A brief overview of Savings Accounts, Peer-to-Peer and Stocks and Shares

23rd November 2016
P2P

Oftentimes at Fundshare, we tend to pay particular attention to how you can use P2P as a way to get better rates on your savings and, there’s a good reason for that. 

As savings rates have taken a dive following Brexit, now more than ever, savers are looking for alternative ways to get good returns on their cash. [1]

What we often don’t do is talk about how you can use P2P as a way to increase your net income, just like you would with a stocks and shares investment.

We believe that for many people, the stock market is a scary place to invest their hard-earned capital. And as a result, they may leave their money within the safe confines of the bank’s savings account, making little interest in the process. 

Imagine, if you will, a spectrum of sorts. Savings on the left, and stocks and shares on the right. It’s fair to say, that these two investment classes are practically worlds apart.

So, could P2P be the investment class which bridges the gap? Let’s have a quick look at all three and see. 


Savings Accounts                

What are they? A regular savings account, sometimes known as a deposit account, is an account that you open with a bank or building society. Basically, you give your money to the bank and they pool it with a large range of other investments and invest it where they see fit. The account you choose will then be subject to an agreed rate of interest which will be paid back to you over an agreed timescale.

Term: Easy access variable, short notice accounts and fixed terms from one to seven years. 

Return: Many offering 0.25%, some could end up not offering any interest at all.[2] Usually at end of term unless otherwise stated.

Risk: Low. Protected by FSCS up to £75,000 in case of bank failure.[3]

Access to funds: Varies depending on account. Quick/easy access accounts are by the namesake, easy and quick to access. However, there could be charges for the longer-term accounts.

Knowledge required: None. Bank does all the hard work.

What are the benefits?

Safety: With a savings account from a traditional banking institution you’ll automatically be covered up to £75,000 by the Financial Services Compensation Scheme.

Guaranteed interest: As the rate is agreed by the bank, it is guaranteed. Sure, the interest rates may be low, but at least they’re constant.

Tax-free: All interest rates are paid in gross and no tax will be removed. Basic rate tax payers (20%) may get up to £1000 per year tax free, with higher rate tax payers (40%) able to earn £500 tax free. [4]

And the negatives?

Low returns: Even prior to the Bank of England base interest rate cut, savings rates have been known to be, at best, pretty paltry. With typical interest rates normally sitting in at around the 1%-2% with the longest savings deals, the return is pretty slim on your investment. Not ideal if you’re looking at using your savings to create capital.[5]

Limited withdrawals: In some cases, savings accounts may offer only a limited number of withdrawals per year and may also charge for any time you go over this limit. This isn’t necessarily a condition of all however so you may wish to check the fine print of your savings account.


Stocks and Shares

What they are: Simply put, with stocks and shares, you’re investing in the equity stock of a company that floats on the stock market. Any company that is at least part public owned may be bought and sold on the stock market, including tech companies and car manufacturers.

As an investor, you’ll either buy stocks directly from the company that’s selling them or buy the shares off another investor indirectly. Though a misnomer of sorts, as you’ll always be buying stocks through a broker. 

If the company makes money, you’re entitled to a share of the profits but, you also assume a share of the risk.

Term: Variable. You buy and sell depending on your certain circumstances. It’s generally advised that day trading, that is the buying and selling of stocks daily, is left to the professionals and the best way for the layman to make money on stocks is to stay in for longer terms.[6]

Return: Variable. Generally seen that the longer investments pay out better than short.[7]

Risk: Variable. Risk can be monitored and sometimes predicted if you’re savvy but all stocks and shares carry a degree of risk. Covered by the FSCS up to the value of £50,000 if the stocks become affected by failure of the platform.[8]

Access to funds: Generally speaking, the time when you make money on your stocks and shares is when you sell them. If sold at a time of high value you’ll make profit, if you sell when they’re worth less, you could lose money.

