In one year’s time ISAs could look very different. All going well, rates for savers will be boosted by the regulation of peer-to-peer lending, which is being considered as a solution to the tax conundrum faced by HMRC in respect of peer-to-peer.
Watching ISA rates get cut pains everyone. Fundamentally it’s a good product – it allows people to prudently save cash, knowing their savings are as safe as they possibly can be through the Financial Services Compensation Scheme.
However, “guaranteeing” a sub-inflation return really is a false economy and it's time for consumers to ditch this outdated product. Yesterday, the Government-backed NS&I announced cuts of 0.5%, reducing the rate to 1.75%.
Even if you can get a slightly better return (The Nottingham Building Society offers 2.10%) you can have to wait 60 days to access your funds.
You could opt for a five-year fixed rate of 3% - but surely rates will rise at some point in that term, so you won’t be doing so well after that stage.
Things get worse if you’re a higher rate taxpayer.
A basic-rate taxpayer would need to earn 3.5 per cent on their savings to beat the current level of inflation yet there is only one account that gets close according to Moneyfacts – Skipton Building Society’s Limited Edition Fixed Rate Branch Bond – a seven-year bond – paying 3.5 per cent. There isn’t a single account paying the 4.66 per cent that higher-rate taxpayers would need to beat inflation.
Which is why lending to businesses makes so much sense. On rebuildingsociety.com, the average rate earned so far is 15.1%. There have been no defaults. If defaults do occur at the market rate of 1%, your return will drop. If they increase to 5%, your returns will drop, but you’ll still comfortably outstrip ISAs.
It’s time for the UK to get smart and re-evaluate risk. Is it better to have sub inflation return and lose none of your capital or go for substantially more interest with some risk to your capital position?
