What Would I Do With £70,000?
A spam e-mail turned up in my Inbox asking me what I would do with a lump sum of £70,000.
I would have no hesitation and I would stick it into a peer-to-peer lender, that had a mechanism that protected my lump sum and gave me interest. Without doing the research, I think that is either Zopa or Ratesetter, at present. But there may be others with an equally safe risk profile.
Zopa, the one I know best, has given me the following.
1. A safe haven for my money, until I want to do something else.
2. 5.1% interest before tax.
3. The ability to either roll-up or take-out the repayments and interest.
4. You might also get invited to the occasional party to meet the team. You might meet mavericks like me there too!
Dont’t put your lump sum near any wunch of bankers. The Bank of Mattress is probably a safer investment.
Why Bother With Traditional Savings Accounts?
The Sunday Times today, has an article entitled Savers Face Clampdown On Access To Top-Rating Accounts. Here’s the first two paragraphs.
Savers are struggling to access the best-paying accounts as banks and building societies impose restrictions, such as limiting customers to certain postcodes, and slash the deposits that can be held.
A report for The Sunday Times by the consumer group Savings Champion shows the amount that can be saved in the best buy accounts has shrunk significantly in two years. In 2012, you could save up to £1m in the top two best-paying easy access accounts and up to £9m in the third-ranked. Today, the top three easy access deals allow up to £3,000 or £6,000.
And there’s a lot more in the same vein.
For nearly eight years now, I’ve not used a traditional savings account. I have over a hundred thousand of my hard-earned money in an account with Zopa and in that time, I’ve earned over five percent.
The banks can only get savers to invest in their rip-off products, as they know there are several hundred mugs born every minute.
And to me the great thing about Zopa is that it is not just a high-interest account, but one with fast planned access, where you can start saving with as little as a tenner. I talked about how to use an account to your advantage here.
You don’t have to live in a specific postcode, or have millions to play with and so long as you’re over eighteen and fund your Zopa account from a UK bank account, you’re in the club.
I should also say that with Zopa, I will also include other reputable peer-to-peer lenders. But I’m entitled to have my preference.
Managing Zopa As A High-Interest, Almost Instant-Access Deposit Account
The media is full of articles and comment moaning about the derisory rates that you can get on any savings. There is also the related moan, that if you sign up for some higher-interest account, your money is locked away for several years.
So what does the average man on the Dalston omnibus want from a savings product?
1. A Very Low Chance Of Losing Their Money
You’ve worked hard for the money and you don’t want to lose it. One of my friends, a very sensible Irish doctor, put all his savings in an account with an Icelandic Bank. That broke one of the golden rules of saving by which I live – Never trust your money to anybody domiciled outside of where you live. Would I bank with Santander? Of course not!
2. The Best Possible Rate Of Return
Certainly better than you’d get from a reputable bank or building society.
Note the Rule of 72, which says that if you divide the interest rate you’re getting into 72, that gives you the years to double your money. So if you’re getting five percent, that will mean it doubles in 15 years. But two percent takes 36 years.
3. Instant Access Would Be Nice
Obviously, it would be nice to be able to remove your savings from the account without suffering any penalty or charges.
4. The Minimum Possible Level of Management And Paperwork
We all want to put our money, in a place with the convenience of the Bank Of Mattress.
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So does a product exist that gives us all we need?
It is my view, that a peer-to-peer lending platform, and Zopa in particular, can be used as a high-interest instance-access deposit account.
In this discussion, I’m using Zopa as it is the peer-to-peer lender I know best. But the analysis could probably apply to your own favourite.
Zopa also has the following features.
1. Your Investment Is Probably Safe
I say probably, as occasionally, one of my loans has gone into default, but now Zopa safeguards your money. Here’s what they say on the website.
Earn great returns on your savings with peace of mind. The Safeguard is a fund designed to step in and give you back all your money, plus interest, in the rare event a borrower cannot repay. Find out more about the Safeguard fund.
But even so, my losses on older loans before Safeguard have been about four percent of the total interest I have earned on my investment.
2. Automatic Reinvestment
If you should so choose, you can re-invest any money that is credited to your account because of interest earned or loans repaid.
