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There’s been lots of media commentary this month about savings rates being at the highest level since 2015 and suggestions that this will continue through the year.

Firstly, if you find yourself in this situation, you are not alone. Over 40% of people in the UK either have no savings at all or just a small amount of cash, less than £500, put away.

In our latest video about savings, James Blower explains how the Financial Services Compensation Scheme protects savers deposits with banks, building societies and credit unions

 

 

 

On the eve of Halloween, we’ve seen a range of new fixed rate bonds launched from Coventry Building Society, Fidor and Vanquis. Are these a sweet treat or will an investment in to these savings bonds come back to haunt you?

James Blower explains the Personal Savings Allowance in his latest video.

 

Each month, James writes a column in Around Town Magazine which goes out to 50,000 homes in Essex. This is his October article.

James Blower of The Savings Guru explains why he's such a massive fan of regular savings accounts.

 

 

 

 

The government owned NS&I reported it's financial results for the year to 31st March 2017 at the end of last month.

Each month we write a column in Around Town Magazine, which goes out to 50,000 households in Billericay, Rayleigh and Upminster in Essex. Here’s our April column.

Last month’s article on cash Individual Savings Accounts (ISAs) sparked some interesting emails to arrive in the Savings Guru inbox.   Many people hadn’t realised that the same non-ISA savings account often paid a significantly lower interest rate and that the tax benefits to savings in an ISA were not there for so many savers with the advent of the new personal savings allowance.

A number of you had seen the advent of the new Innovative Finance ISA for Peer to Peer lending and wondered how these worked, if they had a separate allowance to cash ISAs and whether they were a better alternative to cash ISAs. So here’s my overview and thoughts on Peer to Peer lending and the new Innovative Finance ISA:

  

What is Peer to Peer Lending? 

Peer to peer (P2P) lenders effectively replace banks as the middleman in financial transactions by matching savers with borrowers. These borrowers can be individuals or companies. Whereas banks operate on what is known as Net Interest Margin (NIM), which is the difference between the interest rate money is paid to savers and the rate paid by borrowers, P2P companies typically charge a fee (which is taken from the return, rather than being paid upfront by savers) for their match making.

 

Is my money protected?

The big difference between P2P companies and banks is that there is no financial protection for savers with P2P whereas savers with banks are protected by the Financial Services Compensation Scheme (FSCS), within the scheme limits. There is a chance that savers can lose their money.

www.fscs.org.uk

 

How risky is P2P? 

It is possible that savers could lose all their money but P2P firms do a number of things to limit risk for savers. Money is spread across a number of borrowers to limit the risk of loss e.g. if a saver puts £1,000 in, this may be lent to 50 borrowers who get £20 each. The P2P firms also carry out their own checks on the borrowers and many grade them according to the level of risk. A savers portfolio can therefore have a range of borrowers in with differing interest rates to reflect the risk.

 

Is P2P unregulated?

No – since 1st April 2014, the industry has been regulated by the Financial Conduct Authority which requires firms to present information clearly to customers, be honest about the risks involved and have contingency plans (in case things go wrong). Firms who don’t follow the rules can be fined or face sanctions from the regulator.

 

What’s the attraction to save with a P2P instead of a bank?

For savers, the projected interest rates on offer are far higher than those on a savings account. With the best instant savings account paying 1.30% and the top five year rate offering 2.60%, returns of 4 – 6% from the major P2P firms compare favourably and this has made them attractive for many savers, despite the risks.

 

How does the Innovative Finance ISA work? 

It works very similar to a normal ISA. There’s no separate allowance so the £20,000 ISA allowance applies which means that savers can use it all on an IF ISA or put hold sums up to £20,000 across cash, stocks and shares and IF ISAs. Interest on P2P investments is treated the same as bank interest from a tax perspective so anything over the personal savings allowance limits (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers) is liable to tax. With the potential for higher returns, the IF ISA is popular as the personal savings allowance limits can potentially be breached on much smaller sums than a savings account.

https://innovativefinanceisa.org.uk/

 

How popular is P2P lending? 

