Earlier this summer the Government introduced changes to pensions, bringing forward the state pension age to 68; it is said that this will result in 7 million people in their late 30s and early 40s losing around £10,000.
This indicates a general consensus that citizens have responsibility for their own financial well-being; with this being highlighted all the more due to the demographic affected.
This creates an opportunity for the P2P industry: to help make up for the short fall in pension funds by those affected and to create awareness of a much more flexible, and digitally empowered way for people to manage their investments and create prosperity for their futures.
Unlike the state pension, P2P empowers individuals by allowing them to directly invest into businesses which pique their interest, and at a rate of interest that matches their risk appetite.
How those affected can take control by investing in P2P
Investing in P2P can compliment both the state pension and private pensions held by individuals, and could be particularly interesting for those affected by changes to the state pension.
Spreading funds across different asset classes, including P2P, is a great way to diversify risk. Setting up a monthly standing order, transferring a few hundred pounds of salary can create a lifetime habit of investing which can build up over time. This can also allow you to maximise the choice of P2P investments on offer, by being able to benefit from a choice of different opportunities over a twelve month period.
Returns from P2P can be boosted by sheltering them from tax within an IFISA. The current annual allowance is £20,000. The estimated average APR before fees and bad debts, on Crowd2Fund.com is currently 8.7%. At this rate, if the IFISA allocation is invested in full over 10 years, this would generate a return of up to £125,000, assuming amortised loans are fully reinvested.
The return here is benefited by a powerful combination of compounding interest, and from funds growing tax free.
Unlike private pensions, P2P is fully transparent, allowing investors to directly choose where to invest, easily see where their money is going, and see how their funds are performing.
Reform
The bringing forward of retirement age to 68 also creates an opportunity to reform the state pension. We live in very different times to when it was first introduced in 1908.
Digital technology now means that it is easier than ever before for individuals to make everyday transactions, and it is increasingly expected for them to leverage digital and online tools to make decisions to better themselves.
The state pension is too prescriptive by only allowing for individuals to draw from it at a certain age, and does not take into account the specific circumstances of citizens.
It is reasonable to think that people may wish to draw upon it earlier due to wanting to having a pretirement work/life balance due to embracing changes associated with the gig economy. Additionally, people may want to take it sooner due to being in poorly health or having a family history with a low life expectation.
These sentiments are echoed by former pensions minister Ros Altman, who says:
“The state pension is flexible enough only for those who are healthy and wealthy enough not to need to take it at state pension age. If they can afford to wait longer, they can get more state pension; but if they cannot manage until that age, it is just too bad. Is this the best we can do?”
Lobby for inclusion of P2P in auto-enrolment pensions
The changes to the state pension, being a clear signifier that individuals need to take responsibility for their own actions, also makes this a ripe opportunity to lobby for P2P to be included within auto enrolment pensions.
First introduced by the Government in 2012, the auto enrolment pension requires all companies in the UK to make pension contributions for their employees unless they opt out. Employees are currently given a raft of different choices around which schemes to take out from the provider.
However, this does not currently include P2P. This is surprising as P2P debt is now very much part of the mainstream, with over £11 billion of funds now transacted in the UK alone.
For the first time everyday individuals are taking an interest in where their investments are going. Allowing auto enrolment funds to be investments into P2P debt will make people even more engaged with their investments and give them enhanced autonomy. This has clear benefits for both the state and the individual.