Peer-to-peer lending: the basics
Rather than remain in poor-paying high street savings accounts, the more adventurous among you will be far better suited to taking on more risk with different products entirely. Those of you who are fed up with banks and building societies but not quite ready for the stockmarket, why not look at the peer-to-peer (P2P) sector?
P2P websites pair savers with borrowers, acting like middlemen in that they offer a place for the two groups to come together and agree lending arrangements.
This means savers are in effect ‘lenders', lending their own money (in the shape of a deposit) to those who wish to borrow; and getting a return on their money from the loan rate charged to borrowers (this loan rate is cheaper than the rate offered to borrowers by high street banks and building societies - otherwise borrowers would have no need to visit a P2P lender in the first place).
P2P lenders are far from risk-free at the moment as they are unregulated and therefore lenders' deposits are not protected by the Financial Services Compensation Scheme, which protects savers to the tune of £85,000 if their savings provider goes belly up.
But the Financial Conduct Authority is to regulate the sector from April 2014, while Zopa and RateSetter have introduced their own protections. RateSetter, for example, operates a ‘Provision Fund' that spreads the lending risk across all borrowers and allows for a lender to be repaid if borrowers miss a payment.
The government disappointed P2P fans with its recent Autumn Statement, by refusing to allow the products to be held within an individual savings account (Isa). This would have been the final step in the P2P sector's journey to becoming a fully-fledged, realistic alternative to the high street. For now, it remains something of a secret for maverick income-seekers.
We asked three people why they have already gone down the P2P route...
Doug Owen, 60, Portsmouth,
Doug has been using RateSetter for three years.
"What I liked about RateSetter was its Provision Fund, because I didn't want to risk my money. Also, its business model as a lender is straightforward.
"The experience was pretty smooth – I got in early in the company's life and only had a few trivial issues with the website. Other than that, the process has been flawless.
"I started off with a three-year loan of about £1,000. That went well and once the interest started coming in, I became more confident. So I started a rolling monthly account, which is probably where most of my money is right now.
"P2P is definitely a more viable option than a bank savings account – the only reason I don't put more money in is because you can't wrap it in an Isa or a Sipp. With a bank, you spend your days worrying about moving accounts to chase 3%, whereas with RateSetter I just leave it there. In total, with my three-year loan and my rolling account, I'm getting a rate of around 3 to 3.5%.
"There is a sense of altruism to it – the person at the other end is getting a more competitive loan rate. But I'm getting a decent return on my money, too. The average guy in the street doesn't get a good deal from the high street, but this has become part of our overall savings strategy now."
Martin Roberts, 74, from West Wales
Martin is a keen peer-to-peer lender and has been loaning money to profitable businesses in need of a cash injection for several years. He started off arranging loans to companies he knew from his time working with the Institute of Directors in West Wales, which made him a good return while providing a "needed service", he says.
He was excited to see the advent of a formal P2P industry through Funding Circle and gradually upped the amount he lent to substantial sums. However, despite Funding Circle's published high average rate of return (currently 5.7% net), Martin came to realise that as a higher-rate taxpayer, the return he was earning on a five-figure sum investment was only around 1%. "I would have done just as well to have left it in the building society account I had removed it from to get a better rate."
Martin says since more people have piled into the big P2P lenders, rates have come down.
So, since March, he has been investing with the less well-known P2P lender Assetz Capital. Unlike Funding Circle, RateSetter and Zopa, Assetz provides its lenders with the opportunity to invest in secured loans, as the borrowers usually have to have property to put down in case of default.
Martin said during his time lending with Funding Circle, he did experience a few defaults and he lost money. Funding Circle doesn't have a fund in place to refund savers should this happen, although Zopa and RateSetter do.
Assetz lenders are also able to pick and choose who they lend to unlike at the other sites, where their money is pooled together and the identity of the borrower isn't revealed to the lender.
"I prefer this approach," explain Martin. "I have my own criteria for whom I lend to and I like to use it when I invest through Assetz."
Martin says the returns he makes vary between 10 and 13%.
Elaine Banks, 64, from Taunton
Elaine has been saving money through peer-to-peer lender Zopa for the past six years.
She's put in more than £3,300 so far, normally in lump sums of around a couple of hundred pounds every now and then. The returns, she says, are "reasonable" but what she really likes is the ethical aspect of it.
She enjoys being able to help people and the fact her money can be loaned in small sums to lots of different borrowers. "On the website, you can read about the borrowers and why they need the money. For example, I once saw someone who had been unemployed for a while and needed the money to buy a scooter so he could get to his new job."
Today, Elaine prefers her money to be lent to borrowers with the highest credit ratings available after having previously lost a small amount lending to higher-risk individuals."At the end of the day, peer-to-peer lending is a bet on human nature but as I only lend small sums, there's not much I can lose. Even though I've lost the odd £10 here and there, the returns my money has made are still better than what I would have made had I left it in a poorly paying savings account."
Elaine's husband also joined the site two years ago when Zopa was offering members £100 to recommend friends to join. "He got the £100 and took me out for dinner with it," she says.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.