We need to start radically rethinking how we are going to obtain an income in retirement. In just five weeks, anyone over 55 can draw down the cash in their pension pot and spend it however they want. Two financial products that have, until now, been relatively obscure should start becoming rather more central to our planning.
First, there is peer-to-peer lending. Given that Zopa has proved the concept works – it is 10 years old this week – there is a powerful argument for having a portion of your ongoing assets in P2P loans. Stick the money away for five years and you’ll get 5.1% a year from Zopa or 6.8% at Funding Circle. Yes, it’s riskier than National Savings, but it’s probably less risky than buying shares, and if the government (as expected) lets you put P2P loans in an Isa, the income will be tax-free as well. Sensible savers should consider a spread of investments for their retirement that will pay an income, blending National Savings bonds with equity income and corporate bond funds as well as P2P loans.
Equity release is the other product whose time has come. It’s no surprise Legal & General has signalled it wants to massively expand in this area. Until now, it has suffered from two factors. First, it has a murky past, dating back to the scandals around mis-sold home income plans of the 1980s. Second, and more importantly, the maths didn’t stack up. If you’re 55 with a £250,000 home, the most you can extract from your home is around £50,000. If you live into your mid-80s, the rolled-up interest will mean the insurance company will grab most, if not all, of your home’s value on your death.
But the maths are far more favourable if you do equity release later in life. At 80, the amount you can release from a £250,000 home is closer to £120,000.
If, say, a couple have £150,000 in their pension pot at 65, then an annuity for life would pay just £7,100 a year, says L&G. Instead, they could put it in a mix of P2P and funds, initially earning 5% a year – around £7,500 – but also start drawing down the cash – what advisers call “decumulation”. Without too much jiggery-pokery they could probably take around £12,000 a year until they are 80 – but will, of course, exhaust all their pension savings. However, they then take the equity release money, enabling them to return to an income of £12,000 a year, on top of their state pensions. In other words, they will enjoy a retirement income far in excess of what the annuity would have paid.
Many people won’t want to do equity release as they want to leave something to their kids – as well as pay for care home fees. But it’s now a serious option.
