Getting my pension at 55

Good_bad_and_ugly

I don't mind p2p as an aid to diversification, but you suggested the entire pension lump sum was invested in this one asset class. I wouldn't do that with my money in any asset class. Especially at retirement.

jamesd

Would you really read it as one asset class if you substitute "pension", ISA" or "VCT" for "P2P? P2P isn't yet a tax wrapper but that's on the way. P2P has for some years now been becoming just a broad category of investment wrapper rather than some single specific type of investment.

Like those, there are a range of types of P2P available, from high risk equity investing in startups through asset-backed (secured) lending. Ignoring the whole crowdfunding/equity part of P2P for the moment, some of the options include:

1. lending to consumers, not generally available in other ways, with protection funds. Eg. Ratesetter, Zopa.
2. asset-backed lending to construction firms. Eg. Wellesley & Co, rebuildingsociety.
3. asset-backed lending to businesses based on aircraft leasing or other forms of security. Eg. Ablrate.
4. asset-backed car purchase financing. Eg. Buy2LetCars.
5. asset-backed pawn-like lending. Eg. Moneything (also does secured lending to consumers and general businesses)
6. general lending to businesses. Assetz.

There are around 35 different P2P platforms discussed here and that's not the whole universe of them. I don't know how many VCTs there are but by this point I expect that there are more P2P options than VCT options.

What the propositions usually have in common is security or protection from loses in some other form, which isn't generally present in equities and has significant limitations in the case of bonds.

Whether say unsecured but protected or secured lending to consumers, secured lending to general businesses and secured lending to property developers should be considered different assets classes rather than all "fixed interest" might be an interesting discussion to have, much like discussions of various types of bond (government, corporate, term, security grade etc.) might be discussed. But whatever the generic classes, those three markets have different properties and they aren't the only choices.

So, when I wrote P2P and you wrote one asset class, what were you thinking of more specifically in your definition of what an asset class is and what you thought I was suggesting in terms of range of investments and correlations between them and other asset classes? What sort of correlation would you expect between equities and unsecured lending to consumers, lending to consumers secured on cars and secured lending to property developers? Assuming they are held to maturity, how about correlations with gilts or corporate bonds of short or long maturities?

jamesd

Good_bad_and_ugly wrote: »

Especially at retirement.

One of the interesting things about retirement is that capacity for loss is reduced. As you might have gathered from the list I gave, capital value protection is routinely available in the P2P space. That makes it a particularly suitable area for retirement investing where there is reduced capacity to handle capital losses.

The negatives include things like relative immaturity - it's only really been available for ten years - and lack of FSCS protection.

I don't know whether you noticed it but one of the things I was concerned about was sequence of returns risk. Using capital-protected investments is one way to reduce that risk. Same for commercial property, for which I was mainly thinking of the types secured on physical buildings rather than equities.

1st_petrolhead

jamesd wrote: »

It isn't necessary to pay an adviser to do this, it's entirely possible for you to do it yourself.

If you want the income for life the commonly used guideline that has a low chance of a substantial fall in income later is 4% of the pension pot's initial value, increasing by inflation each year. That would mean £5,400 a year.

If you have other pensions that will start to pay out later from past jobs please describe them, the amounts and when they start. Please also say what your state pension would be and when that starts.

I'll assume in 12 years and an £8,000 state pension. I'll also assume 3% inflation and 4% investment growth after costs before inflation (so 7% total). In that case you could take around £14,400 income until state pension age then nothing topping up the state pension long term. Or you could take around £11,000 until state pension age then reasonably expect to be able to top up your state pension by another £3,000 to give you an ongoing 11% plus inflation income for life, with around £76,000 pension pot still around at state pension age. If it is still possible to defer the state pension you could increase that long term income by deferring. I'm assuming that you are content to have some decrease in value to generate income while alive.

The calculation until state pension age doesn't use the 4% guideline because there is deliberate drawing on capital to boost income. The calculation from state pension age does. I also ignored your redundancy money and any other assets, assuming that you need the pot to provide all of your income need from day one. To do this more properly the redundancy money and other savings should be added to the initial pot.

To reduce risk you should keep one year of the planned income from investments in a savings account and draw on that to provide your regular income. Have income from savings and investments paid into that account and top up periodically with capital sales. Do not do capital sales just after a market downturn. the purpose of this is to increase the overall success rate by avoiding you being forced to sell during a downturn, without it immediately affecting your income.

To reduce overall risk I suggest that you invest the pension lump sum into peer to peer lending using at least three different peer to peer firms with different types of lending customer. Interest rates from around 5-12% are available and you can use this to provide around £2,700 of the income (assuming 8% average interest rate). For the remainder you would need to draw from the pension, all of this will end up being within your personal allowance or tax free interest allowance.

