What Effect Will Pension Freedoms Day Have On Crowdfunding?
6th April 2015
On the 6th of April, the pension industry will undergo its largest reforms in a generation. It will no longer be necessary for people to exchange their pension pots for an annuity once they reach retirement. As announced by George Osborne in the 2014 Budget, people over the age of 55 will be able to access their entire pension pots to spend as they wish. It is predicted that this may result in a flummox of withdrawals, with the possibility of consumers putting their money into alternative investments.
We believe that this will represent a huge marketing opportunity for the crowdfunding industry to reach an older and informed demographic of investors, who wish to make more ethical investments such as those listed on Crowd2Fund.com
Up until now, upon reaching the age of 55, people who invested their money into defined contribution pension schemes were able to take out 25% of their pension pots tax free as a lump sum. Savers were then only allowed to make limited drawdowns on the balance available each year, and were then forced to purchase an annuity at the age of 75. Over recent years annuities these have received negative publicity due to paying out low interest rates.
The new measures being introduced no longer require savers to take out an annuity. Subsequent to taking out 25% of their pension pot tax free, they can draw out the remaining balance without any limitations, payable at their marginal tax rate.
Whilst it is expected that the buy to let market is likely to get a boost from fresh funds, this is unlikely to be to everyone’s taste due to the hassle that goes with along with being a landlord. Dealing with tenants and leaky roofs is not for everyone.
Crowdfunding could be an attractive alternative investment for savers to deposit their money due to its constant presence within the personal finance pages, and due to such investments generally offering a high rate of return and being considered more ethical than buy to let. For example, the interest rate of debt campaigns on Crowd2Fund is currently around 9%-10%.
Whilst crowdfunding may be classified as bearing a higher risk than other alternative investments, this can be mitigated by holding a diversified portfolio across asset classes and/or different crowdfunding campaigns. Investors drawing down on their pensions may choose to invest a proportion of funds into crowdfunding campaigns, alongside less risky investments. Alternatively, a portfolio approach can be taken to crowdfunding by investing in a range of different campaigns as opposed to sinking funds into one or two. The key thing is for investors to not put all of their eggs into one basket.
Additionally, equity crowdfunding may be appealing due to the generous income tax breaks offered by SEIS and EIS qualifying companies. If pension holders withdraw more than 25% of their lump sum they are taxed at their marginal rate. However, this strategy may make commercial sense if it is possible for investors to be able to claim the relevant income tax relief before being hit with the tax bill for the draw down on their pension funds.
James Acton, a Crowd2Fund investor member, who reached the age of 55 in November says, “I plan on drawing down my 25% tax free lump sum within the new few months. I have been shopping around looking for the best ISAs on the market. However, the returns are so pitifully low that I do not think I will bother in the next tax year. Instead I plan on investing around twenty per cent of my tax free allowance across equity and debt crowdfunding campaigns. My strategy is to invest a greater proportion of these funds into debt. Equity is more risky but you have to speculate to accumulate.”
At Crowd2Fund we are excited about the opportunity which pension freedoms present for crowdunding. We currently have plans to develop a product specifically geared towards pensions.
NOTE: The above information is for informational purposes only. People’s tax circumstances are unique. If you are seeking advice relating to your pension please see pensionwise.gov.uk, or speak to an Independent Financial Adviser.
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