Knowledge required: Knowledge of the market and the company is a must alongside knowledge of political, media and general market trends.

What are the benefits?

Potentially high returns: The often touted figure of 7% is an average that’s sometimes considered by investors to be a rough guide of what one could expect over the course of a year. Naturally, there’s the potential for far greater returns on this, especially if a company is in a state of increasing fiscal growth, but with that potential for greater return also comes the potential for losses.[9]

Knowing your investment: As you’re directly investing in a company, you’ll most likely have made the decision to do so yourself. You can track the company’s progress either yourself or through a stock broker to determine how it’s performing and if you could benefit from buying more shares or selling the ones you’ve got.

And what about the negatives?

Risk: As you’re investing directly in companies, you’re completely open to the volatility of the market. On the one hand this could offer greater potential returns but, there is always the potential to lose money also.

Understanding: Buy and sell price, spread, diversification, it can all get pretty confusing with stocks and shares. Then you have to know the company, the market and be able to predict trends within both of these in order to make savvy investments. If you choose to sell at the wrong time you could lose money, potentially everything.

Uncertainty: Stocks tumble for a myriad of different reasons including media scandal, political upheaval and uncertainty in the market. For this reason, it could be said that unless you’re specifically trained in the market, stocks and shares could be perceived as a gamble.


Peer-to-Peer

What it is: P2P investments allow you to invest in companies, people or property in small increments much like stocks and shares but you have the option of putting your money into an account and allowing the platform to invest for you (like a bank) or perform the investments yourself (like stocks and shares).

Term: Variable. Many P2P platforms have fixed terms of investment, just like a savings account. Longer term fixed rates may allow you to access your money early but you may have to pay a penalty.

Return: Returns vary depending on the type of investment you make, how many borrowers you lend to and how long you invest for.

Risk: Unlike stocks and shares and savings accounts, with P2P you won’t be covered by the FSCS if the platform goes under so there is a risk that you can lose all your capital. That said, most P2P platforms offer some form of investment protection from security, insurance and provision funds. Finally, by diversifying your investment across many borrowers, you should, at least in theory, cover any loss of a single loan default.

Access to funds: Variable depending on platform and account you’re investing in. 

Knowledge required: Variable. One of the potential positives of P2P is that you can decide whether to put your money into an account with the platform who’ll then choose your borrowers for you or, like stocks and shares, choose your borrowers yourself.

Expected return

Length of investment term

Flexibility

Security

Peer-to-peer

Typically between 5% - 10%¹º[10]

Depends on the platform/product.

Early exit available on some products. Charges may apply.

Provision funds and insurance available with certain providers.

Savings

Typically 1% - 2%[11]

Depends on account. From easy access up to 15 years+[12]

Interest rates over 1% can generally only be achieved if money is locked away for 1 year or longer. [13]

Up to £75,000 per person per financial institution is covered by the Financial Services Compensation Scheme (FSCS)

Stocks and Shares

Typically around 7%, assuming long-term investing[14]

As long or short as you wish.

Flexible movement to buy or sell Some may have fixed rates however.

Security in stocks lies in diversification. As you’re investing directly, there’s no middleman to manage your investment or security.

Premium Bonds

Typically around 1.25%[15]

Monthly draws with payout terms.[16]

Pay in and take money out easily. Interest paid out in monthly prize draw.

No risk to capital as NS&I is UK Government owned. Protected by FCSC up to the value of £50,000.[17]

 

 

What are the benefits?

With a P2P investment, you could earn far greater returns of interest than if you were to invest in a savings account due to the fact that you are risking the loss of your money. Typical yields sit between 5% and 10%.[18]

Depending on the sort of platform and product you choose to invest in, you may be able to control where your money goes and for how long – much like with a stocks and shares investment.

As a counterpoint to this, account-based P2P could offer a solution to those that wish to invest in P2P but aren’t financially savvy or time rich enough to perform the tasks associated with self-selecting borrowers.

