Back to Zopa Blog

Pension freedoms and peer-to-peer lending

Britain’s pension savers appear to have enthusiastically embraced the new freedoms introduced by the government back in the spring.

Figures just published by HM Revenue & Customs show that almost 150,000 over-55s have made one or more withdrawals from their pension funds since the legislation was changed on April 6. Around £2.7 billion has been taken out to date.

New rules, new concerns

The new rules mean that pension savers no longer have to buy an annuity when they reach retirement – instead they can leave their money invested in the stock market or make withdrawals of whatever size they like, provided their pension provider’s systems can cope.

HMRC’s figures suggest that fears that savers could quickly deplete their retirement savings as a result of the new system were perhaps misguided. A number of commentators expressed concern in the run-up to April that many people might simply take all their money out of their pensions and use it to spend frivolously on round-the-world cruises or fast cars. But in fact, the average withdrawal has so far been a little over £10,000.

How are people using their pension pot withdrawals?

The research does not yet tell us exactly what individuals are using their pension money for – it could be anything from paying for home improvements or holidays, to simply putting some spare cash in the bank for rainy-day use.

But clearly the new rules mean there is much greater scope for pensioners to think about what is the most suitable place for their funds as well as how to make their money work a bit harder.

The most popular choices

When it comes to saving money into a pension, the default choice is typically some sort of stock market-linked fund, which is generally appropriate given the long timeframe over which the cash in invested.

But once you reach retirement, the picture is less clear cut. Although many of us will be happy to leave at least some money in the markets, others are likely to be averse to such risks. At the other end of the scale, annuities and to some extent bank savings accounts offer significantly more security and certainty – but here, returns are low and show little sign of improving in the short term.

The peer-to-peer option

This is why the launch next year of the Innovative Finance ISA (IFISA) is likely to be timely: it will give retirees the chance to earn tax-free interest by lending through peer-to-peer (P2P) platforms such as Zopa.

This will most likely generate substantially higher returns than traditional savings accounts, although with P2P your capital is at risk (but it typically carries less risk than putting money into stocks and shares).

As such, the IFISA, which is due to be introduced at the start of the next financial year on April 6 2016, is well placed to cater for the needs of a large number of people post-retirement.