Could You Use Zopa As An Annuity?
In this discussion, I’m using Zopa as it the peer-to-peer lender I know best. But the analysis could probably apply to your own favourite.
Zopa also has the following features.
1. Your Investment Is Probably Safe
I say probably, as occasionally, one of my loans has gone into default, but now Zopa safeguards your money. Here’s what they say on the website.
Earn great returns on your savings with peace of mind. The Safeguard is a fund designed to step in and give you back all your money, plus interest, in the rare event a borrower cannot repay. Find out more about the Safeguard fund.
But even so, my losses on older loans before Safeguard have been about four percent of the total interest I have earned on my investment.
2. Automatic Reinvestment
If you should so choose, you can re-invest any money that is credited to your account because of interest earned or loans repaid.
I don’t use this feature, unless I’m going away for a few days and probably won’t be checking my Zopa account.
I normally re-invest any money return manually.
But the automatic reinvestment can be easily switched in and out.
3. You Are In Control
If you want to add more money to your Zopa pot, it is just a simple transfer.
If you want to remove some of the repayments or interest, it is just a simple transfer out and this has got faster recently.
4. You Are Not Part Of The Loan Management Process
On the other hand, you are not part of the loan management process and so you don’t get involved with any tedious paperwork or micro-management. As I have thousands of loans in Zopa, it’s a process I want no part of it.
As a software man of a certain experience, I would prefer to trust well-written software Rather than my own judgement.
5. One Percent Fees To Savers
Click here to see what Zopa says about fees to savers.
My use of Zopa is to have a sizeable pot there, which I add to, as and when I have spare funds available. Usually, this is around the 12th of each month, as that is after all of my monthly bills have been paid.
Recently, I have needed extra funds for work on my house, so I’ve withdrawn money from Zopa at times, instead of re-investing it.
So to return to the question I asked about can Zopa be used as an annuity!
Suppose you invest a sum and you want this to give you an income of say £3,000 a month, which you wanted to be paid on the 20th of each month.
At the start of each month, you would switch off Zopa’s auto top up feature, which means that any repayments and interest go in your holding account.
Then a couple of days before the 20th, you transfer the required £3,000 out of Zopa into your bank account. Any surplus would be reinvested and auto top-up could be switched on again.
Obviously, you would need sufficient funds in Zopa to generate at least £3,000 of interest and repayments in a month.
If I pro-rata my mature Zopa portfolio, then I would estimate that a pot of about £100,000 would be needed to extract £3,000 a month. But don’t take that as gospel, as it needs a proper calculation to be done.
I’ll be working on it.
On the other hand using Zopa as an annuity has lots of advantages.
1. Flexibility
If say one month, your horse has just come in and you’ve won several thousand in the 4:15 at Kempton, you can leave the money to accumulate.
And if in another, your car needs repair, you can take out everything you can.
2. You Can Cash It All In
I often wonder what would have happened, when my wife got cancer, if we hadn’t had any money or two sons who could drop everything and help. It would have been difficult in the extreme.
But a Zopa fund could have been liquidated without penalty and used as income in the last months or years of my wife’s life.
You can sell on good loans, but I’d have just not bother to reinvest any money and transferred it all out of Zopa.
3. Transfers To And From Zopa Are Going To Get Faster
This is something that is happening and will improve all our lives in the future.
But it particularly helps with an investment like Zopa, where you’re effectively using it as a quick-access deposit account.
It wouldn’t be fair not to state the disadvantages.
1. You Can Earn More With Other Peer-to-Peer Sites
There are always other better ways of earning higher returns, but then they usually come with a higher risk profile.
It’s your money, so do the research and make your choice.
After all we all know the old joke about the best way to make a small fortune! Give a large one to a financial advisor!
The Increased Speed Of The Zopa To Nationwide Transfer
I needed to remove some of the excess interest and repayments in my Zopa account to top up my Nationwide current account.
The last time, I looked at the speed of this, it took three or four days before, it was fully documented in my bank account and available for use.
I initiated the transfer at 06:43 on the 19th. I know the time precisely, as Zopa send a check e-mail on every requested transfer. The payment arrived in my bank account sometime before 06:00 this morning. So it was definitely under forty-eight hours.
Remember too, that I’m only siphoning off interest and repayments from Zopa. In a typical month you get upwards of five percent of your investment in Zopa, available for withdrawal, without cashing in any loans.
