What is a Peer to Peer ISA?
A Peer to Peer ISA sounds complicated – but to the experienced and keen investor, it can be a great way to diversify your portfolio, try a new, innovative form of investing, while benefiting from the tax benefits associated with an ISA account. But what exactly is a Peer to Peer ISA, and which ones should you be looking at?
What is an Peer to Peer ISA?
Also known as an Innovative ISA, a Peer to Peer ISA is makes use of the ISA platform by using peer to peer lending (P2P).
This does what it says on the tin: a peer can lend to a peer.
In these types of ISAs, savers are able to choose to lend their money to a borrower directly rather than going through a middle man – this cuts out stages to the process and also means that the lender (in this case, maybe you) can benefit from a better interest return on their investment.
There is a fairly big range of different platforms which offer Innovative or Peer to Peer Lending; this means whether you are looking to lend your money to others and enjoy the returns, or looking to borrow money through this platform, there is a lot of choice.
How does it work?
Like any ISA, this allows investors to gain returns on their investments which are protected from the taxman because it is within the ISA wrapper; the UK government allows every British adult to put up to £20,000 each year into an ISA or ISAs, the returns of which will be safe from capital gains tax.
This type of ISA are typically available online, and allow you as an investor to put your money into various types of funds of which borrowers can seek various types of loans (e.g. personal, business, property).
Your money will then be lent to individuals and ideally generate returns.
In order to get a Peer to Peer ISA you have to be…
- Over the age of 18
- A resident of the UK
- A UK taxpayer
What are the risks?
This is a more risky form of investment when it comes to ISAs so it suits a more experienced investor who also has a fairly good tolerance for risk.
The risk with any investment is that you could theoretically get less money back than the amount that you put in.
But with Peer to Peer lending, this is slightly riskier – especially as this kind of investing is not currently under the protection of the Financial Services Compensation Scheme (FSCS).
It is, however, regulated by the Financial Conduct Authority.