Savings schemes that offer more than your bank

Brave savers could now earn four times what the top savings accounts are offering by funding a peer-to-peer loan, so is it time to cut out the middle man in the hunt for returns?

Savings deals have plummeted since the Bank of England cut interest rates 0.25 percentage points last month. The best rate is now 2.2 per cent; peer-to-peer products offer returns of up to 9 per cent.

According to Moneyfacts, rate reductions in the savings market have outweighed rate rises for 11 consecutive months. The average easy-access rate fell to 0.49 per cent in August, down from 0.66 per cent last year, while the average return on a five-year fixed bond fell from 3.97 per cent to 1.69 per cent.

RCI Bank offers the best easy-access savings product with its Freedom Savings Account offering 1.2 per cent, while you would need to lock up your money for two years to get a best-buy rate of 2.2 per cent with Atom Bank.

You could earn up to 9 per cent interest via ThinCats, a business loans peer-to-peer platform. Hannah Maundrell, of Money.co.uk, the comparison website, says: “The prospect of earning near 10 per cent on your savings is undeniably tempting, but there are catches that mean you need to invest with your eyes open. Think of them as a halfway house between saving and investing; the rate they advertise generally isn’t guaranteed and your cash isn’t protected by the Financial Services Compensation Scheme (FSCS).”

What is peer-to-peer?
Peer-to-peer lending allows individuals to lend to each other, bypassing the need for a traditional bank or building society. Money from individual lenders is put together to fund borrowers seeking personal or small business loans and in some cases buy-to-let mortgages.

It has become increasingly popular with lenders and borrowers, owing to poor returns on savings products and a lack of access to finance for individuals and small businesses. Lending in the sector reached nearly £6 billion by the end of June, according to the Peer- to-Peer Finance Association, up from more than £4 billion at the end of 2015.

How does it work?
Platforms such as Zopa and RateSetter display rates based on how long your money is locked up for and how risky a borrower is deemed to be by the platform. RateSetter, and some other peer-to-peer platforms, determine the interest offered by supply and demand among lenders and borrowers. Others set their own headline rates — Zopa cut its lending rates this month to maintain its competitiveness with other lenders.

Your money is usually spread over a number of loans, either automatically or of your choice, depending on how much risk you want to take.

As with the savings market, the longer your money is locked up, the better your returns. The products work like a normal savings product, paying interest monthly or quarterly, but accessing your funds can be more difficult because the process relies on another lender wanting to buy and there may be an access fee. For example, ThinCats charges 1 per cent of the capital outstanding to sell your loan.

You can earn your interest tax-free using the Innovative Finance Isa. Many platforms are awaiting approval from the Financial Conduct Authority (FCA) for Isa manager status, but peer-to-peer products can still benefit from the £1,000 tax-free personal savings allowance.

How different is it to crowdfunding?
The FCA differentiates between debt-based crowdfunding, or peer-to-peer loans, and equity-based crowdfunding, where you invest in return for a share in a business. Crowdfunding is more risky because you are investing in early-stage businesses with a high chance of failure. You may not get any return unless the company lists on the stock market or is sold. Like peer-to-peer providers, crowdfunding platforms must conduct due diligence on borrowers and must ensure that lenders understand the risks and will invest less than 10 per cent of their net assets. At present you can put peer-to-peer products only into an Innovative Finance Isa, but from November you will be able to include bonds and other debt securities made through peer-to-peer and crowdfunding sites.

Is peer-to-peer lending safe?
All peer-to-peer platforms must be authorised by the FCA. This means they have to follow certain rules on conducting due diligence on borrowers, ensuring that risks are made clear and holding client money separately.

Peer-to-peer loans do not benefit from the FSCS, which protects up to £75,000 of savings, but if you invest via a financial adviser, you benefit from protection of up to £50,000.

All peer-to-peer platforms should be FCA registered and display their rates for borrower arrears and defaults, which should give an idea of how risky the loans are. Check the type of loans that are being funded. For example, LendInvest facilitates buy-to-let loans secured on property, which provides an extra layer of security.

Neil Faulkner, of the peer-to-peer research agency 4th Way, says: “Peer-to-peer lending is an investment, not savings. The risks are entirely different in that you can suffer capital losses, although most sensible medium or long-term investors have a high chance of beating inflation.”