Do alternative savings offer happy returns?

Corporate bonds, structured products and  peer-to-peer lending can beat cash savings, says Chiara Cavaglieri. But at what cost?

Squeezed savers are being tempted by investments that promise to beat the banks – and with cash rates so poor, the appeal is easy to understand. If you are looking to generate a higher return, however, be aware that the alternative investments carry surprising risks.

Corporate bonds:

Investors like these because they offer less risk and a higher income than shares. When you buy a corporate bond, you are basically lending money to a company in exchange for a fixed level of interest each year, plus all of your capital back upon maturity. Retail corporate bonds – issued by big-name companies such as John Lewis, National Grid, Stobart, Provident Financial and even The Jockey Club – are particularly popular.

Patrick Connolly of the adviser Chase de Vere says: “For many investors, corporate bonds would seem like a logical [alternative] to cash savings. They pay a fixed rate of interest, which is higher than that available on savings accounts, and return your money at a predetermined time in the future.”

Yet the bonds are investments, not savings products. That means there’s no Financial Services Compensation Scheme (FSCS) protecting up to £85,000 of your money. A corporate bond is only as secure as the company behind it, and unless you’re an expert, calculating the return you get for the risk can be very tricky.

 “Investing in a single company is a high-risk approach,” Mr Connolly adds. “We have seen how even supposedly strong and secure companies, such as the high-street banks, can get into financial difficulties.”

Corporate bond funds are one way to spread the risk because you invest in a number of different companies. But you will pay annual fees of around 2 per cent to a fund manager who could still make a few bad calls.

Structured products

These are often pitched at cautious investors, but they are not as safe as they seem and can be very difficult to understand. The big sell is that you can beat returns on cash savings while still protecting your capital through a counterparty that guarantees the return of your initial stake.

 Structured products are sold under many names – such as guaranteed equity and income bonds, growth deposit plans, guaranteed capital plans, protected investment funds. The problem with all of them is that there is no “guarantee” that counterparties won’t default. This is something that around 6,000 investors found out the hard way when Lehman collapsed in 2008.

 When they work well, returns can be far superior to cash, but many structured products have limited scope to perform. You might actually get less interest than you would with an ordinary savings account, or even no interest at all, and you don’t benefit fully from any rise in the stock market – as you would with shares. Adrian Lowcock at the adviser Hargreaves Lansdown says: “A structured product can be presented to look more attractive than cash and stock markets, but is not necessarily so. The product is quite complicated in how it is structured and you don’t really partake in the upside either.”

Peer-to-peer lending

P2p is fast becoming a significant alternative to cash and will be even more so soon when it becomes eligible for inclusion in tax-free Isas. The way in which peer-to-peer platforms work is to match savers and borrowers, cutting out the banks so that both sides enjoy better rates.

 For a p2p investor, annual returns as high as 12 per cent are undeniably attractive, but ultimately you must once again be prepared to lose some, or even all, of your money. Platforms are now regulated by the Financial Conduct Authority (FCA), but there is still no FSCS protection.

 Zopa has been around since 2005 but this is still a very new industry. Most platforms spread your cash to minimise risk, but each one has its own model so you need to get to grips with the individual perils. Aside from fees and, for now at least, paying income tax on returns as you do with normal savings, you need to think about what protection, if any, is in place. Zopa and RateSetter hold, respectively, a Safeguard Fund and Provisions Fund to cover borrowers who default. But this does dampen returns (currently around 5 per cent over five years).

Returns are generally higher if you lend your money to small businesses, as you can with Funding Circle, but this is inherently riskier than lending to individuals. Funding Circle is currently returning an average of 6.1 per cent, after bad debts and fees, but these returns are calculated before tax. That means you pay tax on all the whole lot, before bad debts have been taken away from your earnings.

The Swedish platform TrustBuddy offers an impressive 12 per cent return for its payday loan platform, but here you pay currency exchange costs and your money is scattered across borrowers in Denmark, Estonia, Finland, Norway, Poland, Spain and Sweden.

Other platforms specialise, which could leave you exposed if a particular sector struggles, Abundance Generation, for example, offers returns of 6-9 per cent for investment in ethical and sustainable energy projects in the UK.

Lenders such as FundingSecure (a P2P pawnbroker), Assetz Capital (loans to property developers) and ThinCats (business loans) also have their own variations on the peer-to-peer model.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones