7 Questions to Ask Before Opening an Innovative Finance ISA
Innovative Finance ISA introduced:
An Individual Savings Account creates a tax-free zone, or wrapper, for a limit of £15,240 of your savings and investments.
The Innovative Finance ISA (IFISA) for marketplace investors (peer-to-peer) will be available from 6thApril, 2016. This high rate ISA is the third type of ISA available alongside Cash ISA and Stocks and Shares ISA (there is also a ‘Help to Buy’ ISA for first time house buyers).
Let’s assess the benefits, the pitfalls and where you can get one of these “P2P ISAs”.
1. What benefit does the new Innovative Finance ISA give me?
The Innovative Finance ISA gives you tax-free interest on the loans you make through peer-to-peer lending UK platforms. You can make that transition from searching for the best savings rates to making an alternative investment and earning one of the best investment rates on the market, now that the UK government has introduced this high interest ISA product. There is a limit to what level of investment shall earn tax free returns, however; £15,240 is the limit across all ISAs.
2. What is my allowance?
The limit of £15,240 is not just for peer-to-peer investments made through your Innovative Finance ISA. The limit applies to all investment and savings, which are cash, stocks and shares and investments in P2P lending. How you wish to distribute the allowance is up to you.
3. How can I spread the allowance?
You can divide it, for example, £10,000 in Stocks and Shares and the remaining £5,240 through investments in marketplace lending (P2P), or simply invest all £15,240 through the Innovative Finance ISA in multiple peer-to-peer investments (or single, up to you). Be conscious that there are rules around withdrawals, particularly through your IFISA, so find out the policies on ISAs here: ‘Innovative Finance ISA 2016: Overview’.
4. What can I earn through an IFISA?
Just so you’re aware, no P2P platform has been granted permissions to hold an IFISA, as of yet. They will get them, but it takes time. Let’s look hypothetically at RateSetter’s IFISA. According to RateSetter’ calculations, if you invest the full £15,240 in the IFISA (a five-year term earning the current average of 6.18% p.a plus assuming you are a higher rate taxpayer) you will be able to save as much as £376 per year. Not bad for someone who was once maybe a saver, and now a high interest investor? Remember this, there are multiple products on the peer-to-peer lending UK market, so compare P2P lending opportunities on our home page now.
5. Is there any FSCS protection like I get with my savings?
Unlike savings or investments in banks, where you’re covered up to £75k and £50k respectively, with marketplace lending products (P2P) you are not covered by the Financial Services Compensation Scheme (FSCS). This means that your investment is at risk, especially in the case of a platform ceasing trading or becoming insolvent.
6. No FSCS coverage, how is risk mitigated then?
All UK platforms implement their own risk-mitigation procedures, including asset-backed security, provision funds (safeguards) and strict underwriting criteria. As a 10-year-old industry, with over 50 active platforms, P2P lending boasts an impressive record for safe-guarding and growing its customers’ investments.
In addition to the safety measures – resulting in an industry average default level below 2% – the FCA has announced that they will engage in consultation around bringing marketplace lending under the protection of FSCS, and will review the regulatory framework in 2016. So fingers crossed.
7. Who can I open an IFISA with?
Currently, there are only two P2P lending platforms who are fully regulated by the FCA and approved by the HMRC as ISA plan managers allowing them to offer the Innovative Finance ISA. They’re listed below.
With Crowdstacker you manually select British SME businesses to invest in.
Here are the two investments you can currently lend to across Crowdstacker:
Target raise: £10million
Raised to-date: £5,437,117 (since Q4 2015)
Interest rate: 6.39% per annum
Term: 12, 18 or 36 months
Security: £45m assets
Min investment: £1,000
Next closing: 22nd July 2016
Target raise: £3million
Raised to-date: £3,163,095
Interest rate: 6.8% per annum
Term: 3 years
Security: residential property
Min investment: £700
Next closing: 22nd July 2016
With Crowd2Fund, similar to Crowdstacker, you manually select British businesses to invest in where a personal guarantee is taken to secure the loan.
Interest rate: 8.7% per annum (average)
Min investment: £250
You will soon be able to get IFISAs from major P2P lending platforms, such as Zopa, RateSetter, Funding Circle and so on in time. Expectedly, this may take much of 2016, due to a backlog in FCA regulation procedures. It was also announced last week that 3rd party ISA Providers can also offer Innovative Finance ISAs, and, this is the exciting part, you can hold multiple peer-to-peer products within one IFISA! More on who offers IFISAs here: ‘Peer-to-Peer ISA changes benefit savers 2016’.
At the end of the day it all comes down to research. Comparing peer-to-peer lenders, to find out which is the best platform for you to invest across, for your risk appetite, is essential. For new investors in this asset class, there is a degree of risk, it is not a savings product. Be assured, data and information is at hand, empowering you into becoming an investor and earning the best interest rates on offer.
The IFISA is a massive win for the peer-to-peer industry. This shall be remembered as a huge step in marketplace lending transitioning into a mainstream asset class.