Peer-to-peer returns put Nisas to shame
Saturday 16 August 2014
Many people will have put their savings in new cash-based Nisas in the past few months to save paying tax on their interest, but despite this benefit, they will be dismayed with the level of returns currently on offer.
Unfortunately for savers the Isa market mirrors the depressing outlook for the savings market as a whole.
With rates at rock bottom and further cuts taking place every week, maybe now's the time to look at an alternative and more lucrative home for your savings – such as peer-to-peer lending.
The returns from peer-to -peer providers look more appealing than ever, with RateSetter, for example, offering 3.5 per cent for a one-year bond as I write this. Even when you deduct 20 per cent tax, the net return is 2.8 per cent AER and is in a different league from the best one-year fixed-rate Isas, with Tesco Bank and Aldermore paying just 1.65 per cent.
In cold, hard cash terms, 1.65 per cent interest on the maximum cash Nisa allowance of £15,000 would give you a net annual return of £247.50 compared with a £420 net from the RateSetter one-year bond option.
Zopa remains the biggest player in the peer-to-peer marketplace and is equally competitive. It boasts more than 52,000 savings customers – not surprising when it pays a 5.2 per cent return over five years.
RateSetter is becoming one of the fastest growing P2P firms and saw an inflow of £25m in the last month alone.
It even offers a monthly access account paying 2.2 per cent – so if you're nervous, you can dip your toe in the water and try it out with a minimum deposit of just £10.
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 something not currently available with a peer to peer provider, however if industry mumblings are to be believed this may well be something that changes in the not too distant future.
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 as with a NISA so if you wanted to save £20,000 or even £50,000, that's an option.
One of the main concerns with people depositing their cash with peer-to-peer providers is that although the returns far outweigh those paid by the banks, they don't offer the cast-iron guarantee to savers that bank customers enjoy under the Financial Services Compensation Scheme.
As long as you fully appreciate and are comfortable with this, lower overheads of not having to run a nationwide network of branches, means you can obtain better returns on your cash.
Providers have their own methods in place to depositors. RateSetter for example maintains a "provision fund" with a balance of almost £7m built up from borrower fees. The fund is used to reimburse lenders in the case of late payment or default.
This safety net has ensured since it started almost four years ago, every penny of capital and interest has been returned to every single lender. Zopa also operates a similar model.
Peer-to-peer is here to stay and as long as providers keep rates competitive and bad debt levels under control, there's no doubt in my mind that it will become an even bigger thorn in the side of the banks. If you're fed up with miserly deals this year, maybe it's time to look elsewhere.
Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk
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