200k inheritance. What to do?

Upwind

bowlhead99 wrote: »

I would say yes. Making unsecured lending to indivduals or companies, in one country, for £75-90k total, using only 3 main platforms, is a bit 'eggs in one basket' to me.

If you don't already have any other asset classes beyond cash (say, investment funds that invest in shares, corporate and government bonds and commercial property, etc etc etc, both in the UK and internationally?), then it sounds like you are planning to put a lot of your whole 'net worth' in one asset class and one economy (the UK) and you are using few providers which gives you a risk of things going wrong.

There are lots of different types of risk, so bit of a long answer.

Keeping your money in low interest bank accounts (whether ISA or not) gives you inflation risk (long term, you will struggle to get a return equalling inflation and so you can never take any money out while still having the interest receipts keep up with inflation).

Also, it gives you shortfall risk (presuming you have some long term objective to actually make money with your capital, you are probably doomed to fall short of that because you can't make any money out of a risk free deposit account where the money just sits there until you ask for it back.

The higher interest bank accounts are nice and not to be ignored because the rates are better than inflation, and your deposited money is guaranteed, but are only really a temporary solution. Once interest rates rise and you can get reasonable rates all over the place (albeit with higher inflation, probably), banks will not want to keep blowing their marketing budgets to continue to stand out from the crowd by paying super premium headline rates on the first £x in your account. They will go back to other perks or account features or services or exclusive other products to tempt you in, as they did 5 years ago and 10 years ago and 20 years ago. So, at some point, current accounts will probably stop being a sensible home for your cash.

So looking at the p2p lending option as something different...

P2P lending is basically making loans at fixed rates to people or businesses. Again you have inflation risk because you are locked into a rate which won't rise as inflation goes up. You promise they can have your money for 5 years and they aim to give it you back. If the economy is booming and inflation is rampant and some of the businesses or people you lend to are very successful, you get your money back but you don't share in their profits in any way other than getting paid what they said you would.

Meanwhile, the people who aren't successful will just not pay you back. This is 'credit risk'. They just might not be creditworthy, even if they look like they are today. Some of the platforms put away 'rainy day money' to cover the loans that go bad. It may or may not be enough. Generally you pay tax on the interest you receive, but you don't get a tax deduction on the loans you made that go bad.

You also have the situation where they might pay the lending platform back the money, but the lending platform might not have enough people paying it back or taking out new loans to run its platform successfully and may go bust before paying you. In theory the loans are ring-fenced but in reality if they go under you will find it hard/impossible to collect what the middleman owes you, because you will have little pots of hundreds of loans directly with companies and individuals which you cannot effectively collect on yourself. Some administrator or rival lending platform or administrator may step in, to try to recover the loans for you over time, but might not do a good job; or might just instruct a debt collector to try to recover the money from the companies and individuals who took out the underlying borrowing at 20p in the pound because it's better than nothing. So, you have 'counterparty risk' - where a party to your investment transaction (the middleman investment platform is no longer solvent enough or resourced enough or bothered enough to see your transaction through to the end.

Unlike a cash deposit or regulated investment, there is no financial services industry compensation scheme covering P2P. In the case of savings, if a bank goes bust and can't repay you, you're covered. Not here.

You also have opportunity cost of locking into a loan for say 3-5 years because the market interest rates or investment returns on other opportunities might increase significantly while twelve months down the line, here you are stuck with your p2p loan that doesn't get paid off for another 2-4 years. You could perhaps call that 'liquidity risk'. If you commit to a 5 year lending program, then need or want the money for something else, you can't get it. Your assets are not liquid, they're locked up; the borrower is only going to pay back in line with the contract. Unlike cash in your instant access bank account or your shares or corporate bonds listed on the stock market, you can't just come up with a price for someone to take it off your hands with a day's notice. You are stuck with it through thick and thin. If you want to sell the loan on, second hand, there is not much of a secondary market, if any, and you won't get back what you paid.

So, if you get over the 'liquidity risk' problem because the platform has a method of giving you an early exit, you instead take on 'investment risk' because the market appetite to buy the loan off you just might not be there unless you're willing to offload the loan for less than you paid.

Also, the borrower probably has better terms than you. If he wants out, because Nationwide are able to give him a loan at 4.2% rather than the p2p company at 6%, he can probably just pay you off. So you get a portion back early and you don't get 5 years worth of interest you only get a couple of years. But you locked yourself into the contract so as a lender you didn't have the flexibility to get out early. So if market rates go down you just get your money back and have to reinvest elsewhere at a lower rate, while if rates go up you just have to suck it up and keep on with the loan you're stuck with. So, the risk of being exited from the lending arrangement early, and having to find something / someone else to invest in for the rest of the term while you keep the other loans running, is a type of risk.

You get repayments as you go along. So if you lend out £5000 over 60 months at 5% to an individual who wants to buy a new car, you'll get a bit under £100 back each month as it gets paid off in chunks. On average, if you start with a loan of £5000 and it goes down to nil, only a bit over £2500 on average will really be invested for the term because people keep paying you off every payday. You have to decide what to do with that money - lock it up for another 5 years at whatever the going rate is, that month? Or take it out to spend it? Unless you manage your account carefully, putting the money back on loan for shorter and shorter terms, you don't really get to deploy the whole £5000 for exactly 5 years and take it back at the end, which might be frustrating compared to a bank account or other type of investment.

