Many people will have put their savings in cash based NISAs 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 dismal outlook for the savings market as a whole.
With rates at rock bottom and little sign of improvement maybe now’s the time to consider peer to peer lending, an alternative and more rewarding investment option.
The returns from peer to peer providers look more attractive than ever, with RateSetter for example offering 4.2% for a 1 year bond as I write this. Even if you deduct 20% tax, the net return is 3.36% AER and is in a different league from the best 1 year fixed rate ISAs from Shawbrook Bank and Virgin Money paying just 1.75% and 1.71% respectively.
In cold hard cash terms 1.75% interest on the maximum cash NISA allowance of £15,240 would give you a net annual return of £266.70 compared with a far healthier £512.06 net from the RateSetter 1 year bond option.
Zopa remains the biggest player in the peer to peer marketplace having lent more than £1 billion and is equally competitive with its rates. It currently boasts more than 59,000 lenders, not surprising when you see that at it advertises a 5.00% return over 5 years.
RateSetter is growing fast too and saw an inflow of more than £40 million in the last month alone.
It even offers a monthly access account paying 3.1% (at time of writing) – so if you’re a little nervous or unsure if this is right for you, you can dip your toe in the water and try it out with a minimum deposit of just £10.
Lending Works is another straightforward retail P2P provider currently offering 4.8% fixed for three years and an impressive 6.3% for a five year term.
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 in the peer-to-peer market.
Providers also have their own robust methods in place to depositors. RateSetter for example maintains a ‘provision fund’ with a balance of more than £15.3 million 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 five years ago, every penny of capital and interest has been returned to every single Lender. Zopa also operates a similar model with its Safeguard feature whilst Lending Works utilises a reserve fund and a unique insurance scheme to protect lenders cash.
As long as providers keep rates competitive and bad debt levels under control, there’s no doubt in my mind that P2P will become an even bigger thorn in the side of the high street banks, particularly when it enters the ISA market in April 2016.
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