The problems facing savers have been discussed at length.
Long term low interest rates, pushed much lower recently by the Funding for Lending Scheme (FLS) and relatively high inflation, which is predicted to rise further, have combined to produce a ‘perfect storm’ for savers.
There are currently only a handful of Cash ISAs (Individual Savings Accounts) which beat inflation. If you are a tax-payer, whether basic or higher rate, there are no accounts whatsoever which pay enough interest, after tax, to keep pace with inflation.
In a recent article we looked at some of the alternatives available to savers, which you can read by clicking here. However, two additional options have hit the headlines this week, namely peer to peer lending and a new savings account from Agri Bank.
We thought we’d take a look at both and ask whether you should consider them as an alternative to a traditional savings account.
Peer to peer lending
The relatively new concept of peer to peer lending, also known as person to person lending or crowd funding, is the practice of one person, or a group of people, lending money directly to another person or group of people, bypassing the traditional banking system.
Peer to peer lenders are believed to have lent over £300 million in 2012 alone and some experts, including Bank of England Director, Andrew Haldane, believe that it will change the face of lending in the UK. Speaking to the Independent newspaper in December last year Haldane said: “The mono-banking culture we have had since the 1990s is on its way out. Instead, we are seeing a much more diverse eco-system emerging with the growth of new non-bank groups offering peer-to peer lending and crowd-funding which are operating directly with a wider public.”
More and more savers, disillusioned with the poor interest rates on traditional savings accounts are being tempted by peer to peer lending. Zopa, the largest, is currently quoting an annual rate of return, after charges and an allowance for defaults, of 5.4%, more than double the best one year fixed rate bond from a traditional savings account.
But before savers get too carried away we should strike a few notes of caution.
Firstly, whilst the risk is spread on some platforms, for example with Zopa you can choose the credit worthiness of who you lend to and your savings are pooled with multiple investors and borrowers, other peer to peer platforms don’t work in the same way and directly pass your savings to a single or small number of borrowers, which increases the level of risk.
Secondly, your savings are not protected by the Financial Services Compensation Scheme (FSCS), whilst some peer to peer lenders try and reduce the risk by spreading your investment between multiple borrowers, if there is a default you will lose money.
Finally, the sector is currently unregulated, which means anyone can enter this market. However, to provide additional consumer protection from April 2014, the sector will be regulated by the Financial Conduct Authority, which will be replacing the Financial Services Authority.
In our opinion peer to peer lending could fill a gap between traditional savings and investing. It is certainly higher risk than traditional savings account, however over the short period of time is has been available it seems to be less risky than investing. Although investors should beware of some peer to peer sites, where the risk is not diluted between multiple borrowers and may actually be significantly more risky than other ways of investing.
Agri Bank launch a new account
A further example of innovation in the savings market is the recent launch of three fixed rate bonds by a farmer’s bank.
Agri Bank, a specialist lender of money to UK farmers and agribusinesses, has launched three new fixed rate bonds at 3.35% for three years, 3.5% for four years and 3.6% for five years.
Frank Sekula, AgriBank founder, said: “Our aim is to offer savers more competitive rates than are currently offered by banks by focusing solely on the sector that we know best and being very efficient at delivering our services.”
The rates are well above the best alternatives on the market, but there is a downside, the accounts are not protected by the Financial Services Compensation Scheme (FSCS), therefore if Agri Bank fails, savers will lose their deposits; significantly increasing the risk.
Whilst a new option for savers is to be welcomed, as should the innovative approach taken by Agri Bank, savers need to weigh up the additional return, of between 0.35% and 0.75%, against the lack of depositor protection.
For the shortest term three year fixed rate bond, the difference between the Agri Bank offering and the next best account, offered by the Co-Operative Bank is just 0.35%. The three year fixed rate bond from the Co-Operative Bank benefits from FSCS protection and with such a relatively small differential we believe that the extra risk, due to the lack of protection, is not rewarded sufficiently enough, however savers must of course make their own mind up.
Alternatives to savings accounts
Peer to peer lending and the new fixed rate bonds from Agri Bank are just two innovative new options for savers. If interest rates continue to remain low, and inflation rises as predicted, we are likely to see further new product launches over the course of the next few months.
Savers though shouldn’t be seduced by the headline rate, the devil is often in the detail, especially when it comes to the protection savers will enjoy if things go wrong.
Our team of Independent Financial Advisers in Nottingham are experienced in making savings and investments work harder for you. If would like advice on your savings or investments call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org