I’ve used Nationwide and Zopa as an example here, but I suspect most other reputable institutions, companies and individuals are the same.
I think the only thing that will happen to this sort of transfer in the future is that it will get faster.
Analysis Of My 2013 In Zopa
I have been looking at my figures for 2013 for my investment in Zopa. What started as a bit of a fun punt has grown, as I have tended to use it as a dumping ground for bits of money, that I have no immediate use for.
If I look at how much money I have had invested at the end of the last few years, we see the following figures.
2011 – £40870.05
2012 – £103609.57
2013 – £146812.13
Averaging out the amount, throughout the year gives the following figures
2011 – £48962.13
2012 – £57628.61
2013 – £131194.47
The difference between the two figures is because, over the year, I’ve tended to add any unspent money or unexpected monies to my Zopa account.
The earnings for each of the three years are as follows.
2011 – £2862.86
2012 – £2514.18
2013 – £5846.81
Which corresponds to these returns.
2011 – 5.85%
2012 – 4.36%
2013 – 4.46%
Returns are not as high as they were, but that is because rates have softened, since Zopa safeguarded money that has been invested.
But the most interesting figure is how much money has been available to me to take out or reinvest. This is either interest or returned capital. in 2013, I have taken out £4900 and reinvested £76170 back in Zopa. That is a total of £81070, that I could have used to fix the roof, go to the World Cup in Brazil or use for wine, women and song. Obviously once taken out, it can’t be taken out next year.
But it does illustrate one of the advantages of Zopa and I suspect some of the other peer-to-peer lenders. If you need to realise investments to raise cash for an emergency or a long-planned spending, you can withdraw quite large amounts without penalty, by just withdrawing income, income instead of reinvesting it.
There is a corollary to this. If say you have a sum, that you might need, then investing it in Zopa, should give an acceptable return, until you need to withdraw it for another purpose.
It is also interesting to apply Justin Urquart Stewart’s, so-called Rule of 72, that he talked about in this article, in the Daily Telegraph.
There is the old “Rule of 72” which can also help. This number helps you to find out how often your money will double in value. What you do is divide into 72 the rate of return you hope to get. So for example let’s assume you could get 7pc after all costs on your investments in the long term (not an impossible figure) – then 7 into 72 goes roughly 10 times – so your money doubles every decade.
That would mean that as I get 4.5% or so, from Zopa, the money in there will double in sixteen years. I’ll only be 82!
Is This The Best A Bank Or Building Society Can Do?
The Guardian reports that the Leeds Building Society is offering a ten-year bond, which locks your money away for just four percent interest. The Guardian says this.
Leeds Building Society has launched the account, a fixed-rate savings bond offering a rate of interest that is eight times the Bank of England base rate and almost double the current rate of inflation. But it is not an account for money you may need in a hurry; customers have to agree to tie their money up for 10 years, until 31 December 2023, with no withdrawals of capital allowed during the term. And the minimum amount that can be put into the account is £10,000.
It certainly is not for me, as I get more than that, with the ability to retrieve my interest from Zopa.
But it does seem that no bank or building society, offers a better deal!
Is Mark Carney A Lucky Governor?
Napoleon is reputed to have said.
I know he’s a good general, but is he lucky?
Mark Carney may or may not be a good central banker, but he certainly seems to have arrived in his new job, just as the recovery in the economy seems to be starting. It’s reported here in the Independent.
So it would seem that Cameron and Osborne, might have been influenced by Napoleon’s words, as Mark Carney does appear to have the luck to inherit good figures. Perhaps tough, Mervyn King should be given more credit, as it would seem that things got going under his stewardship of the Bank!
But we’ve seen this economy inheritance before. Tony Blair inherited a good economy and then proceeded to waste it all, so that his successor left us in the mess we are today.
It’s not that we have boom and bust, we have had a succession of governments in this country of generally a pretty good one followed by one that isn’t that good at all. I’m not going to play party politics here, as you can find bad governments of both left and right. And good and bad periods of governments that were in power for a long time. Find me a man or woman, who says that everything Margaret Thatcher or Tony Blair did was good, and I’ll show you a liar.
Perhaps we need to have more of the country run by independent organisations like the Bank of England and the BBC. Why for instance, isn’t the NHS, totally removed from the meddling of politicians? After all, how many politicians could successfully run a whelk stall?
To return to the economy, Mark Carney has said that interest rates could possibly rise next year.
They already are!