I don’t use this feature, unless I’m going away for a few days and probably won’t be checking my Zopa account.
I normally re-invest any money returned manually, as I might need to invest it in something else!
But the automatic reinvestment can be easily switched in and out.
3. You Are In Control
If you want to add more money to your Zopa pot, it is just a simple transfer.
If you want to remove some of the repayments or interest, it is just a simple transfer out and this has got faster recently.
The only restriction, is that transfers must be from and to a UK bank account.
4. You Are Not Part Of The Loan Management Process
On the other hand, you are not part of the loan management process and so you don’t get involved with any tedious paperwork or micro-management. As I have thousands of loans in Zopa, it’s a process I want no part of it.
As a software man of a certain experience, I would prefer to trust well-written software rather than my own judgement.
5. One Percent Fees To Savers
Click here to see what Zopa says about fees to savers.
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My use of Zopa is to have a sizeable part of my assets there, balancing it with less risky assets like shares in BP or HSBC. I add money to Zopa, as and when I have spare funds available. Usually, this is around the 12th of each month, as that is after all of my monthly bills have been paid.
Recently, I have needed extra funds for work on my house, so I’ve withdrawn money from Zopa at times, instead of re-investing it.
So to return to using Zopa as a high-interest instance-access deposit account.
1, Earnings From Zopa
I find that I’m earning about five percent before tax on money invested in Zopa.
But what is interesting is that for every £50,000 I have invested in Zopa, repayments, interests and capital repaid come to about £2,500 each month. This figure might be lower for someone investing now, as a lot of my loans are to sensible individuals for five years and weere made a couple of years ago.
2. Balancing Zopa With Your Bank Account
So this money can either be reinvested or if you need some extra funds repatriated to your bank account.
One thing that helps is that a large proportion of clients repay their loans on or about the first of the month. So a large amount of money is received in the first week or so of the month!
By careful budgeting and transferring money between Zopa and your bank account, you can maximise the amount of money, that is earning you more money in Zopa and keep your bank account in what you consider to be the black.
3. Matching Your Agreed Overdraft Limit To Zopa Monthly Cash Flow
I should say that my agreed overdraft limit on my current account, is sensibly matched with the amount of money, I could normally be able to repatriate from Zopa in a month.
This means that in a month with heavy expenditure, I don’t drop myself in it.
4. Flexibility
If say one month, your horse has just come in and you’ve won several thousand in the 4:15 at Kempton, you can leave the money to accumulate.
And if in another, your car needs repair, you can take out everything you can.
5. You Can Cash It All In
I often wonder what would have happened, when my wife got cancer, if we hadn’t had any money or two sons who could drop everything and help. It would have been difficult in the extreme.
But a Zopa fund could have been liquidated without penalty and used as income in the last months or years of my wife’s life.
You can sell on good loans, but I’d have just not bothered to reinvest any money and transferred it all out of Zopa.
6. You Can Start In A Small Way
Most investments require a large sum to get started, but you can flirt with Zopa to see if it for you for as little as ten pounds.
7. Transfers To And From Zopa Are Going To Get Faster
This is something that is happening and will improve all our lives in the future.
But it particularly helps with an investment like Zopa, where you’re effectively using it as a quick-access deposit account.
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It wouldn’t be fair not to state the disadvantages.
1. You Can Earn More With Other Peer-to-Peer Sites
There are always other better ways of earning higher returns, but then they usually come with a higher risk profile.
2. It All Sounds Too Good To Be True
I am not a Financial Advisor, but a Control Engineer and a Mathematician. On the other hand, I’m investing my own money! And I’m also prepared to show my analyses to anybody who wants to see them!
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It’s your money, so do the research and make your choice.
After all we all know the old joke about the best way to make a small fortune! Give a large one to a financial advisor!
The Stability Of Zopa’s Rates
Since Zopa brought in their safeguarding of lenders, the rates they’ve been offering for money lent over five years appears to have been pretty stable.
Average monthly rates are as follows.
Month Rate
Sep-2014 5.20
Aug-2014 5.20
Jul-2014 5.19
Jun-2014 5.11
May-2014 5.19
Apr-2014 5.00
Except for some days in June 2014, a rate of 5.2% guaranteed has been offered.
