One of the defining elements of the post-recession era in the UK has been the dramatic decline in interest rates. Bank of England rates plunged from the giddy heights of 5.75 per cent in July 2007 to record lows of 0.5 per cent in March 2009. They stayed put at this level until the Brexit vote on June 23, before new ground was broken in August, as base rates were slashed further to 0.25 per cent.
The effect on savers and pensioners has been profound. In the mid-2000s, earning 5 per cent on a cash ISA was fairly standard. Today, a recent study by Moneywise unearthed that the average return on an easy access ISA has tumbled to just 0.73 per cent – a drop of 0.36 per cent compared with a year ago.
Given that inflation has been forecast to reach 3.5 per cent in 2017, it leaves those with savings facing the grim prospect of seeing their money lose value in real terms.
The rise of peer-to-peer lending
The one thing such misery for savers – coupled with volatile returns for investors on the stock market – has done is create a vacuum for good-value options to earn a decent return in relation to risk.
Arguably the asset class to step up most from the ashes is peer-to-peer lending (P2P); an online mechanism whereby those with funds to spare are matched directly with creditworthy borrowers in need of a loan. It effectively removes the intermediary such as a bank or building society from the equation, and the borrower then just pays off the loan directly to the lender, who pockets the interest. The platform obviously does take a fee of some kind, but annualised returns of up to 5 per cent are commonplace for lenders.
It is important to distinguish between P2P and putting money into the bank, as capital is at risk with the former, and there is no cover from the Financial Services Compensation Scheme if the borrower defaults (or if the platform itself goes under). However, platforms do have measures in place to mitigate such risks, such as reserve funds to cover any missed payments, and even an insurance against borrower default in the case of Lending Works.
A new ISA
But what has really piqued the interest of savers and investors has been the arrival of the new Innovative Finance ISA, which went live in the UK on 6 April. Most of the UK’s major, pre-existing platforms weren’t able to offer this wrapper from this date, as it is mandatory for a platform to be regulated by the FCA in order to do so. With the application process for this said to take up to a year – or even longer – many are still under review.
However, Lending Works got confirmation of this authorisation in October, and expects to launch their new wrapper early on in the New Year. This will be another significant boost for lenders through platforms like these, as you’ll be set to shield returns on P2P investments of up to £15,240 (or whatever the individual ISA allowance is for future years) per year from tax, which means more pennies end up in the investor’s pocket.
“The impending launch of our ISA marks an exciting chapter in our journey,” commented Michael Todt, Content Manager at Lending Works. “At a time where earning real returns is becoming increasingly challenging, this should offer consumers an excellent opportunity to grow their money, and build towards a more secure financial future.”
A look to the future
Certainly there are no silver bullets when it comes to saving and investing, and the general picture doesn’t look as though it is going to improve significantly anytime soon. That said, the derisory returns being offered by banks are not the only way to go. If, after weighing up the risks and rewards of peer-to-peer lending, you decide that it is a sensible option to place your hard-earned money, then you wouldn’t be the first!
The key, as with any investment, is to be sure you have a good understanding of what’s involved, and to be comfortable with the level of risk you are taking on. After that, it should hopefully just be a case of sitting back and letting your money do the rest. But whether you’re inclined to opt for peer-to-peer lending or not, be sure to keep your eyes peeled for alternatives to the bog-standard savings account or cash ISA. Working for your money is the hard part. It’s thus only fair that once you have some money set aside that it then works hard for you!
"The impending launch of our ISA marks an exciting chapter in our journey."
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