My Zopa figures are showing that their five ear loans, which were about 4.5% earlier in the year, have been rising slightly in recent weeks and now sit at 4.8%. I haven’t had a major bad debt for six months and the only blot is that my true returns are still stuck between 4 and 4.5% before tax, and are marginally down on last year.
As I believe Zopa is a stable system, where the sensible, savvy lenders, provide loans for canny borrowers of good credit, it could be a good marker as to the way the market is going.
Zopa Breaks The Million Pound Barrier
In the last seven days, if you ignore Saturday and Sunday, when they don’t normally distribute loans, they have lent out 5.7 million pounds, which works out at over a million pounds every working day.
Can this steady level of high lending be in part due to the troubles at the Co-operative Bank?
If we believe the stance of the Co-op, their typical customer will be an ethical person, who probably thinks seriously about their money. They will probably think, that bankers are responsible for a lot of problems. I won’t say anything about their politics as being sensible with and thinking about money, is not the preserve of any political leaning. I’m even sure that some people who might support some extreme parties, may well have some of the best structured finances in the country.
But with the Co-op banks troubles, are these thinking people deserting the bank before it is too late and for their saving and borrowing, they are going to the peer-to-peer lenders like Zopa.
Certainly, if I look at my lending on Zopa, the rate of late payments and new bad debts seems to have fallen compared to a year ago. This could be put down to better checking on the company’s part, but is it also due to the fact that those that think about their money are moving away from the banks.
So are the peer-to-peer lenders contributing to the demise of the Co-operative Bank?
Zopa Approach A Million A Day
I keep detailed figures about Zopa’s lending and not just the amount of money I have invested in the peer-to-peer lender.
Over the last few days, the amount of money they have lent daily is now approaching a million pounds.
Perhaps a better figure is to look at the lending over a week and even that figure is around £600,000 a day.
That is a lot of money, for a business that didn’t exist eight years ago.
An Investigation Into The Stability Of Peer-To-Peer Lending Systems
For some time, I’ve thought that peer-to-peer lending systems, and Zopa which I know best, in particular, are a very interesting proposition mathematically. I did muse on this question some time ago in Stability in Financial Systems.
My education is at Liverpool University, where I got a B. Eng degree in Electronics in 1968. I had specialised in Control Engineering and my undergraduate thesis was all about mathematical modelling.
Most of my career since has been about large business, monetary and planning computing.
But one thing that must be born in mind, is that after I sold Metier in 1985, I formed a finance company in partnership with a friend. We still talk so it must be a good relationship.
In the years I had a stake in that company, I modelled the cash flows for obvious reasons of watching risk, just as I do with my funds invested in Zopa now.
The company taught me a lot about the finance industry and it was partly for that reason, that I invested my savings in Zopa nearly six years ago. And I’ve not regretted it one bit!
As I said in Stability in Financial Systems last year, I have a feeling that Zopa is a stable system. I also think they have used this stability to their own advantage, to create their Safeguard offers.
Obviously, a full investigation would be of value to see how, if Zopa my proposition concerning the system is correct.
You would just right down the various cash flows and see how the various scenarios will affect the company.
Tumblr News Give Me A Plug
I don’t read Tumblr News but they must sometimes read my blog, as this article entitled, Former OFT boss: regulation can be a bridge to new customers, has a link to this post of mine. In that post from August 29th, 2009, I said I had over £30,000 invested in Zopa and now nearly four yeas later it is just a shade under £140,000, with total interest of nearly £140,000 and bad debts of just £650.
I think I’ll accept that!
My investment in Zopa has certainly performed better than pudence’s investment in the Royal Bank of UK Taxpayers and Lloyds TSBleed.
An Unseen Advantage Of Peer-To-Peer Lenders
There are three main peer-to-peer lenders in the UK; Funding Circle, Ratesetter and Zopa and I have extensive filters and Google alerts that look for any fraudulent activity concerning these companies.
Have I just not found them, but I haven’t seen or heard of anybody trying to get access to any of their web-sites for illegal purposes. I’ve not even heard of anybody trying to hack Wonga either.
On the other hand I’ve had over thirty phishing attempts in the last few weeks to try to get into my non-existent Barclays account.
So are you at an advantage if you keep your savings with a peer-to-peer lender?
Certainly at present you are! But phishing attempts will come, even though I think they would be a very difficult scam to setup and target successfully.
The Anonymous Widower 