Investments beyond P2P for its relative stability and decoupling from the stock and bond markets could include some commercial property funds, with global, European or UK equity funds providing the longer term growth needed to keep up with inflation.

Thank you for your excellent reply.

No other pensions and the last state pension forecast was about £145 per wk which I will get when I am 66, about 11 years time.

I assume your calculations were based on investing the whole amount and not taking the 25% tax free?

Happy to have a decrease in value, in fact I would like the idea of nothing left when I die, now where is that crystal ball

I know nothing about P2P lemnding, how safe is it

dunstonh

Happy to have a decrease in value, in fact I would like the idea of nothing left when I die, now where is that crystal ball

You describe an annuity.

I dont want an anuity as I dont want to loose the pot.

Yet the above statement contradicts that.

jamesd

1st_petrolhead wrote: »

No other pensions and the last state pension forecast was about £145 per wk which I will get when I am 66, about 11 years time.

OK, that's close enough at £7,540 to the £8,000 and 12 that I used so I won't redo the calculations. The shorter time compensates for the lower income using the 4% guideline: 11,000 not needed for one year x 4% = £440 more ongoing income from state pension age, roughly.

Once we're a year or so after the flat rate state pension is introduced from 6 April 2016 you should ask for a statement to find out if and by how much you're short of the maximum. Then you can make voluntary contributions or buy years to get to the maximum value. That's cheap to do and buys you more income and longer-term safety (because it's effectively guaranteed income).

1st_petrolhead wrote: »

I assume your calculations were based on investing the whole amount and not taking the 25% tax free?

They were based on taking the 25% and investing it outside the pension, rather than spending it.

1st_petrolhead wrote: »

Happy to have a decrease in value, in fact I would like the idea of nothing left when I die, now where is that crystal ball

The crystal ball is a problem alright. The traditional answer is buy an annuity because that guarantees 100% loss of the capital at the time you spend it to buy the annuity. The trouble is, annuity rates are dire at younger ages and even with big safety margins drawdown can do better. Then from state pension age, deferring the state pension does better (around 3% of capital for an inflation-linked annuity at 65, 5.8% from deferring the state pension).

There are many issues with annuity value for money but the critical one is that the firms are not allowed to reduce the amount paid (well, ignoring some recent rule changes). So they have to allow for severe conditions by reducing what they pay out. While you as an individual can work out whether you can take a drop in income to get the chance in more likely outcomes of higher income. Then you can choose between the guaranteed but lower annuity income or the not guaranteed but potentially dropping non-annuity choice.

Later in life the "but lower" annuity part ceases to be true. Once enough people start to die off the subsidy the early diers give to those who live longer ends up making annuities good value for money for income production.

The trouble with the investing route is that investments can drop in value and nothing is guaranteed. Which is why there are guidelines like the 4% rule and why I'm writing about safety margins and diversification. So while what I've outlined should be fine, there are chances that you'd find it doesn't work out that way after all. Which would mean that you'd have to reduce your income target.

1st_petrolhead wrote: »

I know nothing about P2P lemnding, how safe is it

The options vary a lot. Stick to the secured or protected types and read up on them at the P2P Independent Forum. You could also post there asking about a mixture of three of them to use for retirement income.

My personal favourite at the moment is Ablrate but I don't think it'd be appropriate for more than a third of your lump sum value and I'd be more comfortable with a sixth. That's because you don't have the income or total investment value that I have, so you're less able to deal with any trouble. Assorted reasons for this but it's relatively new and the types of things that the money is lent for are often not in the UK and each of those things makes the proposition a bit more risky even though it is regulated by the FCA. The 10-12% interest rate compensates for this but you still have to protect yourself from loss by diversifying: no interest rate is good enough if you end up losing all your money. Diversifying into lots of different things is how you protect against that. Not that it's really practical to actually lose all of your money unless someone actually steals it, but you have to plan for that worst case when working out how to diversify.

Protection from loss is also why it's important that you do at least a significant amount of state pension deferring when you reach state pension age. Not only is the 5.8% rate more than you can prudently take from investments as income, it's also not subject to the ups and downs in value, so it reduces your overall risk level, without actually costing you much in potentially lost income if markets were to do well.

1st_petrolhead

dunstonh wrote: »

You describe an annuity.



Yet the above statement contradicts that.

Well I think it does not. From my understanding, when you take out an Anuity you loose the pot of money. I don't want to loose it, just spend it before I die. So, for instance, I may decide to treat my self to a Porsche when I am 65

ossie

Once you have spent what is left at 65 on a Porsche how you going to afford the fuel?

1st_petrolhead

Ah, that would be telling

chris_m

Maybe it'd be something like this;

http://miami.ebayclassifieds.com/cars/west-palm-beach/100-electric-porsche-boxster/?ad=8213517