Why Local Lending can be a wise investment

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When you have some spare cash to put aside, be it a lump sum or a regular monthly contribution, the biggest decision is normally whether to opt for a bank account or some form of investment.

While deposit accounts offer guaranteed interest, interest rates for the past decade or so have been at historically low levels, often well below inflation. This has led to more of us choosing to invest our capital into companies in the hope that, by taking on a bit more risk, we’ll benefit from significantly higher returns.

But when it comes to selecting an investment, the choice is vast – the growth in the asset management industry means that today it is practically just as easy to take a stake in a Chinese copper miner as it is to buy shares in British Airways or BT.

But investment isn’t always about making a quick buck or trying to back the right company. Over the past few decades, more and more people have started to use other criteria when choosing businesses to invest in – in particular, they are taking into account ethical factors such as, is this company sustainably run, or is it involved in activities such as weapons manufacture or tobacco production that I am not comfortable funding?

Investing in ethical opportunities this way does not mean sacrificing profits for principles: rather, it is an opportunity to make money while also contributing to the social good, whether it is in the form of promoting renewable energy sources or fairer business practices.

And thanks to alternative finance providers such as FOLK2FOLK, there is now another compelling option for investors in the UK: the opportunity to fund viable businesses in their local communities. Through the local lending movement that we have established, individuals with £20,000 or more can lend directly to support small and medium-sized enterprises (SMEs) based in their area.

Not only does this give investors the chance to benefit financially from the success of local entrepreneurs, it also helps retain money in an area’s economy and thus boost prosperity levels through the likes of increased employment and higher spending.

This is all part of FOLK2FOLK’s drive to create financially and socially sustainable communities to help the UK advance economically while also meeting the challenges and opportunities thrown up by Brexit uncertainties.

The money put forward by FOLK2FOLK’s lender community is lent mong local business borrowers and is secured against property that those businesses own – which helps reduce the risk to investors. Meanwhile, if you lend larger sums of money, your capital can then be spread across a number of companies, again to help diversify and reduce risk.

Annual interest is 6.5%, and lenders’ capital is repaid at the end of the term, which can be up to five years depending on the loan term the borrower chooses.

And thanks to FOLK2FOLK interest can be earned free of income tax: under current rules, a FOLK2FOLK loan of £20,000 can be held in an Innovative Finance ISA with all subsequent interest payments free of tax, and additional Innovative Finance ISAs can be opened in later years to help shelter more of your interest earned from tax.

To learn how to invest locally and join us in The Local Lending Movement visit https://www.folk2folk.com/lend/invest-in-a-loan/

How P2P lending can help you beat inflation

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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://www.folk2folk.com/lend/invest-in-a-loan/

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

Why P2P can be a positive investment choice for retirees

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The reforms of the UK’s pension system introduced in 2015 were prompted to a large extent by problems in the annuity market.

Prior to the changes, most people who reached retirement were effectively forced to use most or all of their pension funds to buy an annuity – a type of insurance product which pays a monthly income for life.

The main attraction of annuities has always been that the income they pay is guaranteed: there is no chance that the money can run out before the customer dies. But in the wake of the financial crisis of 2008, annuity rates declined sharply. As a result, thousands of people found themselves with little choice but to cash in their pensions in return for relatively meagre levels of income.

The freedoms brought in by the coalition government in April 2015 mean that retirees now have much more choice about how to use their pensions to provide the income they need in retirement. It is now easier to leave money invested in the stock market while making regular withdrawals to cover living expenses – an option known as drawdown.

Individuals can now also take 25% of their money out of their pensions tax-free for use in other investments without facing the punitive tax charges that were part of the pre-2015 rules.

These alternative options mean that pension savings have the opportunity to continue to grow even after retirement: a factor that has become increasingly important given the significant rises in life expectancy in recent decades.

But with this potential growth comes, as ever, an element of risk: by staying invested in shares, for example, there is a chance that the value of your capital could go down as well as up. And another possible downside of drawdown is that the investor takes too much income in the early years and thereby runs out of money at some point later on.

So, it is hardly surprising that a number of alternative forms of investing have become popular since the pension reforms were introduced.

Peer-to-peer lending is one investment option that has a lot to offer retirees who are happy to take on some additional risk compared to cash or bonds but with less risk and volatility than investing in shares. In recent years, P2P investing has emerged as an additional source of income for retirees and for those considering drawdown or buying a guaranteed income through an annuity. Typically, P2P lending tends to offer higher rates of return than offered in the current annuities market with the benefit of preserving capital in the event of death.

FOLK2FOLK is one P2P platform, that specialises in local secured lending, allowing investors to earn annual interest of either 5.5% or 6.5%* by lending sums of £20,000 or more to small, local businesses and entrepreneurs. In many cases with P2P investors, lending is helping to provide an additional source of income during their retirement to support their lifestyle.

The capital you lend is at risk, but bear in mind that these loans are secured against property owned by UK business borrowers. Funds can also be diversified across many borrowers in £20,000+ chunks – so if you lend £100,000, this could be spread across five borrowers of your choice depending on the availability of loan opportunities at the time of investing.

Lending through FOLK2FOLK also means that you can preserve your capital for future generations or partners: while interest is paid out monthly, your original capital is repaid at the end of the term, which can be up to five years depending on loan term.

Alternatively, by investing through the FOLK2FOLK platform, however, £20,000 would return interest of between £1,100 and £1,300 a year for up to five years* – and crucially, your capital would not be eroded, provided your borrowers repaid their loans. This can give investors greater flexibility to reinvest their capital later if things change and allow capital to be passed on within their inheritance set up which is not the case when buying an annuity.

A numbers comparison

By way of comparison, a 65-year-old who is considering buying a basic flat-rate annuity. At today’s rates**, £20,000 would generate a guaranteed annual income of £1,036 for life but you wouldn’t be able to pass this income or capital on to a partner or family in the event of a death.

For a £100,000 sum, the annuity would generate £5,181 a year as opposed to £5,500-£6,500 through FOLK2FOLK*.

And £250,000 would provide annual income of between £13,750 and £16,250 via FOLK2FOLK* compared with the £12,953 – and no return of capital – available from the annuity.

For more information about joining the local lending movement at FOLK2FOLK please visit – https://www.folk2folk.com/investing