income in the early years: this could deplete the fund much faster than it can grow, and again the money may run out.
The new rules also mean that it’s easier to withdraw cash entirely from a pension and use it for other investments such as buy-to-let or just to splash out on a cruise or a new conservatory.
Some surveys suggested that a large number of people would consider taking money out of a pension and putting it in the bank. This might appear low risk, and the top-paying fixed-term deposit accounts do give the option of taking a monthly income. But with the base rate stuck at 0.5%, returns remain depressingly low.
Getting a regular income from peer-to-peer lending investments
With peer-to-peer lending, the risk you take on is higher than with a bank but less than on the stock markets (which could be especially attractive given the ongoing turmoil related to issues in Greece and China). As a result, interest rates are substantially higher than on savings accounts.
Lenders can choose to take the capital and interest paid back by borrowers every month as an income, or have it reinvested in new loans.
Many financial experts believe that pensioners should look at having a combination of holdings – for example, an annuity to provide an essential basic income, as well as some higher-risk investments with an eye to the long-term. But it is clear that, given the risk-return profile and the option to take income as and when required, P2P loans can play an important part in this mix.