Is the time right to favour cash over investments?
It feels like a lifetime ago, but it’s worth remembering that, prior to the 2008 financial crisis, returns on savings accounts of 5 per cent were nothing unusual. In fact, in 2007, the average returns being earned by Brits with money in easy access savings accounts was 3.3 per cent, and 5.1 per cent on accounts with a notice period for withdrawal.
Of course, that all changed as the depths of the ensuing recession took hold of the economy, and savers have had to endure derisory rates in the years since. Last year was arguably the nadir, as the average return being earned on instant access accounts was 0.4 per cent, while notice accounts yielded an average return of just 0.9 per cent.
Is the market for savings on the rebound?
There have been signs in recent months that the savings market is recovering, not least as a result of the Bank of England (BoE) raising interest rates to 0.75 per cent in August – the highest since March 2009. You can now fetch up to 1.5 per cent on an easy access account, while there are better deals available if you are willing to lock your money away for a fixed term - the best of which at the moment is 2.71 per cent on a five-year bond.
The latter rate actually eclipses the level of inflation, with the CPI reported as 2.4 per cent for October. In the context of the past decade, that isn't too bad, especially when you factor in the protection afforded by the Financial Services Compensation Scheme. Throw in the current Brexit uncertainty, and a stuttering stock market, and cash starts to look like a rather appealing asset class.
Yet despite the encouraging upturn in the savings market, it's important to not let perspective be skewed by the bleak period savers have endured. Even today, Savings Champion reports that fewer than 30 accounts offer a rate superior to that of inflation. And rates in general remain in the gutter when compared with their historical average. Remember, even as recently as the early 1990s, it was normal to earn double-digit returns on savings.
Today, most savers are seeing their money erode in real terms. That in itself may make long-term fixed-rate accounts - which have inflation-beating rates - more enticing. But with base rates widely expected to increase over the coming months and years, there is also a risk of losing out if your money is locked away in this type of account as and when better deals emerge.
Time to consider peer-to-peer lending
Looking away from the savings market, peer-to-peer lending (P2P) has firmly begun to establish itself in the UK since the crash, and its merits are becoming increasingly clear. The stock market's bull run of recent times has run out of steam – the FTSE 100 index has slumped 8.7 per cent so far this year - with many fearing that we are in the midst of a bubble. Investing in stocks and shares carries a significant amount of risk at the best of times, but it would appear to be especially fraught at present.
That's where peer-to-peer lending offers a meaningful alternative. The sector continues to deliver stable returns to those who choose to lend money through platforms, with rates well above inflation (tax-free via the Innovative Finance ISA too). At Lending Works, for example, lenders can now earn annual returns of up to 6.5 per cent, which is considerably superior to rates earned by savers.
Even as interest rates have begun to rise, savings returns haven't actually closed the gap on peer-to-peer lending either. Although there is no direct link between BoE base rates and those offered by P2P platforms, invariably the market of supply and demand for loans results in P2P returns following suit. As such, lending via peer-to-peer has become even more lucrative in recent months.
It must be reiterated that, as with any investment, peer-to-peer lending isn't risk-free, and the possibility that capital and/or returns can be lost endures. Yet even as the economy has shown signs of stagnation, default rates have remained well under control within the P2P market.
In any event, leading platforms use numerous methods to mitigate risk, such as diversifying lender money across multiple loans, maintaining a segregated reserve fund to cover arrears and defaults, and the unique insurance against default available through Lending Works. Additionally, FCA-regulated platforms are obliged to have processes in place to ensure their loan book is wound down in an orderly manner in the event of platform failure.
Thinking about your portfolio
It all amounts to a strong case for having a rethink when it comes to your investment portfolio. There is no doubt that cash will always have a role to play. It may not be a means to grow your wealth in a meaningful way, but it offers both peace of mind and accessibility. And the fact that rates are finally beginning to emerge from the doldrums can only be a good thing. Equally, stocks and shares are a proven way of increasing your asset value over time.
Sound investment is underpinned by diversification though, and maximising your wealth requires a certain level of pro-activeness. So if you're a keen investor who is looking to re-evaluate your portfolio, apportioning a greater level of it to peer-to-peer lending is well worth considering. And given that most investment alternatives are currently under-performing, there really is no time like the present to do it.
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.
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.