Two Ways That P2P Lending Can Help You To Retire

Making adequate retirement provision is one of the most difficult financial challenges facing British adults today.

How high your retirement income will be depends on a number of complex factors and choices, including:

• Over how long a period you invest
• How much of your income you set aside
• The returns your contributions (and those of your employer, if you have one) earn
• The charges levied on your retirement fund
• The age at which you decide to stop working
• Which retirement product(s) you decide to use
• How long you live after retiring
• Interest rates and investment returns during your retirement.

In short, building a decent retirement income means saving harder, longer and more consistently throughout working life.

Three big problems facing pensioners today

During the global financial crisis of 2007-09, the Bank of England repeatedly slashed its base rate until it hit 0.5% a year in March 2009, where it stayed for more than eight years.

Last August, the Bank cut the base rate once more to an all-time record low of 0.25% a year. Although today's ultra-low interest rates are great for mortgage borrowers, they spell disaster for savers and pensioners.

What's more, thanks to a four-decade rising market for bonds (company and government debts paying fixed incomes), highly elevated bond prices have left the returns on bonds near to all-time lows. Alas, this reduces the income available to pensioners who have invested in them.

With interest rates and bond yields in the doldrums, this translates into much lower annuity rates. (Annuities are guaranteed incomes paid for life by insurance companies in return for surrendering lump sums. In other words, it's the money pensioners receive each month when they retire.)

Again, this has sharply lowered retirement incomes for pensioners.

It's hard to think of a period in the past 40 years or so when times were harder for UK pensioners!

P2P lending can pump up your retirement pot twice

Step one: turning income into a retirement pot

The first way that you can use peer-to-peer (P2P) lending to improve your future retirement income is to generate a higher income that can be turned into an even bigger pot of money.

Typically, P2P lending produces a before-tax income – that is, the interest you earn – ranging from 3.5% to 7% a year, after bad debts.

When saving towards retirement, your P2P lending income can be re-lent into yet more loans, which grows your pot faster and increases your future wealth. This rolling-up of loans multiplies your wealth over the years, because you earn interest and then re-lend it to earn more interest on the interest.

While P2P lending produces significantly higher income than savings accounts, it also adds another string to your retirement bow.

Adding P2P lending to your retirement pot helps to diversify your wealth (i.e. spread the risk) by shifting some of your money into a different type of investment. While diversifying does not guarantee higher returns or protection against future losses, it does help to reduce risks and improve your chances of reaching your ultimate financial goals.

Step two: turning a retirement pot into income

When you decide to retire (or reduce your working hours prior to retirement), you need to replace lost wages with income from investments. With well-diversified retirement planning, your investments might include, for instance, shares, property, cash, bonds and P2P lending.

However, with interest rates and bond yields at record lows, generating decent retirement income has become a serious struggle.

Fortunately, P2P lending can help you to improve the income generated by your assets due to the higher interest rates available.

In particular, you can use cash inside (or outside of) pensions or tax-free ISAs to buy P2P loans, thus producing enhanced income in retirement.

In other words, P2P lending can help to boost your retirement income and offset the low returns offered by cash deposits and annuities.

What's more, you don't need to be rich to try your hand at P2P lending. Most P2P lending websites have minimum investment levels ranging from £10 to £100, with some starting at just £1. This makes it fairly straightforward for you to lend your spare cash across a wide range of P2P loans, thus improving your diversification and risk management.

Here are the minimum investment levels at six popular P2P lending websites (from lowest to highest minimum):

P2P lending website	Minimum lending amount
Assetz Capital	£1
Funding Circle*	£20
Growth Street*	£10
Landbay*	£100
Lending Works*	£10
RateSetter	£10

‘Retired Richard' tries P2P lending

Here's an example of how a theoretical pensioner known as Retired Richard decided to use P2P lending to help boost his retirement income.

Richard owns his own home, has no debts, and has an income from a combination of private, company and state pensions. However, Richard's cash on deposit earns him yearly interest of a mere 1% a year – and that's before tax.

Keen to take some risk in order to generate a higher income, experienced investor Richard earmarks £20,000 of his spare cash for P2P lending.

By spreading his lending across multiple websites and P2P accounts, Richard earns a steady income of 6% a year from P2P loans.

In other words, Richard's £20,000 in cash was earning £200 a year in interest, whereas it is now earning £1,200 a year from P2P lending.

By taking on the risk of P2P lending, Richard has increased the income generated by this lump sum by a factor of six.

P2P has potential for retirement provision

Summing up, investing in P2P lending has the potential to play a much bigger part in retirement provision. If your goal is a higher income in retirement, then P2P lending can be an attractive alternative to traditional investments – but only if you understand and are prepared to shoulder the risks of lending your money to individuals and/or corporate borrowers!