Peer To Peer ISA – 5 Ideas For Your 2018/19 ISA
Savings accounts and cash ISAs are struggling to stay ahead of inflation this year. With your annual ISA investment limit raised to £20,000 last year, this may be the time you want to look at a new type of ISA which offers around double the yield of a Cash ISA (with an increased risk, naturally).
What is peer-to-peer investment?
You may be more familiar with it as internet-based crowd-funding. At its simplest it’s a form of lending that cuts out the middleman (that is to say, banks) and connects lenders directly to small, innovative businesses that need funding, allowing borrowers to pay less interest but also giving higher returns to investors.
The UK government stepped into the peer-to-peer lending space as a lender at the end of 2012, making some direct loans to innovative SMEs. In April 2016 the government launched the Innovative Finance ISA, to encourage individual investors to get into peer-to-peer funding with the added tax-free advantage of an ISA wrapper.
Effectively, you are able to invest in a business by buying some of its debt in “crowdfunding debentures”: similar to a bond, paying fixed interest over a period of time, and you’re not charged tax on the interest you earn.
The scope of the Innovative Finance ISA covers peer-to-peer lending platforms, such as the examples we show below, but it doesn’t extend to equity-based investing.
How much can you invest?
As much as you like, but only the first £20,000 per year will be eligible to sit inside your Innovative Finance ISA.
You can split your £20,000 allowance across various different types of ISA (Cash ISA, Stocks & Shares ISA, Innovative Finance ISA, etc), but the combined amount invested during the tax year must not exceed your personal limit.
You’re only allowed to hold one Innovative Finance ISA account each tax year. But you will be able to open a new Innovative Finance ISA with a different P2P platform each tax year.
Who can invest in an IFISA?
Any UK taxpayer aged 18 or over.
Unlike with Cash ISAs, there are no immediate plans from the government to introduce a Junior Innovative Finance ISA for under-18s.
Pros and cons of an IFISA?
- The big plus is the more attractive return.
- But peer-to-peer lending is a more adventurous type of investment, and these kinds of loans are not without risk. You don’t want to just be comparing interest rates on a like-for-like basis against bank or building society Cash ISA accounts.
- Unlike a UK bank or building society account, peer-to-peer lending is not currently protected by the Financial Services Compensation Scheme (FSCS).
- What that means is that individual P2P lending platforms have different discretionary arrangements for protecting investors’ money, but their reserve funds are not regulated and the platform’s ability to cover all defaulted loans is not guaranteed.
5 to look at
Their IFSA offers easy access to the UK property market: you become a mortgage lender, secured by first charge on British property.
Terms: 2-5 years
Invest from: £100
Earn: 4.4% fixed interest
Limited offer: an extra 2% on shares and 1% on loans in Year 1
Feels like crowdfunding, allowing you to choose the businesses you invest in. You can start very small, and make monthly additions to your investment.
Term: 1-5 years
Invest from: £10
Earn: estimated 8.7% APR
If you like the brand you could feel comfortable here, and the easyMoney bonus card gives you savings of up to 55% at more than 100 British retailers.
Term: no fixed term
Invest from: £10,000
Earn: target 7.28% annualised return
Automatically diversifies your funds across at least 20 loans in their Loan Market, with no more than 5% of your funds in any one loan.
Term: no fixed term
Invest from: £1,000
Earn: target 6% return
Summer offer: up to £400 cashback if you invest before 31 August 2018
The option of a Rolling, 1-year or 5-year term is useful. For the Rolling and 1-year terms capital and interest is repaid at the end of the term you’ve opted for. With the 5-year term interest is repaid when the loans are repaid.
Term: Rolling, 1 year or 5 years
Invest from: £10
Earn: up to 5.2% annualised expected return
New investor offer: £100 bonus when you invest £1,000+ for a year.