A Budget for alternative savers

Chancellor George Osborne’s latest Budget statement contained few major surprises for the business sector, but did serve to confirm that many of the initiatives to support the Alternative Finance industry remain ‘work-in-progress’.

For example, we are now informed that plans to create a new class of ISA specifically to accommodate P2P investments, which were first mentioned in the Chancellor’s Budget in March 2014, are subject to further consultation this summer – in other words, after the General Election in May. The more optimistic had been hoping that details would be revealed in time for the new 2015-16 tax year.

No further clarification was forthcoming from Mr Osborne either about the new mechanism through which the major banks will be compelled to refer rejected loan applicants to alternative sources of finance; the appropriate regulations under the Small Business Bill are expected to hit the Statute Book some time next month.

An area of good news for the sector was the announcement that the first £1,000 of income from savings will be tax free for basic rate taxpayers (£500 for higher rate taxpayers) and the confirmation on Thursday that this includes loan interest from P2P investments.

Mark Hawkins, FD of Invest and Fund, said: “It would take a deposit of £1 million to generate interest of £1,000 at a bank deposit rate of 1%, so consider how long it would take the average saver to benefit”, said Mr Hawkins. “However, some rates of return [from P2P] can be as high as 15% per annum which, in theory, could mean that an investment of as little as £6,667 would be sufficient to generate £1,000 of income, albeit at higher risk”.

According to Altfi data, the industry made an average return of 5.09% for investors across the last 12 months. This is over four times the amount that can be earned on deposit from a major bank or building society in the same period. Net returns will increase substantially from April 2015 when the new rules allowing P2P lenders to offset losses against tax become effective.  According to Government figures, bad debt relief on P2P loans will save investors £10m on interest earned over the next year. This amount should increase to £15m on interest earned in 2016-17 and £20m on interest earned in 2017-18.

Perhaps the most far-reaching news, however, was confirmation that pensioners will be able to sell an existing annuity in order to release cash held in their pension pot, thus bringing them into line with those not yet retired who, after next April, will not be forced to buy an annuity in the first place. This will add to the wall of cash looking for a new home.

With all of these innovations and amendments to digest, the need for independent, objective advice surely becomes even more crucial. The news is out there and people will want to know how best to benefit and what pitfalls to avoid. It is such a pity that those best placed to give that advice outside of Government – for example, members of the IFA community – have demonstrated a marked reluctance to step into the P2P business loans arena.  

As Sacha Bright, chief executive of business loans and crowdfunding aggregator, Business Agent, said: “We want to see investment in new businesses, particularly start-ups where there is the most need, but we must look at ways to protect vulnerable people through spread of risk and a sensible process of due diligence.”