How can peer to peer lending help you save for retirement?

Saving for a pension has always been a challenge. And, as the social and economic make-up of the UK evolves, it’s becoming ever more important to start saving early. However, when you take a look at the reality of the numbers, it will likely be an alarming prospect for millennials and Generation Xers alike.

According to the latest figures reported in the Independent, in order to retire on an annual income of £19,000, it’s estimated that the average Gen Xer (someone born in the early 1960s to late 1970s) needs to have already put aside £187,000 towards retirement. Millennials (born between 1982 and 2004), on the other hand, should have squirrelled away £73,500 by this point - that’s on top of what you’ve saved up for a house deposit, or put aside for the first family holiday to Disneyland. Other sources suggest that the rising cost of living coupled with a fall in wages and increasing life expectancy means that many members of the millennial demographic are going to need £80K more than their grandparents did when they reach retirement. And that’s only if they want to cover the essentials.

A 2017 survey by Which? revealed that a retired couple currently needs £18,000 to stay on top of basic living costs such as heating, food and housing each year. Extras, like holidays or other leisure activities, mean topping that up to £26,000 – equating to needing a combined pension pot of £210,000 on top of their state pension. To put that into perspective, if they started saving from the age of 20, they’d need to be putting aside £131 a month. If they don’t begin until they’re 30 then that rises to £198.

Of course, many people will be enrolled in workplace pension schemes. But often that isn’t enough on its own. And what if you want to put aside a little extra? How can you look to maximise your pot for the golden years?

working out retirement

Getting the ball rolling ⚽️

ISAs have long been a popular way of saving for the future – letting you earn interest on money you put aside without having to pay tax on it. Lifetime ISAs were introduced to help those aged 18-39 build funds for later life. Generally, you’re able to contribute £4,000 a year, which the government then top up with an additional 25% – that’s up to £1,000 of free cash. However, bear in mind that if you want to take the money out before you’re 60 then you’ll lose your bonus (unless you’re using it to buy a house).

The stock market has also traditionally been a popular way to save for retirement, but it’s becoming a less and less attractive proposition for younger generations. A 2018 study in the US revealed that only 23% of 18 to 37 year-olds think the stock market is the best place to put money they won’t need for 10 years or more. That’s significantly less than older generations, with 33% of Gen X and 38% of baby boomers choosing the stock market, despite having a shorter investment horizon.

But millennials have good reason for being cautious about the stock market. Many see it as too risky. Equities are going through a particularly uncertain period and, for some, it’s not worth the headache. Financial planner Doug Bellfy explains:

“A stock market crash that starts the day after you retire can cause a permanent lifestyle impact if all your money is invested there.”

Take a look at peer-to-peer 🔎

Peer to peer investing (P2P) is one alternative to the stock market for those looking to put their money to work. It’s a bit like financial matchmaking, connecting individuals or companies looking to borrow with investors that have money to lend. The use of technology means they can cut out the traditional middle-man – IE. the big banks – often letting the borrower and lender benefit from more favourable rates.

P2P has exploded onto the scene over the last decade. In 2018, a record £6.1bn was lent through P2P companies in Britain, a 20% increase on the previous year. Across the four largest P2P companies, the value of outstanding loans totalled £4.5bn – 42 times the £106m outstanding eight years ago. The industry’s been boosted by moves such as the introduction of Innovative Finances ISA, launched by the Treasury in 2016, which allows investors to earn interest from P2P investments within the popular tax-free wrapper.

It could be a great way to start building up your pension pot for later life on top of your workplace contributions. For example, if today you invested just £50 a month in peer-to-peer lending earning an annual rate of 5%, 30 years from now you could have over £42,000. And, thanks to compounding, nearly £24,000 of that will be in interest alone.

pension saving

But of course, as with all investing, in peer-to-peer lending comes with risks that you need to be comfortable with. Your capital is put at risk, so it is possible you could get back less than you put in. Furthermore, unlike if you put your money in a savings account, P2P investing is not covered by the Financial Services Compensation Scheme (FSCS).

While retirement may seem a long way off for many young people, the realities of taking steps to be prepared for it are very much in the here and now. In some cases, the difference between struggling to make ends meet in old age and a year-long cruise around the Caribbean will depend on decisions made today. Whether you decide to put aside money into a savings account or take on some risk by investing, the most important thing is to start early, and make contributions often.

Want to find out how Growth Street can help you build up your retirement funds? Click here to find out more. (Capital at risk. No FSCS protection.)

We also recommend that readers seek professional advice when planning how to reach their retirement objectives.

Written on in Investing