PORTFOLIOS WITH FIZZ
SAVERS fed up with miserly interest rates can be tempted to shun deposits in favour of riskier investments. The Mail on Sunday weighs up the alternatives for those prepared to take a gamble in return for a higher income.
PEER-TO-PEER LENDING 5 to 12 per cent a year
INCREASING numbers of savers are tempted to cut out the banks and direct their money into Peer-to-Peer (P2P) loans – and no wonder, with returns of ten times or more than paid on a standard savings account.
Savers do this using online platforms where they ‘lend’ money for fixed periods directly to individuals or businesses, choosing the rate they want to earn.
Individuals lent more than £1.2billion this way in 2014, according to the Peerto-Peer Finance Association – nearly double the sum for 2013.
With plans for P2P to be allowed in Isas from next April as well as counted as part of a new £1,000 savings interest allowance introduced at the same time, it is expected to explode in popularity as lenders will be able to earn returns tax-free.
James Meekings, co-founder of Funding Circle, a key provider in the business lending market, says: ‘The new pensions freedoms will also have a big impact as we fully expect savers to put a portion of their money into P2P.’
Rates range from about 5 per cent to 12 per cent before tax, with the riskier loans attracting the highest interest. Funding Circle’s average rate since it launched in 2010 is 6.3 per cent, for example. There are dangers. Borrowers may default on loans, and savers’ cash, unlike deposits, is not protected by the Financial Services Compensation Scheme if the company goes bust. Adrian Lowcock of AXA Wealth says: ‘The lack of a secondary market to resell a loan means a lender won’t be easily able to get the money back early should they need it.’
Some platforms are flexible, allowing lenders to make early withdrawals or sell on the loan – for a charge.
The big players try to reduce the dangers by encouraging lenders to spread risk or arrange an automatic option to divide their money across multiple borrowers. Funding Circle, for one, has an autobid process with cash split between 100 borrowers, minimising the impact if one or two default.
The main players for loans to individuals include Zopa and RateSetter, while for businesses they include Funding Circle, ThinCats, Landbay, Abundance Generation, Trillion Fund and LendingWorks. To compare deals visit comparison services money. co.uk and nurturemoney.com.
David Goodall, from York, is an enthusiastic lender and has recently signed up with platform Trillion Fund to lend £4,000 to E5, a venture between manufacturer Endurance Wind Power and installer Earthmill, which is raising £2.5million to run ten small and medium-sized wind turbines across the UK.
David, who is married to Denise – herself an investor – says as early-bird investors the couple will receive 7.5 per cent a year over three years, with payments made half-yearly. Those investing now receive 7 per cent. David, 74, chief scientific officer for instruments and biotechnology firm Paraytec, says: ‘I was not happy with the poor returns from the banks, coupled with the bonus culture of those at the top.’
MINI-BONDS 5 to 7 per cent a year
THESE bonds are essentially IOUs issued by companies directly to private investors that pay an attractive rate of interest and often offer quirky benefits – such as discount vouchers – but savers can lose all their money if a company goes bust.
Popular past mini-bond issues include retailer John Lewis, which pays 4.5 per cent over five years (maturing in March 2016) plus store vouchers worth 2 per cent. Chocolate specialist Hotel Chocolat’s three-year bonds (maturing in June 2017) are aimed at serious chocoholics – paying 7.25 per cent in the form of a shopping card used for buying products at the company’s shops.
The mini-bond phenomenon grew out of the financial crisis, when smaller companies struggled to raise money from the banks. These bonds are not listed so investors cannot cash them in until the bond’s term ends. Liam Kavanagh, managing director of mini-bond manager Rockfire Capital, says: ‘We have seen a surge in interest from the retired and anticipate this trend growing following the pension reforms.’
Current bonds include Rectory Homes, the property developer, offering a secured five-year minibond paying 6.25 per cent a year and Big60Million, the UK community benefit energy company, which this month launched a £20million bond paying 6 per cent a year.
On a more modest scale are Hambledon Vineyard’s five-year English Fizz Mini Bonds launched last month on crowdfunding platform CrowdBnk. The Hampshirebased wine maker aims to raise £3million to expand its stocks of sparkling wine.
One bond pays 8 per cent a year – but rolled up until maturity – on a minimum investment of £10,000, plus a half case of wine each year. There are also perks for smaller investors – £1,600 earns half a case and £3,200 a dozen bottles.
Lowcock warns such bonds are highly risky and can lose investors all their money. He says: ‘Although the yields on minibonds are attractive there is not enough transparency.’
Lowcock suggests that better options, though with lower yields, are either fully-fledged ‘retail bonds’ or corporate bonds. Retail bonds are sold direct by companies to individuals but unlike mini bonds they are listed and so can be traded before maturity.
Investors can buy these bonds through the Stock Exchange’s Order Book for Retail Bonds. For upcoming issues go to website londonstockexchange.com.