I have £40k. Should I go for peerto-peer?

The Daily Telegraph - Your Money - - MONEY MAKEOVER -

A£40,000 in­her­i­tance is a sig­nif­i­cant sum to most peo­ple. How­ever, it could soon be nib­bled away if you earn a low salary and have high liv­ing costs. Olivia Hansell, 21, re­ceived her in­her­i­tance only a few weeks ago after her grand­par­ents died ear­lier this year. She has no spe­cific fi­nan­cial goals at the mo­ment but wants the £40,000 to grow over five years. Around £37,000 is in a San­tander 123 ac­count, which at present pays 3pc on bal­ances up to £20,000.

Since re­ceiv­ing the money Ms Hansell has ap­plied to open a num­ber of other high-in­ter­est sav­ings ac­counts. How­ever, this has af­fected her credit rat­ing and she has re­cently been turned down for ac­counts at Tesco and RBS.

Sav­ings ac­counts are where she wants to put the bulk of her in­her­i­tance but she is also in­ter­ested in other, more risky ven­tures such as peer-to-peer be­cause it of­fers “higher re­turns more quickly”.

Ms Hansell, a re­cent grad­u­ate in pol­i­tics, phi­los­o­phy and eco­nomics, earns £16,000 as a start-up busi­ness con­sul­tant.

Her one-year con­tract will end next June and by then she hopes to have been of­fered a bet­ter-pay­ing job. She thinks a £24,000 salary is achiev­able. If not, she plans to travel and work abroad.

She pays £725 a month to rent a stu­dio flat in Brighton, which she knows is not sus­tain­able on her salary. She has yet to feel the full im­pact as her mother paid the first six months’ rent in ad­vance. From Novem­ber Ms Hansell will have to pay the rent her­self. She has no debts other than a £500 over­draft. un­suit­able for those who want se­cu­rity, who should usu­ally fo­cus on FSCS-pro­tected cash sav­ings.

If Ms Hansell is pre­pared to take more risk, she could con­sider peer-topeer, but only for a small pro­por­tion of her money. I would pre­fer to use a “multi-as­set” in­vest­ment fund that spreads risks by in­vest­ing in a range of as­sets such as shares, bonds, prop­erty and com­modi­ties.

Funds Ms Hansell could con­sider in­clude In­vestec Cau­tious Man­aged, Schroder Multi Man­ager Di­ver­sity and JPM Multi As­set In­come.

She should ide­ally be sav­ing into a pen­sion and should see what op­tions her em­ployer of­fers. The ear­lier she starts the eas­ier it will be to build up a de­cent re­tire­ment fund. How­ever, I wouldn’t tie up any of her in­her­i­tance in a pen­sion at this stage; she can al­ways make con­tri­bu­tions in future.

This young reader wants ad­vice on how to in­vest an in­her­i­tance. By Amelia Mur­ray

As Ms Hansell’s cur­rent fi­nan­cial po­si­tion is any­thing but sta­ble, I would de­fer mak­ing any con­crete plans for in­vest­ment or lock­ing away funds for any­thing longer than the short term.

I un­der­stand that she may not en­vis­age need­ing ac­cess for a pe­riod of five years, but her sit­u­a­tion could change rad­i­cally in Novem­ber, when her ac­com­mo­da­tion con­tract is up, and again in nine months’ time, when her em­ploy­ment con­tract ends.

Ms Hansell needs to re­tain max­i­mum flex­i­bil­ity with her cap­i­tal as it may be needed to sup­ple­ment her in­come un­til she takes on more gain­ful em­ploy­ment.

The first thing she should do is sort out her ac­com­mo­da­tion un­til June next year. Her rent equates to more than 62pc of her take-home pay, and, tak­ing into ac­count other liv­ing costs, it is not fea­si­ble to re­main there.

I would urge her to carry out an in­come and ex­pen­di­ture anal­y­sis, tak­ing into ac­count how much she spends each month on util­i­ties, food, travel, en­ter­tain­ment etc, to work out how much she can ac­tu­ally af­ford on rent, and start­ing the

‘I would ad­vise her to en­sure the safety of her money via an FSCS-pro­tected bank’

search on that ba­sis. In a city such as Brighton I would imag­ine that there are op­por­tu­ni­ties to house-share to re­duce her ac­com­mo­da­tion costs.

Be­cause of the in­sta­bil­ity of her cir­cum­stances I would or­di­nar­ily rec­om­mend at least a year’s worth of in­come to be held in in­stantly ac­ces­si­ble cash to cover liv­ing ex­penses in the event of an emer­gency.

How­ever, as we’re un­cer­tain what Ms Hansell’s ex­penses may be next year, I would be tempted to re­tain all of her money in cash. She could put half in in­stant-ac­cess ac­counts, £10,000 in a no­tice ac­count and a fur­ther £10,000 in a fixed-term de­posit ac­count of one year at the most, in or­der to achieve bet­ter re­turns. She might also wish to con­sider in­vest­ing some of her money in Pre­mium Bonds, which of­fer taxfree re­turns, can be ac­cessed at short no­tice and of­fer max­i­mum pro­tec­tion.

Over the long term, hav­ing a mul­ti­tude of ac­counts should not af­fect your credit score too much as long as they are kept in or­der with lit­tle ac­cess to credit. Open­ing ac­counts at the same time can have a short-term ef­fect, how­ever. Based on an amount of £40,000, three ac­counts should be enough to gen­er­ate a com­pet­i­tive re­turn.

Peer-to-peer lend­ing can of­fer rates bet­ter than you’ll get from stan­dard cash ac­counts, but this is due to the risks in­volved. An in­creased rate of, say, 1-2 per­cent­age points will give you lit­tle ex­tra ben­e­fit for the as­so­ci­ated risk.

I would, in­stead, ad­vise Ms Hansell to en­sure the safety of her money through an FSCS-pro­tected bank or build­ing so­ci­ety ac­count.

I fore­see her po­si­tion re­main­ing in this fluid state for the next cou­ple of years, at least un­til she has found her­self a per­ma­nent job and her stan­dard of liv­ing is fi­nan­cially achiev­able and sus­tain­able.

At this point there may be scope to in­vest her funds for bet­ter re­turns, but not be­fore then.

Olivia Hansell earns £ 16,000 a year but pays £725 a month to rent her flat

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