Latest official figures show that inflation, as measured by the consumer prices index, remained at 3% last month – well above the Bank of England’s 2% target.
The Office for National Statistics said rising food prices are putting the squeeze on consumers, who continue to see interest rates on their savings accounts lag behind inflation despite the recent Bank of England base rate increase to 0.5%.
According to personal finance data provider Moneyfacts, the average rate for a one-year Cash ISA stands at just 1.04%, meaning that savings held in accounts like these are actually falling in value once inflation – the rising cost of living – is taken into consideration.
In fact, a recent report from the Social Market Foundation (SMF) shows that savers have lost about £8 billion from the value of their nest eggs over the past five years. This is because money left in instant-access cash savings accounts isn’t keeping pace with inflation, which stands at its highest level for five-and-a-half years.
The SMF study suggests that savers are holding about £200 billion more in cash savings than they need to meet their “rainy day” needs, and this money could be working harder. Had this money been invested in peer-to-peer (P2P) platforms, the SMF said it would have increased in value by more than 20 per cent, giving UK savers a return of about £40 billion on their combined £200 billion cash pile.
Investing in shares has traditionally been seen as a way of taking additional risk for potentially higher returns, but P2P lending is an increasingly popular alternative to the stock market, especially now that investments can be held within a tax-free* Innovative Finance ISA (IFISA).
LendingCrowd was one of the first P2P platforms to launch an IFISA with our Growth ISA, which has a target return of 6%** and allows customers to build a portfolio of loans quickly without having to spend time choosing their own investments. Diversification is the key here, as spreading money across a range of businesses is the safest way for investors to protect their capital from bad debt.
Funds in the Growth ISA, which has a minimum investment of £1,000, will automatically be diversified as far as possible so that no more than 5% of an investor’s funds are held in any one loan. We’ll also automatically reinvest monthly repayments of capital and interest, increasing diversification over time.
LendingCrowd also offers the Self Select ISA, which can be opened with a minimum of £20 and lets customers hand-pick their own investments on our Loan Market, where they can lend to credit-assessed businesses at rates from 5.95% to 16.25%†.
We encourage Self Select investors to spread their investments across as many businesses as possible, and they also need to take the time to review those companies thoroughly. They should understand the business profile, its financial needs and its management information, and only lend if the borrower matches their risk appetite.
*Tax treatment depends on the individual circumstances of each investor and may be subject to change in future.
**As an investor, it’s important to remember you’re lending to businesses so your capital is at risk. The 6% target rate is variable, net of ongoing management fees, estimated bad debt and before the 1% withdrawal fee. LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.
†Investors can lend at rates between 5.95% and 16.25% based on LendingCrowd’s Credit Bands. Interest rates are guided by the credit grading allocated to each loan. Higher-risk investments may yield greater returns but can also lead to lower returns if the business can’t fully repay its debts. This is known as bad debt. Find out more at our Risk matters page.