In January this year, the Peer to Peer Finance Association, a body that represents a number of P2P firms, including some of the largest, announced that lending on its members platforms had exceeded £8bn. While the overall size of the market in the UK is hard to predict exactly, we estimate it is approximately £12 – 15bn. This is dwarfed by the £1.5tr held by banks but P2P continues to grow quickly. Zopa, the oldest P2P lender, was only set up in 2005 so the industry has developed rapidly.

https://p2pfa.org.uk/

 

Is there anything else to be aware of? 

With a savings account, savers start earning interest on the day they put their money in. With P2P lending, this will be when your funds can be matched to a borrower – this is not always straight away. It may only be a few days but, with larger amounts, it could take a few weeks to drip feed it in.

Similarly, although some P2P firms offer accounts where you can access your money relatively quickly, this isn’t always instant like it is with a bank savings account so make sure you understand what you are investing in and how you can get your money back.

 

So, should you consider P2P?

My view is that P2P is definitely worth considering. There are risks involved so savers shouldn’t put all their money in to P2P but it is worth considering putting in a proportion – perhaps something like 5 – 15%. Savers who are debt free and willing to take some risk over the longer term may want to considering trying it out by putting in small amounts initially to get used to it.

If you are interested in finding out more, the two largest firms, who are both members of the Peer to Peer Finance Association, are worth having a look at:

 

Zopa

Zopa lends money to individuals wanting personal loans and offers projected returns of 4% in its ‘Core’ product and 4.6% in its ‘Plus’ product and savers can invest from £1,000.

 

Funding Circle

Funding Circle lends to businesses and has an autobid system which spreads your money across a wide range of borrowers. It has two products, Conservative and Balanced which have projected returns of 4.80% and 7.20% after fees and bad debts.

http://www.zopa.com/

https://www.fundingcircle.com/uk/

 

There are a huge number of smaller firms also worth exploring including Proplend, who offer projected returns of 5% - 12% on property lending and Market Invoice, who lend money on invoices and loans to British businesses. 

https://www.proplend.com/

https://www.marketinvoice.com/

 

That’s all for this month. As ever, if you have any questions or feedback, don’t hesitate to get in touch with us via This email address is being protected from spambots. You need JavaScript enabled to view it.

Virgin Money have launched a new Manchester United Double Champions E-Bond paying 3%.  However, there’s a massive catch...

I’m regularly asked about Cash ISAs and whether they are still worth using as a savings account. These questions always increase in March and April as the end of the tax year approaches and the start of a new one is on the horizon. So, let’s look a bit closer at them this month and see whether they should be something you consider for your savings.

 

Background

ISAs were introduced in 1999 as a replacement for PEPs (which were used for shares) and TESSAs (which were used for cash savings). Initially the overall allowance was £7,000 with a maximum of £3,000 being allowed for cash. For nine years, this remained the case until we saw a £600 increase in the cash allowance in 2008.

2011 saw the introduction of the Junior ISA for children and in 2014 we saw a huge increase in the ISA allowance with £15,000 being permitted within an ISA and it being possible to hold the entire amount in cash. Last year, this increased to £20,000 and the allowance will be maintained at this amount for 2018/19 tax year which starts on 6th April.

 

What is the difference between Cash ISAs and ordinary savings accounts?

Fundamentally, there’s very little differences in the actual account itself. A cash ISA is not dissimilar to an ordinary savings account, it’s just got a tax wrapper around it which means you aren’t liable to pay tax on the interest you earn. Think of it like a two chocolate bars, one still in the wrapper and one out of it – they are the same chocolate bar. 

The main difference is the interest rates charged on the different accounts. In the early days of ISAs, there were some very competitive rates as providers fought for your cash ISA savings. In 2018, it is a very different situation with ordinary savings accounts often paying more than their cash ISA equivalents – sometimes considerably more.

For example, the best one year fixed rate is 1.95% whereas the best one year ISA pays just 1.46%. Similarly, on a five-year fixed 2.52% can be found on a standard account whereas the best five year ISA is 2.25% by comparison.

