Have the 2015 pension reforms had any impact?
We’re just three weeks into the pension freedoms, and already researchers are scrambling for data to demonstrate any significant change in the behaviour of over 55s. Journalists are struggling to contain their curiosity too, as they seek to find out if pensioners have started withdrawing their pots in huge sums or if the impact has been minimal.
Even here at Lending Works, we’ve had plenty of calls from media looking to ascertain whether the changes have led to a clamour towards peer-to-peer lending, especially in light of our unrivalled new features for lenders over the age of 55, which went live in April.
Our statistics already suggest an incline in the percentage of our lenders aged 55 and over. However, it is early days yet, and we’ll thus steer clear of making any sweeping conclusions!
In terms of the numbers regarding pension withdrawals, it would appear that there has been a greater rush for the phone than there has for the pots themselves thus far, with the Association for British Insurers reporting that their members fielded almost 230,000 calls between April 7–10 from retirees (and investors) seeking clarification on the freedoms. That said, some firms also said they’ve already experienced large withdrawal requests for a variety of purchases, including holidays, home improvements and even speedboats!
Are annuities becoming less popular?
Until April 6, it had essentially been obligatory for pensioners to apportion at least 75% of their pots towards the purchase of an annuity. Given that this is no longer the case, and that those over the age of 55 can now make multiple drawdowns of their pot (the first 25% of which is tax free, and the remainder at the marginal rate of income tax), it seems to follow that people will take their money and go down roads less travelled.
One fascinating development was last week’s announcement by Moneyfacts that income levels from standard annuities have fallen to an all-time low. The average annual income payable from a standard single-life annuity for a 65-year old with a £10,000 pot has plummeted by 5.9% in 2015. For someone with a pot valued at £50,000, it has fallen even more sharply by around 6.4%. Enhanced annuities have shown slightly more resilience during 2015, but have nevertheless plunged to their lowest levels since April 2013.
The table above underlines the poor returns being offered on annuities, and such declines have been attributed to a sharp decrease in gilt yields, along with low inflation and interest rates. Yet the pension freedoms have been ‘blamed’ for these falling annuity rates too. This may seem counter-intuitive, given that the reforms should, in theory, make annuity providers more competitive now that the conveyor belt of customers that used to come their way is no longer automated.
However, a reduction in sales, particularly to those in good health, has affected the mortality cross subsidy calculations. This, in turn, lowers the insurance element of annuity payouts, which now leaves recent retirees in the unfortunate position of deciding whether to annuitise at the lowest point in the history of the product.
Let the scams begin!
You’d struggle to google the term ‘pension freedoms’ and not come across words such as ‘scam’ or ‘fraud’. The Office for National Statistics estimates that £2 trillion is held in occupational pension funds, and a considerable portion of these funds are at risk of falling into the hands of fraudsters.
It’s difficult to quantify statistics in this regard, but regulators suggest that between £500million and £1billion has been lost to pension scams by unwitting savers in the past. Worryingly, employee benefits firm JLT estimates that this number could rise exponentially to £3billion by the end of 2018 – indicative of the dangers that come with liberating pensioners to spend or invest their pots freely.
So are the pension freedoms good or bad then?
It’s a heated topic of debate, but here at Lending Works we’re very much in favour of the legislation. While it’s a valid argument that it creates a more favourable climate for scam artists, advice on how to avoid falling foul is widely available online, while the Government-backed Pension Wise service offers those eligible for the reforms free guidance.
And despite the reforms being a factor in the declining rates of annuities, the crucial thing to remember is that retirees are no longer shackled to them, and can instead look to alternatives such as peer-to-peer lending. While we don’t position ourselves as a direct substitute for an annuity, we are firm supporters of portfolio diversification across multiple platforms and strongly believe that ours offers those in their golden years the opportunity to earn lucrative returns in a safe manner.
Ultimately, only time will tell how significant an impact these regulations will have on the 320,000 people with defined contribution pensions who retire each year. How people invest their money is a very personal choice, and, what may be ‘right’ for some, may not work for others.
But at a time where low interest rates and poor returns have damaged the morale of pensioners, these reforms provide them with the chance to explore the many other viable and beneficial alternatives that are out there. We, like many others, will be keenly monitoring their progress in the upcoming weeks and months.
There is barely a week to go until the conclusion of the 2017/18 financial year, which means that, as ISA season begins to hot up, time is running out to take advantage of your ISA allowance.
At the Summer Budget in 2015, George Osborne had multiple nuggets of good news for investors in peer-to-peer lending (P2P), most notably the announcement of the new Innovative Finance ISA (IFISA).
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.