For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
Inflation: A saver's worst enemy
For savers, and indeed all British consumers, inflation data for September released by the Office for National Statistics this week confirmed what was already known: the squeeze continues. For the first time since March 2012, the CPI touched 3 per cent – up from 2.9 per cent in August, and within just 100 basis points of Bank of England Governor Mark Carney being obliged to write to the Chancellor to explain why the target of 2 per cent has been missed by more than a percentage point.
Carney also poured cold water on the idea that the peak has been reached, stating that he expects to write this letter within the next two months, and thus confirming the squeeze is set to intensify.
The effect of a BOE rates increase – or lack thereof
One of the requirements of Carney’s inevitable written communications to the Chancellor is to explain what he plans to do to reduce inflation, and there is one means which stands head and shoulders above the rest: increasing Bank of England rates.
It is something we have argued for time and again in this blog, but it has got to the point now where it would be unthinkable for the Monetary Policy Committee to fail to pull the hawk-shaped trigger when they meet next on the 2nd of November. Carney has already indicated that a “modest” hike would soon be likely when they last convened in August. So, after numerous false dawns since rates tumbled in the wake of the financial crisis, it would undermine the Bank’s credibility in the extreme if it were to keep base rates at the current record-low of 0.25 per cent.
One issue is that increased inflation – largely the result of price hikes in food and transport – has, in the main, come off the back of the 15 per cent devaluation in sterling following last June’s Brexit vote. Yet so telegraphed have Carney’s signals of a rate hike been that an increase to 0.5 per cent has largely been priced in by currency traders and experts. As such, the boost to sterling is likely to be minimal; especially against the backdrop of difficulties in current negotiations with the European Union for the terms of Britain’s departure from the bloc.
Yet increasing rates to higher than 0.5 per cent seems unlikely with such economic uncertainty, along with the fact that household debt in the UK has now reached pre-2008 levels. So while a boost to base rates by 25 basis points in a fortnight looks to be a safe bet, the relief for savers will be marginal in terms of the effect on inflation, and with wage growth and savings rates remaining stubbornly low, households will continue to be stretched. Indeed, comparison site Moneyfacts shows that there are no savings accounts which currently beat the CPI of 3 per cent.
The positive impact of peer-to-peer lending
It is something we at Lending Works take no joy in observing, and despite indications that challenger banks are beginning to boost competition, savers are still losing money in real terms across the board. However, there is a silver lining which shines brighter by the month: peer-to-peer lending.
At Lending Works, we’ve always prided ourselves in our ongoing ability to deliver inflation-busting returns. However, in recent months, our rates have soared, with the 5-year cohort now yielding 5.5 per cent – a 12-month high, and one which puts a lot of daylight between headline returns and inflation.
We must caution against direct comparisons between investments like peer-to-peer lending and savings, given the lack of FSCS cover. That said, thanks to the Lending Works Shield, every penny expected by our lenders has been received timeously to date.
And it is the launch of our ISA which represents the most lucrative proposition, whereby income from your investment can be shielded from tax. For those with money tied up in cash ISAs, the contrast couldn’t be starker. Moneyfacts reported earlier this year that the mean returns on cash ISAs had plummeted to new record lows, while the highest-paying easy-access option pays just over 1 per cent at present.
No doubt, making such decisions with your hard-earned money isn’t always easy. But even if a Bank of England rate hike is to transpire in the near future, it is unlikely to be a silver bullet. It is therefore necessary to look further away from the traditional high-street institutions if you wish to grow your money in a manner that strikes a favourable balance between risk and return.
It should thus be a great source of comfort that sectors such as peer-to-peer lending are changing the momentum during these difficult times. And as it continues its inexorable march towards the mainstream of UK financial services, piling the pressure on more established rivals, it can only be consumers who stand to benefit.
The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
As the tax year end approaches, the financial services industry readies itself for a flurry of activity. That's in large part because, with just a couple of months to go, the so-called 'ISA season' is upon us.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.