A Poor Article On Saving
The Money section in The Times has an article entitled, Safe Havens Are Offering A Poor Return
It contains this paragraph.
Why choose a two-year fixed-rate Isa offering a paltry two per cent return when you could be looking at far more for a stocks and shares Isa?
It then says that cash is less volatile.
But the article doesn’t mention the guaranteed investment I use to get over five percent before tax; peer-to-peer lending with Zopa.
Remember too, with peer-to-peer lending, you are the middle-man, so you only pay commission to yourself!
But then if Francesca Steele, who wrote the article, had the experience of peer-to-peer lending that I have, she’d probably have written a totally different piece entirely.
What Effect Would A Yes Vote In The Scottish Referendum Have On Peer-to-Peer Lending?
I’m prompted to ask this question, as there is a feature in the Times Money section today about the implications of the Scottish Referendum on personal finance.
Searching the Internet for “Zopa Scottish Referendum” there is this discussion in Zopa’s forum.
I’m using Zopa as an example, as it’s the peer-to-peer lender, that I know best.
There is nothing really of importance said and most participants don’t seem bothered.
I see a few small problems, but nothing that major for myself, as I suspect only a couple of percent of my money is loaned to those North of the border.
Scotland Bans Peer-to-Peer Lending
An independent Scottish government could decide to ban peer-to-peer lending (P2P) to protect Scottish banks. After all P2P lending is taking a sizeable and increasing part of the lending market.
This might mean that Scottish loans came into default. But I suspect that under International financial law, the loans would have to be repaid.
The main effect would be in the ability to make new loans to Scottish borrowers and accept money from Scottish savers. But that would only effect Scottish voters and businesses.
Scotland Makes Debt Recovery Difficult
Scottish law is already different to English and I’ve not heard of any P2P lenders having any problems collecting debts.
On the other hand, there are some advantages to having your money in a P2P lender like Zopa.
- Zopa has a balanced portfolio of loans all over the four countries of the UK.
- Zopa doesn’t invest money in investments that would be effected by the break-up of the UK.
- Your money is guaranteed, but this guarantee is not dependent on government favour.
- For Scottish savers, with all the uncertainty of the referendum, it might a reliable P2P Lender like Zopa, might be a safe port in a storm.
A break-up of the UK might not be plain sailing for P2P investors, but I would be very surprised if there were serious problems.
Should You Adjust Your Overdraft Limit To Your Peer-To-Peer Account?
I am going through a high spending period of the year at the moment. I’ve had a lot of expenses and my roof is being fixed. It’s also around my birthday, when I give money to various charities.
I like to keep my current account in credit or at least I don’t let it go over my agreed overdraft limit.
I also use the interest and repayments on my Zopa loans to balance my accounts, by taking amounts out from Zopa towards the end of the month and then reinvesting it around the middle of the next month.
On top of that I have a small agreed overdraft limit, so that if say, I need something urgently and don’t want to use a credit card for the purpose, I can facilitate the purchase on my terms.
Hence the question in the title of this post.
As I get about three percent of my invested sum available for withdrawal every month on Zopa, I have just adjusted my overdraft limit to that figure, to give myself headroom so that I manage my money to my advantage.
The Magic Pudding
One of C’s favourite books was the Magic Pudding. This is a description from Wikipedia.
The Magic Pudding: Being The Adventures of Bunyip Bluegum and his friends Bill Barnacle and Sam Sawnoff is an Australian children’s book written and illustrated by Norman Lindsay. It is a comic fantasy, and a classic of Australian children’s literature.
The story is set in Australia with humans mixing with anthropomorphic animals. It tells of a magic pudding which, no matter how often it is eaten, always reforms in order to be eaten again. It is owned by three companions who must defend it against Pudding Thieves who want it for themselves.
It had been published in 1918, but she had come across the book, when she was a mother’s help to a family in Norfolk. She read it to our three boys.
When I sold out from Metier, I put some money for safe keeping into a fund managed by TA Associates in Boston. The aim was that in a few years time, it would all be liquidated and the money returned for C’s pension fund.