 

Personal Savings Allowance

In 2016, the government introduced a Personal Savings Allowance which means that basic rate tax payers can earn £1,000 in savings interest before needing to pay tax and higher rate tax payers can earn £500 before paying tax. As a result, banks pay interest without any tax deduced now whereas previously you had to fill in a special form for this to be done or tax would automatically be deducted.

This means a basic rate tax payer could have £75,000 in the top paying instant savings account (1.30% from RCI Bank) and not pay any tax on the interest.

 

So, are cash ISAs pointless now?

Well, not exactly. For many people, there will be little or no immediate financial benefit to open a Cash ISA instead of a traditional savings account. However, there are exceptions and things to consider:

  1. Savings in a Cash ISA stay tax free year after year 

Anyone who has opened an ISA every tax year since 1999, and used the full allowance, has been able to shelter over £121,500 plus interest from the tax man and, in April, will be able to add another £20,000 to that allowance.

 

  1.  You can now switch your cash ISA in to a stocks and shares ISA

Until recently this wasn’t something you could do but some people will like the flexibility this allows and may want to hold cash for a period before investing.

 

  1. The Personal Savings Allowance (PSA) could change

There is no guarantee the PSA will be continue and the allowance could be cut or removed. Additional rate tax payers get no allowance. Also, if interest rates rise, the value of the PSA will diminish too as smaller balances will then earn more interest and use the allowance up.

 

  1. There will be accounts worth considering

Nationwide have just launched a cash ISA with no notice required paying 1.30%, which is the same as the best standard paying account. Although only one withdrawal is allowed from the Nationwide account, whereas the non-ISA account from RCI Bank allows unlimited withdrawals, the Nationwide account may appeal to those who wish to secure their ISA allowance in cash for the year.

 

  1. Junior ISAs

Junior ISAs come with their own allowance (£4,128 this year) and rates on them are very competitive. Coventry Building Society pay 3.50% and Nationwide pay 3.25% on instant access, which beat the best ordinary paying accounts for children with no restrictions.

 

  1. Lifetime ISAs

Lifetime ISAs, also known as LISAs, come with a £4,000 allowance within your overall ISA allowance of £20,000. So, if you invest £4,000 in a LISA, you can only put £16,000 in a cash ISA or stocks and shares ISA. LISAs are available for those aged 18 – 40 and you get a 25% bonus from the government each year on top of anything you save. So, if you save £4,000 you get £1,000 from the government. The bonus is paid every year until you are 50 years old.

LISAs are aimed at first time buyers saving a deposit to purchase a home and for those looking to save for retirement. They have been somewhat controversial because there was already a scheme in place (Help to buy) for first time buyers and pensions provide generous tax relief for savers with many financial advisors still considering this a better form of retirement saving.

There was little consultation from the government before LISAs and, as a result, there is only one provider of a cash LISA, Skipton Building Society. Skipton pay 0.75% interest.   However, those saving for a home will find the 25% government bonus attractive and should certainly consider a LISA if they are saving for a deposit.

That’s all for March. Have a great month and see you in April!

James

 

 

Key Facts

 

 

2017 / 18

2018 / 19

ISA Allowance

£20,000

£20,000

Amount that can be held in a Cash ISA

£20,000

£20,000

Start of tax year

6th April 2017

6th April 2018

End of tax year

5th April 2018

5th April 2019

Junior ISA

£4,128

£4,260

Lifetime ISA

£4,000

£4,000

Personal Savings Allowance – basic rate tax

£1,000

£1,000

Personal Savings Allowance – higher rate tax

£500

£500

Personal Savings Allowance – additional rate tax

£0

£0

 

 

ISA accounts

 

Nationwide Single Access - https://www.nationwide.co.uk/products/savings/single-access-isa/features-and-benefits

Coventry Building Society Junior ISA – https://www.coventrybuildingsociety.co.uk/consumer/product/savings/children/junior-cash-isa.html

Nationwide Junior ISA - https://www.nationwide.co.uk/products/savings/junior-isa/features-and-benefits

Skipton Lifetime ISA - https://www.skipton.co.uk/savings/isas/cash-lifetime-isa

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