Savings, P2P and a better way to grow your money
A recent study by Which? (published by Moneywise) has shone a spotlight on the practices of banks and other high-street financial institutions regarding the way savers and borrowers are treated. The findings of the research were released shortly before the Bank of England's decision to hold base rates at 0.5 per cent in early May, and may add further gloom for long-suffering savers.
Which? looked at providers of 327 variable instant-access savings accounts and Cash ISAs in the five weeks after the Bank hiked rates in November (from 0.25 per cent to 0.5 per cent - the first increase in over a decade), and, while most of these providers quickly passed on the full increase to those with variable-rate mortgages, just 20 per cent extended the same courtesy to savers.
Drilling a bit deeper, the data showed that roughly half didn't even increase the interest they paid on savings accounts at all, while just under a third did increase their rate, but not to the equivalent of the 0.25 per cent base rate rise.
In fact, 13 of the top-paying accounts pulled their offers from the market, and subsequently re-packaged them with an inferior rate once they relaunched.
So, what are the best savings options at present?
The clear double standards illustrated above should rightly incense savers, and with the next base rate increase seemingly less imminent than previously thought, many may be left feeling disillusioned. That said, there are still some providers offering palatable returns.
There are easy-access savings accounts paying interest up to 1.32 per cent at present, while you can open a cash ISA and earn a market-leading rate in excess of 1.2 per cent. For those willing to tie their money up for a period of time, a one-year fixed rate bond yields up to 1.85 per cent, while you can also fetch a rate of around 2.75 per cent if you have the capacity to lock your money away for up to seven years.
And for terms in between one to seven years, there are numerous other headline rates which may carry appeal.
Are foreign accounts safe?
A common theme that emerges when assessing best buy tables is the growing presence of foreign banks. There tends to be a natural reticence among British consumers for such options, particularly regarding the issue of eligibility for Financial Services Compensation Scheme (FSCS) cover.
It's worth noting that depositors with some international banks in the UK (excluding Channel Islands or Isle of Man) are protected up to the FSCS deposit protection limit of £85,000.
According to the Bank of England, these include:
•UK-incorporated subsidiaries of European Economic Area (EEA) deposit-takers
•UK-incorporated subsidiaries of non-EEA deposit-takers
•UK branches of non-EEA deposit-takers authorised by the Prudential Regulation Authority to accept deposits in the UK
While eligible depositors in UK branches of EEA banks are not covered by the FSCS, they do enjoy protection from the deposit guarantee scheme in the bank’s home state, which, in most cases, is up to a limit of €100,000.
What about Sharia-compliant accounts?
Although we haven't quoted it as the leading rate, there is a mechanism through which to earn 2 per cent from a one-year savings account, and it comes courtesy of challenger bank Gatehouse. This is one of many Sharia-compliant accounts which are 'topping' the best buy tables. Yet while these are fast making a name for themselves, they are not widely understood by the British public.
Under Sharia law, banks may not profit from the money they receive. So, instead of paying interest, they pay a return in the form of an expected profit rate. As such, there is a certain investment component to putting your money into a Sharia-compliant account, and a risk that you do not receive this headline profit rate.
Nevertheless, there are two compelling factors which will sway many savers. Firstly, these profit rates are monitored on a daily basis, so, aside from a high degree of accuracy, you are also given the option to access your money early in the event that the rate isn't likely to be achieved. Secondly, you still enjoy FSCS cover - provided that the bank is registered in the UK, and regulated by the Financial Conduct Authority.
How does peer-to-peer lending stack up?
Unlike the above, those who invest in peer-to-peer lending (P2P) are not covered by the FSCS, or any deposit guarantee scheme, and your capital is at risk. One must therefore be cautious about making direct comparisons with savings rates, and realise that P2P is not a like-for-like alternative.
However, the state of the savings market does highlight the clear opportunities to grow your money by a far greater extent within P2P, while only taking a moderate climb up the risk spectrum. At Lending Works, for example, you can receive up to 6 per cent if you're willing to invest for a five-year period, and, despite the fact there is no direct link between Bank of England rates and the returns offered by P2P platforms, the industry has generally seen upward movement in the yields offered to investors since November.
The big trump card is the ability to shield P2P income from tax. This can be done automatically via the Personal Savings Allowance, but also via the new Innovative Finance ISA. Setting up an ISA with a platform such as Lending Works involves no fees, and no increased hassle when compared with a Classic account. And while you are limited to shielding returns on a capital balance of up to £20,000 subscribed during the 2018/19 financial year within a peer-to-peer ISA, there is no upper limit on the amount you can transfer from ISAs accumulated in previous tax years.
Deciding where to put your money is a personal decision, and one which should involve careful thought and consideration. The crucial point to note though is that, despite many banks and high-street institutions offering pitiful returns, there are many other ways to grow your money. Whichever way you decide to go, do not let your money sit idle. You work hard enough to earn it - now's the time to make sure it works hard for you too.
There is barely a week to go until the conclusion of the 2017/18 financial year, which means that, as ISA season begins to hot up, time is running out to take advantage of your ISA allowance.
At the Summer Budget in 2015, George Osborne had multiple nuggets of good news for investors in peer-to-peer lending (P2P), most notably the announcement of the new Innovative Finance ISA (IFISA).
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.