22nd June 2015
The onset of new tax-free allowances and increased flexibility may spur on investors to save more but it could mean they take on more risk too, warns new research from Yorkshire Building Society.
The survey highlighted that 42% will start or increase saving when new ISA flexibility rules come into effect in the Autumn and 47% will start or increase saving when basic-rate taxpayers will be allowed to earn £1,000 tax-free on savings and higher rate taxpayers to earn £500 comes into effect next April.
However the increase in saving could mean a rise in risk-taking with one in two savers believing the new rules give them the licence to take more risks with their money. Around 10% of savers – equivalent to 1.8m – say they will definitely take more risk while 40% say they will look at more risky investments depending on circumstances.
That includes investing in peer-to-peer (P2P) lending but the research showed there was a lack of understanding of it where just 42% of people claimed to be familiar with the term – which describes how investors, lend money to others without going through a bank. Of those 60% were unaware that they had no protection under the Financial Services Compensation Scheme (FSCS).
Financial advisers are concerned that the new saving and investing rules are likely to lead to more risk-taking without investors understanding the potential for losing money. Around 70% of those surveyed say they believe clients will look to riskier investments. Nearly half, at 45%, of advisers believe the new rules will increase interest in P2P lending.
The study from the building society also showed that attitudes to returns are a guide to the potential issues ahead – its survey among savers and investors shows on average they are targeting annual returns on savings and investments of 5.3% despite historically low interest rates and recent stock market volatility
However a third, at 34% are targeting an annual return of 6% over at least five years with one in eight believing 8% or more is achievable without taking into account any need to have access to their cash or potential losses of capital.
Andy Caton, executive director at Yorkshire Building Society, said: “Clearly there is evidence from the research that some have unrealistic expectations on the levels of returns they can achieve over the long-term with some people believing 8% a year or more is realistic.
“Advice will be crucial in helping achieve success for the launch of new savings rules and we would urge anyone considering riskier investments such as P2P or equity-based investment to take independent financial advice before doing so.”