How P2P lending can help you beat inflation

For savers and investors, two of the biggest threats to their capital are tax and inflation. Whatever the annual rate of return on a deposit account, there is often the risk that a large chunk of your profits can be eaten away by tax demands or rising prices due to inflation.

At the moment, inflation is a particularly big problem in the UK: the fall in the value of the pound since the EU referendum last year has now fed through into rising costs for everything from petrol and food to clothing and household appliances, according to the latest figures published by the Office for National Statistics.[i]

The latest Consumer Prices Index rose to 2.9% in August[ii], higher than most economists had expected and still well ahead of the Bank of England’s 2% target. The Bank expects the current rate to remain around the 3% level for much of the rest of the year, which puts extra pressure on savers and investors to find a more profitable home for their cash.

The current price increases are especially bad news for those who have money in their bank or building society: the best rates on instant-access accounts are little more than 1% at the moment[iii], and even if you agree to lock your cash up for a year, you are unlikely to earn more than 2%[iv] — so until inflation falls back, savers will have to resign themselves to further losses in real terms. Indeed, figures published by investment company BlackRock in July[v] found that, already this year, British savers had effectively lost more than £760million in this way.

What this means is that, unless you are willing to take some sort of risk with your capital, you’ll be losing money. But while the traditional way to seek higher returns is by investing in shares, peer-to-peer lending has, over the last decade or so, become more popular with those looking for an alternative to the stock market.

Folk2Folk, for example, offers returns of between 5.5% and 6.5% a year for people who lend sums of £20,000 and above to local UK businesses. While this capital is at risk, as it is when held in shares or investment funds, these loans are secured against property owned by the business borrowers.

Risk can also be reduced by diversifying the loans across a number of companies in £20,000 chunks. While interest is paid to lenders on a monthly basis, the original capital is repaid at the end of the term.

What about the other threat to your wealth – namely, tax?

For investors, the recently introduced personal savings allowance as well as increases in the individual savings account (ISA) limit, mean that the majority of deposit account holders are no longer subject to income tax on the interest they earn. But peer-to-peer lenders can now also shelter a significant chunk of their loans from the taxman, thanks to the launch of the Innovative Finance ISA in 2016. This allows up to £20,000 a year to be lent through a peer-to-peer platform every year with any returns earned free of tax.

Regardless of the current level of inflation, the ongoing low-interest rate environment in the UK means that there is every incentive to seek out a more rewarding home for your cash and take a little more risk. If you aren’t comfortable investing in the stock market, or if you’re looking for your capital to generate a more predictable income, peer-to-peer lending could well be the alternative that you’ve been looking for.

To learn more about joining the local lending movement and becoming a FOLK2FOLK lender please visit https://folk2folk.com/invest/investment-products/folk-business-loan-investment/

Peer-to-peer lending is not a savings product and not covered by the FSCS. Capital is at risk.