Isa reform could boost savings rates to 8.4%
The introduction of peer-to peer (p2p) lending to the Isa system could lead to significantly improved rates of up to 8.4% for savers, industry experts have predicted.
Yesterday, Chancellor George Osborne announced Brits would be able to save a total of £15,000 tax-free each year from 1 July, with savers allowed to hold the full amount in cash, stocks and shares, or a combination of the two thanks to the simplified ‘New Isa' or Nisa.
And for the very first time, p2p loans will be allowed to be held in Isas, letting people access returns that are usually much higher than those offered by traditional providers and to be able to do so tax-free.
The move has been seen as a significant moment in the history of peer-to-peer lending – and potentially for savers who have grown accustomed to rock-bottom rates on their tax-free nest eggs.
Chief executive of p2p lender RateSetter, Rhydian Lewis, said the move would help to rejuvenate the industry, with rates of up to 8.4% possible.
According to Ratesetter, the best rate it currently offers to individuals depositing money to be loaned out to other borrowers is 4.6% – around 3% more than what you would get with a standard cash Isa. If the company's top three-year offer was included in an Isa, this rate would rise to 8.4% - a huge increase on what is currently available.
New lease of life
"This is an unprecedented opportunity to breathe fresh life into a failing sector, by expanding the horizons of a new and innovative one, and the government has not disappointed," Lewis said.
"By including peer-to-peer platforms in Nisas, we will be able to give cash-strapped retirees and young people struggling to get on the property latter the help they need.
"We have found the Nisa-ability of peer-to-peer will be most popular among pre- and post-retirees in search of much-needed income and savvy, urban young professionals looking to consolidate their future.
"Savings security should not be a concern with them if they place their cash with a reputable peer-to-peer player."
Chief executive of fellow p2p lender Zopa, Giles Andrew, said: "Peer-to-peer Isas are a game changer for UK savers.
"They will earn three times more interest; tax-free, than from the disappointing low-rate cash Isas available from banks, without having to rely on the riskier stocks and shares ISA options currently available."
However, money expert Andrew Hagger of Moneycomms.co.uk isn't convinced ISA rates will lurch skyward just yet. He said given that Isa rates among the traditional providers had been so low in recent years, a sudden upturn would be unexpected.
However, he is hopeful that rates will improve. "Many providers have been asking for bigger Isa limits and the ability to use the full allowance in cash, let's hope they now step up to the plate and do their bit by offering competitive deals when the new increased tax-free savings limits kick in," he said.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.