Back in April, changes to the UK’s pension system gave individuals much more freedom over how to organise their finances in retirement. The fact that most people no longer have to buy an annuity means they face big choices over how to use their pensions to provide the money to live on after they stop working.
Ultimately, though, these options boil down to one simple question: how do I turn my life savings into a regular income?
Making regular withdrawals - what are the options?
This need among over-55s for a regular income means that many forms of savings or investments now offer an “income option”. That is, they are designed to offer some capital growth while at the same time allowing customers to make regular – typically monthly – withdrawals.
In the world of stock-market investment, the most common way of doing this is through a process of drawdown. This involves a pension remaining invested in shares or other assets in the hope that it continues to grow over the course of retirement, while a small proportion of the fund is paid out as a regular income.
Many savings accounts, in particular fixed-rate accounts, give holders the option of taking their interest payments – however paltry – as monthly income.
Using peer-to-peer lending to take an income
And for those people willing to take on a bit of extra risk in order to generate higher returns, the same option is available through peer-to-peer lending platforms such as Zopa.
With Zopa loans, each lender’s money is advanced to a large number of borrowers to help reduce the risk of any defaults or late repayments. Returns on loans are generated by monthly repayments coming in from all these borrowers and when repayments are made, lenders have a choice: they can either have the money automatically re-lent, or they can take it as an income.
Growing your capital
The first option uses Zopa’s “auto top-up” service – the money is made available to borrowers with the same terms as previous loans, and without the lender having to do anything.
By using auto-top up, customers can use their regular returns to increase the amount they lend and thereby grow their capital.
The monthly income option
But for lenders who want their loans to generate a monthly income – those who have retired, for example – the simplest method is by getting in touch with the Zopa customer services team. They can help you set up your account so that some or all of your returns are paid out as a regular income meaning you can continue to relend the original principal to generate an ongoing annualised return.
A pick ‘n’ mix approach
As we have discussed in previous blogs, many observers expect that the new pension freedoms will result in the majority of retirees taking a “pick and mix” approach to providing income for their later years. For example, some of their pension savings could be used to buy an annuity in order to guarantee a minimum level of income, with some being kept in the stock market and some money being withdrawn from the pension for use in other forms of saving and investment such as P2P lending.
Whatever strategy you choose, though, P2P is flexible enough to let you lend for growth or income depending on how the rest of your finances are organised.
Please remember that with P2P lending your capital is at risk.