Innovative Finance ISA 2016: Where Are We Now?
The announcement of the Innovative Finance Individual Saving Account (IF ISA) was a big milestone for the peer-to-peer lending (P2P) industry. This IF ISA was made available on 6th April, 2016. It’s been almost a month since the new tax-efficient wrapper launched and with it came permissions granted to financial advisers to recommend P2P products to their client-base. So, how does the P2P landscape look after a landmark month for the industry?
ISA Investors Take Notice
First, what does the IF ISA mean for the average investor? Before the IF ISA, you had your major adult ISAs: Cash and Stocks & Shares. People could invest up to £15,240 annual allowance into stocks and shares and save their capital in a cash ISA product (or a combination of the two totalling no more than £15,240). Any returns would be free from income and capital gains tax.
The launch of the Innovative Finance ISA gives investors the opportunity to earn attractive, risk-adjusted returns, uncorrelated to the stock market. With a cash ISA your capital will be doing well to generate meaningful interest and with a stocks& shares ISA you are exposed to market fluctuations; the returns and stability offered by an IF ISA proves advantageous, provided you’re appetite for risk is suited to a P2P investment. A typical Cash ISA product offered by banks pays out an average annual interest of 1.17% (rate calculated in January 2016). You can get an average annual rate of 5% per annum from a peer-to-peer platform.
What Does This Mean for Banks?
A peer-to-peer investment, unlike banks deposit, is not regulated under the Financial Services Compensation Scheme (FSCS). If a bank defaults, the FSCS ensures that up to £75,000 savings and £50,000 investments will be compensated. This is not the case with P2P lending.
In saying that, the launch of the IF ISA has brought about a whole new level of safety for peer-to-peer investors. Only those peer-to-peer platforms which have been cleared by the Financial Conduct Authority and approved by the HMRC will be able to offer the IF ISA.
Moreover, the regulator will now hold financial advisers to account should they inadequately advise P2P products. We believe that the introduction of regulation around advice will encourage the wider wealth management sphere to start recommending P2P investments.
In essence, banks still play an extremely important part in an investors portfolio. Moreover, a cash ISA exposes those saving in one to very little risk.
Which P2P Platforms Offer the IF ISA?
Crowdstacker IF ISA
This SME focused peer-to-peer platform allows you to manually select British businesses to invest in. They are one of few platforms authorised and regulated by the FCA and approved by the HMRC as an ISA plan manager.
Below is a list of their investment products currently available.
(*Statistics correct at time of publication)
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
Target raise: £3million
Raised to-date: £3,163,095
Interest rate: 6.8% per annum
Term: 3 years
Security: residential property
Min investment: £700
Crowd2Fund IF ISA
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
RateSetter, Zopa and several other peer-to-peer lending platforms announced before April that they’d be offering the IF ISA. When exactly? That remains to be seen.
It was expected that platforms, including the big three (Zopa, RateSetter and Funding Circle), would be able to offer IF ISAs by the end of April. Many major platforms are still vocally assuring their investors that they are working with the FCA to receive full authorisation. This may take months, it’s really unknown.
From today we have four days until April’s end. We are all waiting with baited breath to find out when the major players will be able to offer the Innovative Finance ISA.
Providers that are currently offering the IFISA are as follows:
- Abundance Generation
What Will an IF ISA Return?
To be clear, it is your peer-to-peer investments that pay out. The IF ISA is a tax-efficient wrapper that you hold your P2P products in. An IF ISA can be opened through an ISA Plan Manager. ISA managers come in the form of peer-to-peer lending platforms, where the platform’s products can be stored within the ISA wrapper. Third party providers can also offer the IFISA, allowing for multiple P2P products from a number of platforms to be held. Let’s take a peer-to-peer platform as the ISA manager: Zopa’s existing three products will be available within the IF ISA wrapper. The return on investment will be the same as their existing return. Their existing return percentages are:
- The Access account offers 3.5% per year
- The Classic account offers 4.5% per year
- The Plus account gives you 6.5% per year
Doesn’t a Stocks & Shares ISA Provide Similar Returns?
A stock market investment could give you better returns over the long term. With a stock market investment, however, comes market fluctuations which can drastically impact your investment, negatively as well as positively. Investing in peer-to-peer platforms is comparatively more stable and does not suffer from the volatility of the stock market. P2P lending is a relatively new alternative investment, so assessing risk and establishing which of the varied platforms and products you’d like to invest across is important. An independent data and research service allows you to access and analyse the multitude of products available on the market. Standardised metrics allows you to accurately benchmark investments, and insight and commentary supports all analysis so you don’t have to do all the work yourself.