How risk averse should pensioners really be?
Should pensioners necessarily be risk averse? New pension freedoms from April will mean that retirees will no longer have to buy an annuity with their life savings.
The recent huge surge in demand for NS&I’s new Pensioner Bonds demonstrates that there is significant appetite for alternatives to annuities that are low risk. No one wants to lose money in retirement.
However, rates for the lowest risk products available remain punishingly low, risking the loss of capital through the impact of inflation. There are options for those in retirement who can afford to put some of their pot into higher risk/ higher return investments, if they choose carefully.
When planning finances in retirement, the most important thing to cover with income from investments or other sources is your essential outgoings.
Once they are covered, you could choose to take a bit more risk with a % of your pension, remembering to spread your money across different terms, asset classes and risk profiles.
One option is peer-to-peer lending, or loan-based crowdfunding. Peer-to-peer loans – where lenders lend their money to other people, businesses or projects in exchange for interest – are gaining popularity. They cut out the banks, and are therefore able to offer better interest rates than savers (lenders) can get from banks and building societies.
Platforms that offer this type of loan, such as Trillion Fund, which arranges peer-to-peer (or “peer-to-project”) loans for renewable energy projects, will usually perform some due diligence on the borrowers (the project developers) to check that borrowers (renewable energy developers) have enough cash to easily be able to pay back the capital and interest to lenders. One such loan that is currently open is called E5 Energy (details on how to invest are here). It offers a fixed interest rate of 7.5 per cent for three years to those lending before February 28, secured against operating turbines, so in the event that something goes wrong with the loan, the lenders have a charge on the assets.
Lending to renewable energy projects for retirement income has some unique characteristics that can make it a less risky choice than lending to other types of business, where your returns might be based upon the company achieving targets. This is because returns from renewable energy (your interest) come primarily from subsidies that are fixed for 20 years, and electricity prices. These are relatively predictable in a given location once a wind turbine or solar installation is up and running.
There are risks. Developers can go bust and installations can suffer failure. So before lending, check you are happy that there is sufficient protection in place by reading the relevant offer document.
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