Did you know that a war has broken out in the UK savings market?
Well, war is probably an exaggeration, it’s more like a minor scuffle.
But, big news this week, you can now get a massive 1.55% on your instant access savings. I know, I know…
It all started in September, when the vampire squid of investment banking — Goldman Sachs — launched a new savings account — called Marcus.
From the reaction of some, you would think we had witnessed the second coming, not the introduction of an instant access savings account by the worlds most hated investment bank.
Back in 2009, Rolling Stone magazine famously described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. So, it’s good to see that they have redeemed themselves to the UK’s army of beleaguered savers, by offering a savings account that pays a mighty 1.5% per year.
Inflation has dropped in recent months, but with CPI still running at 2.1% in December, you are losing money in real terms, if you invest. Still, credit where credit is due, Goldman have put a small rocket under the UK savings market.
In the last few months, the West Bromwich Building Society, Cynergy Bank and Virgin Money all matched Marcus at 1.5%, and now The Family Building Society and ICICI Bank are beating them with 1.51% and 1.55% respectively.
Each account has its own foibles regarding how you open them, minimum deposits and how many withdrawals you can make in a year, but if it’s instant access and the security of the Financial Services Compensation Scheme (FSCS) you want, then they are top of the list.
Now of course, if you are happy to tie up your money for longer, you can get a higher rate. A quick scan of the best buy tables shows that you can lock up your cash for three years with ICICI Bank, Tandem or Union Bank of India, and achieve 2.4% a year. Three years is a long time to tie up your cash, but at least your savings will now beat inflation — assuming it doesn’t jump higher of course.
An alternative approach used to be to take advantage of the higher interest rates offered on current accounts. This is still possible, but the offers are lousy compared to a few years ago. For example, you can currently get 5% with the Nationwide FlexDirect account fixed for 12-months. However, after that, it drops to 1% and is only on the first £2,500.
Hardly enough to retire on.
So, what to do?
Well, if you are a reader of Income For Life, then you will know that I’m a big fan of peer-to-peer lending. It operates in a similar way to a savings account, but there is no bank or building society in the middle.
Instead, you use a P2P platform, to match-make your investment with an approved and credit-checked borrower. And, it is quite possible to get interest rates ranging from 4% right up into the mid-teens depending on the level of risk you are comfortable with.
Some platforms make unsecured loans to individuals, some make asset backed loans to small businesses and others make short term loans to property developers. There are over 60 FCA authorised peer-to-peer companies operating in the UK and they all have different business models — so there should be something to suit every investor’s needs.
But with so much choice, you need to do your research and I would highly recommend the reviews and rating system operated by the independent website www.4thway.co.uk.
However, the key point to understand is that you do not have the £85,000 protection offered by the Financial Services Compensation Scheme (FSCS). Putting your money into a P2P platform is more akin to an investment than a savings account. So, you need to diversify your loans, and I would personally recommend that you plump for those that are backed by solid security — such as a building or land.
But don’t you have to tie your money
up for a long period of time?
You can if you wish. Many platforms offer loans that are designed to last for several years. But, as long as they have a secondary market, it is usually possible — for a small fee — to sell your loan to another investor and exit the investment early. I’ve done it myself a number of times.
Or, if you really want Marcus-like instant access, then I know of at least one well-regarded P2P company — Assetz Capital — that offer a Quick Access account paying 4.1% and a 30-Day Access account that pays 5.1%. Compare that to the measly 1.55% offered by the banks.
For these accounts, the P2P platform invests your money in secured business loans, but also maintain a high level of cash to aid with liquidity.
Now, it’s important to understand, that they do not guarantee that you can withdraw your cash as quickly as the headline would suggest. They simply state, that in “normal market conditions” withdrawal of funds from the platform should happen within two days.
I’ve never experienced any problems with my peer-to-peer accounts, and they have operated exactly as advertised. But, critics would say, they will only be fully battle tested when we go through the next recession.
So, not quite as smooth or secure as plonking your savings in the bank.
But, for around 2.6x the interest, and assuming they are backed by real assets, I know where I’d rather be parking my hard-earned cash.
If you want to learn more about peer-to-peer investing and many other innovative ways of generating an income, then check out my regular newsletter — Income For Life