But other things didn’t work out too well, due to a recommended investment in an office block in Bsasingstoke, which lost us about nine million and nearly everything else as well.
However, we kept going on our earnings, with a bit of help from the fund in Boston, until an investment I’d made, which everybody else said was worthless, paid most of the money I’d lost back.
The fund in Boston had been a good investment and I made a decent return, when everything was liquidated. But then the fun started, as some of their investments in the category of living dead started showing signs of life and for perhaps we had income from a fund that supposedly had been fully distributed.
C and myself nicknamed the fund the Magic Pudding, especially after we got a cheque for several tens of thousands of dollars.
Eventually, it all came to an end and C and myself were back on an even keel financially. So we sent the fund managers a copy of the book in thanks.
It was appreciated and we all parted company on the best of relations.
I have been looking since then for another Magic Pudding investment.
In an ideal world, you could put a sum of money into a bank account and you can get out a sum every so often, that you need for emergencies, like a new boiler or a holiday for your partner on a big birthday.
You would also want the capital sum to stay intact.
But to do this with a bank, you need a decent interest rate. So you can’t!
I have a sum invested in Zopa, which is around a hundred thousand. This has been built up over the last six years, by putting any spare money into the account. I started it with the money I got from selling C’s Porsche and now I top it up each month with what I have left over from my pension after I’ve paid all my bills. Typically, this sum is a thousand or so each month.
Zopa is very much a rolling fund and in addition to the interest each month, you get a proportion of capital of your micro loans repaid.
So if I look at the lsast couple of years, I usually get something like five percent of my total investment available each month.
If I don’t need any money in a particular month, the money goes back into the pot for reinvestment.
Obviously, the account doesn’t turn into a Magic Pudding Investment, until it has been running for a few years, when a proportion of your micro loans start to mature.
I would never recommend anybody to jump into peer-to-peer lending. But if you are unhappy with what your bank pays, then you should perhaps research some of long established peer-to-peer lending companies of which Zopa is one.
Think of the process of choosing a peer-to-peer lender as as you would choose a new car or house. You pick one that suits your lifestyle.
Victoria Asks The Question
Victoria Derbyshire asked this morning how George Osborne’s pension changes will affect you.
They won’t effect me, but they will effect those companies that provide the dreaded annuities, as I won’t be buying one!
I will be putting money into a peer-to-peer lender like Zopa, to provide me with a flexible income.
Suppose you had £50,000 invested in Zopa and it was generally lent out at 5% for five years. This money would be safeguarded by Zopa.
Once it was fully lent out, you would get an interest payment of £2,500 each year and capital repayments of £10,000 a year.
So in other words, you could withdraw £12,500 a year with no trouble. But if you didn’t and left it to accumulate in Zopa you would be earning more money.
Obviously, you would have to pay tax on your earnings, but the idea of using Zopa or one of their ilk, as an annuity could turn out to be a good one.
There is a rumour doing the rounds, that peer-to-peer lenders will be starting to productise their offerings, by creating specialist ISAs and flexible on-demand deposit accounts.
Peer-To-Peer Lending To Be Allowed in ISAs
The blog on Zopa has just reported that peer-to-peer lending will be allowed in the new ISAs. These new ISAs were announced in the Budget. Here’s part of the blog post.
Fantastic news for savers today as peer-to-peer lending will soon be included in ISAs as announced by George Osborne in the Budget today. The peer-to-peer ISA is an extremely exciting saving option for UK savers – enabling them to grow their money much faster, with reliable and safe returns.
By lending through Zopa with an ISA, UK savers will be able to make at least 2.5 times more interest than the sub 1.6% cash ISAs from banks with the same tax free benefit. Unlike other riskier stocks and shares ISAs, a more reliable and predictable Zopa ISA would allow every saver to become a millionaire under 30 years at the current rate of 5% if they used their full ISA allowance and would double their savings to £2m by saving for a further 11 years. Meaning that by 2044 you could be aZopa millionaire with over £649,000 in interest alone!
So after annoying insurance fat cats earlier, he’s now produced a nasty little surprise for that wunch of bankers, who like to sell underperforming investments, or products that nobody needs or wants.
The Anonymous Widower 