Other risks? How about tax risk - at present you can't do this within an ISA or pension. Ok, it's not a risk, it's a certainty. For most people they receive back much less than the headline rate due to taxes as well as charges and bad debts. Meanwhile all taxpayers and future taxpayers can benefit from investments which offer tax relief - for example maxing your ISA allowances now and in the future, increasing your pension contributions to save income tax etc etc. Putting all your eggs into the p2p basket means you may not have the spare funds to take advantage of all these tax reliefs available to you. Deploying cash into unsecured lending may sacrifice the opportunity to use a tax benefit that the government is offering you now.

Worse, you may find that if ISA allowances are extended to p2p investments in a couple of years time, you can't participate, as your money is already tied up in 3-5 year loans and you can't have it back to invest in new loans or other investments inside tax wrappers for several years to come.

No doubt, p2p can be lucrative. According to the headlines, it pays a better return than cash. But that's because it is riskier than cash and no fool would use the service if they only paid returns at the same level as cash.

If you can afford to tie your money up for longer (i.e. you are not going to need to blow the £100k on a new house in 4 or 5 years) I would be allocating some of it to investment funds within S&S ISAs, some of it to investment funds outside S&S ISAs, some of it to pension, and some of it to P2P lending. £80-£90k of p2p if your only other assets are cash-based, seems you are missing out on equities, real estate, high yield bonds and so on, which can go inside S&S ISAs and pensions and provide you some long term growth. Rather than a fixed target return with credit risk and no tax advantages.

I was hopeful of a more comprehensive response........

Thank you BH99. I take your point on several issues and it has given me some food for thought. I may need to look to some investment bonds and perhaps even some other avenues...

Thanks again...

le_loup

bowlhead, you are a National Treasure.

atush

I agree that you need to address the OH's pension so contribute up to his earned income in the lgps and a personal pension. His income can be replaced by income fronmt he 50K in current accts.

I agree seeing an IFA is a good idea, but I would also address big ticket items if you have any such are replacing old cars, and doing important outstanding maintenance on your home and any small improvements that need making (ie are your bathrooms and kitchen 20 years old etc).

bristol_pilot

bowlhead99 wrote: »

you pay tax on the interest you receive, but you don't get a tax deduction on the loans you made that go bad.

This reason alone is why I don't 'invest' in P2P.

Smithy101

Don't listen to the silly voices here warning against IFA's - if you want piece of mind and someone to do it for you then use then. It might be the best option for you.

If you want to do it yourself however, be aware if you invest all your money in cash investments (Cash ISAs/Savings accounts/Premium Bonds) - don't think these are risk fees because inflation eats them up.

The only way to profit in the longterm is from the stock market.

Have you heard of investment trusts? They've been going since the 1800s they're like a company like BP or Tesco but instead of owning a business they invest in the stock market.
If you think that's risky many have records of increasing their dividend EVERY YEAR for 30, 40 or more years.
Have a look at WhichInvestmentTrust.com or see these low cost and conservatively managed investment trusts: Finsbury Growth & Income, Scottish Investment Trust, City of London, Scottish Oriental Smaller Companies (this one returned over 800% over 10 years).

Investors Chronicle covers them well too and doesn't cost much to subscribe.

Ryan_Futuristics

bristol_pilot wrote: »

This reason alone is why I don't 'invest' in P2P.

Well it's not quite right

According to Funding Circle (who are the only major platform paying what I consider a worthwhile rate above cash):

Taxation relief for irrecoverable loans

- Unlike peer to peer lending where individuals lend to other individuals, relief from Capital Gains Tax may be available on loans which become irrecoverable at Funding Circle.

- In broad terms, in order to qualify for relief the loan must be made to a borrower who:
- Is resident in the UK, and
- Uses the money wholly for the purposes of a trade.

https://support.fundingcircle.com/entries/22557912-What-are-the-tax-consequences-of-lending-as-an-individual-


@bowlhead

Re: Not being able to put the money in a tax-wrapper

While I'd only have a certain allocation to P2P lending, it's not exactly tied up

The money's coming back in daily - so if you turn Autobid off, it just builds up (so you could syphon money between an unwrapped and a wrapped account) ... But you can also sell loans back very simply (which I've not done yet) with only a 0.25% charge

Waiting for them to become available in ISAs could be a bit like waiting to get in the stock market ... It could be that you can only secure these 7-14% rates now, before it becomes too popular


It's not the *known* knowns which seem to be problems - it's the potential for unknown unknowns ... But with cash savings fiddly and limited, bonds expensive, and the stock market neither particularly good nor bad value, P2P lending feels like it should probably have a place in everyone's portfolio at the moment

bristol_pilot

Yes, its the unknown unknowns. I suppose what really spooks me about P2P is who on earth borrows money for anything other than a mortgage anyway? Only the fekless* and desperate surely? The mere fact that they need to borrow money in the first place renders them a high risk in my eyes.

*I know this is not the correct spelling of this word, but the forum thinks the correct spelling is a rude word and blocks it!

MissM0neyPenny

Lucky you, I wish I had that problem!!
If I had that type of money, I would get a buy to let property, let it out, get an estate agent to manage it for me and enjoy the monthly rental income. Property seems to be the safest place to invest money because house prices always increase over time, apparently doubling every 10 years or so.

davelester414

Surely property cannot continue to increase in value with the way things are....

kidmugsy

MissM0neyPenny wrote: »

Property seems to be the safest place to invest money because house prices always increase over time, apparently doubling every 10 years or so.

Priceless. Is that true of bridges too?