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Peer2Peer Finance News | October 20, 2017

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Why investments are the new savings

Why investments are the new savings
Staff
  • On October 27, 2016

Almost two months after the Bank of England cut the base rate to an all-time low of 0.25 per cent, the effects are starting to show.

High street banks have systematically reduced the interest offered on their current account and spending accounts and even the best cash ISA accounts are delivering less-than-stellar returns of under one per cent per year. Furthermore, the weak pound and rising cost of inflation mean that any savings are systematically losing their value. Even so-called ‘safe haven’ investments such as bonds have not been immune to the economic climate – according to recent research from Moneyfacts, the average return on a five-year bond fell from 2.64 per cent in September 2015, to just 1.73 per cent one year later.

Where savings accounts were once seen as the safest place to protect and grow your money, now the average high street account is there simply to minimise your losses. With this in mind, it is no surprise to find that more and more people are turning away from traditional savings accounts and opting to invest their money instead – and there have never been so many investment options for the retail consumer.

Stocks and shares ISAs have been popular for many years now and allow investors to make tax-free returns by investing in stocks, shares and funds via brokers, advisors or fund supermarkets. But recently, savvy investors have been looking at the alternative lending sector for higher returns. Peer-to-peer platforms such as Zopa, RateSetter and Funding Circle have seen their customer base rise dramatically over the past few months, as disillusioned consumers venture outside of the banking world in search of interest.

The ‘big three’ platforms are all offering bank-beating interest rates at the moment. Zopa’s lenders can make a fixed return of between 3.3 per cent and 6.5 per cent, depending on the type of account chosen and the level of risk involved. At RateSetter, investors are being offered returns of up to five per cent in October. And at Funding Circle, some investors are eligible for returns of more than seven per cent.

Earlier this year, the Innovative Finance ISA was launched as a way of enabling investors to make tax-free returns on P2P investments and it was widely seen as the government’s seal of approval for the alternative lending sector. While the IFISA is still in its infancy and most platforms are still awaiting approval, it offers the potential of even better returns for retail investors, even on short-term investments. Crowd2Fund is offering 8.7 per cent over just one year to its IFISA customers, while Crowdstacker offers interest rates of between five and seven per cent, completely tax free.

Of course, P2P investing comes with its own type of risk – namely the risk that the person who is borrowing your money will simply not pay it back. But most platforms have safeguards in place to ensure that this rarely, if ever, happens and P2P lenders are encouraged to diversify their investments across many different loans, to reduce the risk of losing everything.

For disillusioned savers, this risk is well worth taking. When the alternative is watching your money lose more and more value, it is no wonder that ‘investing’ has become the new ‘saving’.