Innovative Finance ISA
Innovative Finance ISAs are a kind of Individual Savings Account offered by certain Peer to Peer Lending platforms that offer a tax-efficient wrapper for investments in Peer to Peer Lending (P2P).
Innovative Finance ISAs grant a way for investors in Peer to Peer to earn tax free interest on their investments. IFISAs are offered by a selection of Peer to Peer Lending Platforms.
As an Innovative Finance ISA is its own distinct kind of Individual Savings Account you are also permitted to open a separate investment and/or cash ISA with the same tax year, however savers who do so will need to break up their annual allowance between the three account types if they do so.
A New Type of ISA
The Innovative Finance ISA is a new type of ISA that is a half way house between a cash ISA and a stocks & shares ISA. IFISAs basically allow you to become a lender through utilising an online platform which connects you to willing borrowers. The interest that you earn through peer-to-peer (P2P) lending is not subject to any tax.
Typical rates of return range from over 2% for short-term loans to over 8% for loans that last 5 years or more.
As with cash and stocks and shares ISAs you are permitted to only open one such ISA per year.
How does peer to peer to peer lending work?
Peer to peer lending platforms allow investors to directly lend money to people and businesses that are looking for a loan, as there is not a middle man such as a bank or building society it may offer better rates.
Although peer-to-peer lending platforms normally have a way of assessing the credit worthiness of their borrowers and may encourage you to spread investments, as borrowers can default on their loans, peer to peer lending is a capital at risk investment, meaning investors could lose some or all of the money invested.
P2P platforms are now obligated to have a provision funds to reimburse lenders in the result of financial loss. FCA regulation requires P2P fund provision to be at least £50,000 by April 2017 but most high profile lenders have much larger funds in excess of millions of pounds. This means that your original capital investment should be protected and you should also receive interest even if the borrower (s) were to cease repayment (s).
Some providers may have a provision fund to cover you in this event; however money invested in an IFISA is still not covered by the Financial Service Compensation Scheme (FSCS) which is a designed to protect savers in certain account types should their provider go out of business.
Is a IFISA right for me?
The suitability of any savings or investment product really depends on your circumstances and attitude to risk. If you are unsure you should seek independent financial advice.
Choosing an IFISA
There are a selection of IFISAs available from different providers, so it is worth shopping around to find the option that you feel meets your requirements. With the launch of innovative finance ISAs in April 2016 the roll out of new products has been slow as the regulator The Financial Conduct Authority has been taking time to approve new providers in this relatively new investment market.
