On the second Tuesday of every month, I’ve been locked in the Groundhog Day of journalism. Just like in the Bill Murray classic, the clock hits 9.30am, I can hear the faint sound of I’ve got you babe by Sonny and Cher, a small woodchuck emerges from my desk drawer to announce that winter will last for another three months and I find myself, robotically, writing almost exactly the same story I wrote at the same time the previous month.
And try as I might to put a fresh spin on it, the headline is always some variant of: “Inflation soars to [insert new higher rate]: but no savings account can beat it.”
The story always comes packed with refreshed, but depressingly similar, analysis of the savings market: out of the 400 or so accounts nationally available to all savers, and don’t come with any restrictions, not a single account, even the ones asking you to lock your money up for five years, pays more than rising prices.
That’s right – every single cash savings product loses you money in real terms.
Yes, I know that the answer to fighting inflation is in the equity markets, but the fact is that not everyone wants to put their capital at risk – be it inexperience, loss aversion or a deep mistrust of anything that puts capital at risk. Government data backs this up – despite the miserably dwindling rates on offer, four out of every five Isas opened in 2015-16 were a cash Isa.
In a bid to make the most out of cash, people have resorted to creative ways to find inflation-busting returns, many of which involve opening multiple bank accounts, paying interest on credit or setting up elaborate payment schedules to bounce money around to meet various terms set by the banks.
In fact, to get a return equivalent to 2.7 per cent, the current rate of consumer price index, on a savings pot of £20,000, you’d need to use this tactic with six current accounts!
Why are we having to solve the financial equivalent of a Rubik’s Cube just to earn more than 2.5 per cent on your savings?
Perhaps you don’t any more, following the news that a brand new Isa launching next week will pay savers as much as 6.1 per cent a year – a rate not seen since the heady pre-crisis days.
The catch, however, is that this isn’t a normal cash Isa – it’s an “innovative finance” Isa offered by peer-to-peer lender Zopa, the first from one of the mainstream and well-established lenders. The question now is whether savers who eschew the stock market will feel more comfortable with something undoubtedly racier than a standard savings account, but which pays them a healthy rate of interest.
Just to recap: peer-to-peer lenders are online marketplaces that connect up savers and investors with people who want to borrow money. By removing the middleman from the equation and doing away with the overheads that banks have, peer-to-peer lending sites can offer much more favourable rates, to both savers and borrowers. The sites are now also regulated by the Financial Conduct Authority, which means this is no Wild West of a financial market.
Zopa will offer two Isa accounts – one paying expected returns of up to 3.9 per cent, which will see your savings lent out to low-risk borrowers. The second paying sexier returns of up to 6.1 per cent, that’s lent to borrowers of all stripes.
And this brings us to the critical part of peer-to-peer lending and whether it truly can become a competitor to the traditional savings market now it has the halo of an Isa around it. This is an investment in which you can still lose money. If a borrower defaults, and fails to repay their loan, your rate could fall. If this happens en masse, well we’ve yet to see what this would mean for the market.
And if a peer-to-peer lender goes bust, there’s no protection from the Financial Services Compensation Scheme, as there is with deposit-based accounts.
Many peer-to-peer lenders diversify your investment, so that repayment is split across multiple borrowers. And they have sought to reassure investors by offering compensation funds, that top up any losses that come from defaults. In a bid to offer top-notch rates and simpler products, however, Zopa is removing its safeguard scheme for Isa investors. By the end of the year, it will no longer offer it to any new investors.
Can a tasty return tempt cash-addicts away from the comfort of the savings market, or will the risk of loss still be a step too far? Perhaps savers should consider getting off the current account merry-go-round and placing a small bit of their Isa nest egg in one of these accounts, at least to see whether the terror of capital risk can be soothed by a real return.
But at least for now I might be able to write a different headline – and deal with the groundhog living in my desk.
Gareth Shaw is head of Which? Money Online