Frazer Fearnhead, chief executive of The House Crowd, explains how property-backed peer-to-peer investing can help you save for your retirement…
Pension investing is probably the most important financial commitment you will ever make. But with savings rates cut to an all-time low, and pandemic panic causing chaos on the stock markets, there are not many options left which combine prudent risk management with long-term returns.
“Some people think pension investing just involves an institutional pension fund, but it doesn’t have to be like that,” says Frazer Fearnhead (pictured), chief executive of property-backed peer-to-peer lender The House Crowd. “There are better ways to save for your retirement.”
One of these ‘better ways’ involves using The House Crowd’s Innovative Finance ISA (IFISA) as a personal pension pot. According to Fearnhead, IFISAs offer greater flexibility and better liquidity than most pension funds, which means that money can be withdrawn in a timely fashion if required.
IFISAs also offer higher target interest rates than cash ISAs, with less volatility than a stocks and shares ISA. The House Crowd’s IFISA product targets seven per cent per annum, but the average actual interest rate it has paid out is 8.71 per cent across all loans.
“If you put your money into an IFISA at seven per cent, you get diversification across our auto invest products, which lessens your risk,” explains Fearnhead.
“And if you are a higher rate taxpayer that’s probably the equivalent of earning 11 per cent and being taxed on it, so it’s a very attractive rate.”
Furthermore, The House Crowd pays interest out twice a year – in April and October. This allows investors to reinvest their interest and compound it year after year to maximise their earnings.
In fact, Fearnhead has calculated that if an investor put £20,000 per year into an IFISA paying seven per cent per annum, withdrawing the interest payments twice a year, at the end of 20 years they would have amassed £400,000. However, if the same investor reinvested that interest and made no withdrawals, after 20 years their IFISA would be worth almost £1m.
“Compound interest is an absolutely critical factor in reaching your long-term investment goals,” says Fearnhead.
“I often use the example that if you had a piece of paper and you folded it just 42 times, it would reach all the way to the moon. And that’s the value of compounding. You just have to keep doing the same thing again and again.”
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However, Fearnhead is adamant that each potential IFISA investor has a good understanding of the risks that come with P2P investing – and more importantly – how to mitigate those risks.
“You have to take sensible risk if you want to make returns,” he says.
“And there is a risk there, but you can diversify. Lend your money out over a number of different loans – make sure that proper due diligence has been done and I think it’s a very effective way of reaching your pension fund goal.”