Diversification of your investment means that the risk to your capital as a whole should, at least in theory, be reduced. If you spread your investment appropriately, that is, amongst many different borrowers, a default on one loan shouldn’t have as drastic an effect on your entire investment.

And, what about the negatives?

As previously discussed, P2P is an investment and not a savings account that means that returns are not guaranteed and there is risk that you could lose all your capital.

 

With this in mind, it is important to remember that P2P investments aren’t covered by the FSCS. This means that if the platform were to go bust your investment is not protected like it would be with a savings account. That said, some platforms do offer safeguards such as security, insurance and even provision funds in order to try to protect your investment in case of a borrower default.

 

As P2P is a relatively new form of investing and is constantly growing, there is no real one size fits all type of investment. In many cases, platforms may differ completely from one another. This can make P2P a bit of a minefield to navigate if you’ve not got experience investing. That said, account-based P2P does offer a bit of a lifeline to those that are fresh to the scene.

So, can I use P2P as a way to generate savings income?

The simple answer is that yes you may be able to. That said, there are conditions which are primarily based on which platform and product you use. With savings rates as low as they are, it’s no secret that savings accounts are probably not the ideal place to put your money if you’re trying to create income, although returns are guaranteed. 

That said, stocks and shares aren’t easy to manage – particularly if you’re new to the investment game. So, if you’re interested in making your capital work for you, you may wish to look into account-based P2P and start from there. Once you’ve determined how you’d like your investments to work in the future and once you’re more comfortable with how P2P works, you could start to reinvest your money into self-select P2P.

What next?

Interested in seeing how your capital could work for you? Try out the Fundshare comparison tool. All you need to do is tell us how much money you want to invest, for how long and with what sort of investment and we’ll pull up a number of products which may be suitable for you.

 



[1] http://www.professionaladviser.com/professional-adviser/news/2470208/study-identifies-uptick-in-p2p-interest-since-brexit-vote

[2] https://www.theguardian.com/money/2016/aug/04/uk-interest-rate-cut-mortgages-savings-pensions-house-prices

[3] https://www.moneyadviceservice.org.uk/en/articles/regular-savings-accounts#risk-and-return

[4] http://occupytheory.org/advantages-and-disadvantages-of-a-savings-account/

[5] http://www.cheatsheet.com/personal-finance/the-pros-and-cons-of-a-traditional-savings-account.html/?a=viewall

[6] http://www.moneywise.co.uk/investing/first-time-investor/beginners-guide-to-investing-the-stock-market

[7] http://www.fool.co.uk/investing-basics/how-when-and-where-to-invest/

[8] http://www.fscs.org.uk/what-we-cover/compensation-limits/investment-limits/

[9] http://www.thesimpledollar.com/where-does-7-come-from-when-it-comes-to-long-term-stock-returns/

[10] https://www.bondmason.com/introduction-to-p2p-lending

[11] http://www.cheatsheet.com/personal-finance/the-pros-and-cons-of-a-traditional-savings-account.html/?a=viewall

[12] http://www.nationwide.co.uk/products/savings/loyalty-saver/features-and-benefits

[13] http://www.cheatsheet.com/personal-finance/the-pros-and-cons-of-a-traditional-savings-account.html/?a=viewall

[14] http://www.thesimpledollar.com/where-does-7-come-from-when-it-comes-to-long-term-stock-returns/

[15] https://www.nsandi.com/premium-bonds

[16] https://www.moneyadviceservice.org.uk/en/articles/premium-bonds

[17] http://www.telegraph.co.uk/finance/personalfinance/savings/11632823/Premium-bonds-limit-rises-to-50000-but-will-you-win-more.html

[18] https://www.bondmason.com/introduction-to-p2p-lending

 

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Your capital is at risk if you lend to businesses. Peer to peer lending is not protected by the Financial Services Compensation Scheme. Please read our full risk warning here.