We’ve seen significant reform to pensions in recent times, aiming to give retirees greater access to, and control over, their retirement funds. While these reforms have been designed to ensure a more comfortable living once retirement has been reached, a number of factors have contributed to the difficulties people in the UK face as they approach or currently live in retirement; insufficient pension savings being the primary concern.
Issues facing retirees
Living longer, spending more
The average time spent receiving your State Pension (retiring at 65) rose from 13 ½ years in 1948 to 21 years in 2007, or 32% of your adult life (assuming adult life begins at age 20), according to the Department of Works and Pensions.
By 2020, both men and women won’t get their State Pension until 66; 2028, will be 67; and the age will continue to rise as years pass.
The average monthly spend for a single retiree, not reliant on the State Pension, was £1,183 according to Royal London at the end of 2015, this equates to nearly £14,200 a year and £283,920 over the course of a 20-years (average) period spent in retirement. By 2050, the average monthly spend of a retiree is set to multiply by nearly 2.5x to £2,930. More alarmingly, 40% of 30-40 year olds think it is ‘somewhat unlikely’ or ‘very unlikely’ the State Pension will exist in 2050.
This means people are becoming more responsible for generating their own wealth for retirement.
Ultra-low returns mean bigger savings pot
Savings rates have been at record lows for years and are unlikely to rise to meaningful levels in the near future, as signified by the recently squashed Bank of England base rate rise. Royal London warned in a recent research paper aimed at Millennials that we should aim to save £250,000 on top of our State Pension to ensure a standard of living comparable to that of the average earner’s current working life.
“If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past,” said Royal London personal finance specialist Helen Morrisey.
Access Royal London research and consultation reports here.
Inflation will eat away at your pension pot
If you’re taking a retirement income of £25,000 per year, in 10 years’ time, at an inflation rate of 2.5%, your income would be an estimated value of £19,530. (The UK inflation rate was 2.5% in March 2018). Taking a little more investment risk can help safeguard against inflation eroding your pension savings.
Liberalisation through changes to pension provision
As alluded in the intro, reforms to pension policy have meant greater liberalisation of pensions. We are moving away from annuities and towards greater choice for individuals.
Alongside State Pension reforms and auto-enrolment, one key innovation has been pension freedoms which came into play in the 2015-16 tax year.
This new legislation means that anyone aged 55 or over, with a defined contribution (DC) pension will have the freedom to access their pension as they wish.
With these schemes, the amount you end up with when you retire depends on the performance of your pension investments. This is unlike traditional plans which relied on an annuity which would be purchased in a lump sum and would guarantee income for the rest of your life.
These freedoms have, however, raised some concerns for regulators and wealth managers, as explored in the Investment Association report published September 2017.
Too much responsibility on the retiree
The FCA cited concerns over the competition and options available to consumers who do not seek advice and that ‘drawdown products are complex to manage’ and understand.
Retirees looking for specific strategies
For advisers, there is an increasing demand to provide strategies which offer an income for life with capital loss protection.
Advantages of peer to peer for retirement
One such solution which has risen in popularity is peer to peer lending (P2P), offering retirees (existing and soon to be) attractive yield, and growth and income strategies. Certainly, we at Orca have found that our customers are increasingly looking to P2P to complement their pension pot. Here are some key benefits for retirees:
- Stable attractive returns
Predictable returns in the region 5% per annum plus can be achieved.
- Diversified portfolio
Diversifying your retirement fund with credit is a good way to protect the returns of your portfolio while spreading risk.
- Uncorrelated yield
P2P investments are not highly exposed to market volatility, as the underlying assets are not listed on an exchange.
- Exposure to different markets
By investing across multiple platforms, you can diversify across a range of markets, namely consumer, business and property.
- Compound growth and income strategies*
If you reinvest your interest, you can achieve compound growth. Typically, investors will view P2P as a long-term holding, but you can drawdown income when you need it.
*P2P is considered a relatively illiquid asset class so early access to funds is reliant on selling holdings to another investor on the platform. This is typically a quick process on the more mainstream platforms in the market.
Find out how you can invest in P2P with an efficient, fully diversified P2P portfolio
Since launching the Orca Investment Platform we have spoken with many retirees. The general consensus is that P2P provides an alternative for their pension pot, providing attractive returns without volatility – a combination not readily found in their traditional asset class holdings. The ability to diversify and grow their wealth, anticipating drawdown when they need it, are benefits of P2P that retirees are attracted to and taking advantage of more and more.