Money Insider: Fed up with ISAs? You could try peer-to-peer lending
Friday 21 March 2014
Many people will be starting to look at the best ISA deals as the end of the 2013-14 tax year approaches; but they'll be disappointed by what they find.
Unfortunately the ISA market is a shadow of its former self with rates at rock bottom; maybe it's time to consider an alternative and more lucrative home for your savings, such as peer-to-peer lending.
The Chancellor announced in his Budget this week that peer-to-peer platforms could be included in New ISAs, when they launch in July with an enhanced allowance of £15,000.
But until then savers looking for decent returns could consider peer-to-peer as the rates offered are looking more appealing than ever.
For instance RateSetter is offering 4 per cent for a one-year bond. Even when you deduct 20 per cent tax, the net return is 3.2 per cent AER – a different league from the best one-year fixed rate Isas paying just 1.75 per cent.
The 1.75 per cent interest on the maximum cash Isa allowance of £5,760 would give you a net annual return of £100.80 compared with a far healthier £184.32 net from the RateSetter one-year bond option.
Zopa is the biggest player in the peer-to-peer market. It currently boasts more than 50,000 savings customers – not surprising when you see that at present it pays a 5 per cent return over five years.
With an ISA people will quite rightly point out that you can ring-fence your savings from the taxman for this and future tax years – which won't be available with a peer-to-peer provider until at least this July.
However if it's the level of net interest earned that's important to you, then peer-to-peer wins hands down, plus you're not restricted to a maximum annual allowance of £5,760.
One of the main concerns is that although the returns far outweigh those paid by the banks, they don't offer the 100 per cent guarantee to savers that bank customers enjoy under the Financial Services Compensation Scheme.
Even though tough credit scoring criteria are in place, there is still an element of risk, albeit very small, that you don't have with a bank or building society.
As long as you fully appreciate this, lower overheads mean you can obtain better returns on your cash.
Providers have their own methods of trying to mitigate the risk to depositors. RateSetter offers a "provision fund" -while Zopa operates a similar model – which is built up from borrower fees, and reimburses lenders in the case of late payment or default. Since it started over three years ago, every penny of capital and interest has been returned to every single lender.
If you're less than impressed with the miserly bank and building society tax-free deals, maybe it's time to consider a different approach.
Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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