But make sure you pay close attention to the possible risks
OPPORTUNITIES for savers to take control of their investments are increasing. The liberalisation of pension rules, announced in this year’s Budget, marked a watershed in the freedom savers can have over their money. But reform hasn’t been limited to pensions. In December 2012, the Retail Distribution Review (RDR) was introduced, changing the way financial advisers are incentivised, and some believe it has increased transparency in the industry and made it easier for investors to identify the investment solutions suitable for them.
Alongside this, advancing technology has opened up new investment opportunities. Discretionary accounts can be made affordable, and online DIY investment services help people make the most of their money without needing to use an adviser, says Danny Cox of Hargreaves Lansdown. Innovative investment manager Nutmeg, for example, offers an off-the-peg managed portfolio for as little as £1,000 per fund.
Peer-to-peer lending can certainly be seen within this context. Technology has helped it scale quickly, says Cox. Figures from the Peer-to-Peer Finance Association showed that over £500m of new money was lent in the first half of 2014 through online platforms like Zopa, with more than 66,000 retail investors providing loans to individuals and small business.
But technology isn’t the only reason why more people are considering peer-to-peer as an alternative to cash or investments like equities and bonds. Since April, peer-to-peer platforms have been regulated by the FCA, and peer-to-peer investments will soon be eligible to be included within the new Isa. Chelsea Financial Services’s Darius McDermott says that the tax advantages of Isa products would make peer-to-peer lending a “more attractive and conventional way” of saving.
But given the rise of DIY investing, and with fewer people now taking financial advice (the number of regulated advisers fell by 1,000 between 2012 and 2013), both closely examining the products you use and proper risk management are vital. Many self investment stocks and shares platforms offer model portfolios that can help align your investments with your risk appetite, and you can compare platform and fund charges relatively easily. McDermott advises similar care when selecting a peer-to-peer lending platform – you should look closely at rates (which can vary significantly), fees, and rules on how long your money will be locked away.
Peer-to-peer lenders often offer returns of over 5 per cent, well above the rock bottom rates at most banks and building societies. But you don’t get equity-like returns without equity like-risks. So ensuring you choose a platform that limits those risks as far as possible is highly important.
Most peer-to-peer platforms are open about default rates. And as it stands, says Cox, they are very low, “less than 0.5 per cent in most cases, which are easily absorbed within the interest rate paid.” And with established players, savers are increasingly protected by the platforms themselves, says Thomas Diaper of Plutus Wealth. They have emergency cash pots in place, and some spread risk across investors (like a pooled investment). Those that lend to businesses can have higher default rates, says Cox, so if you’re concerned by this, you might consider a platform that just lends to individuals.
“Diversification, spreading your money between different kinds of investments and asset classes is the key to reducing your overall risk and investing for the long term,” says McDermott. And as peer-to-peer investments become more credible, they look set to be part of more investors’ balanced portfolios.