THE INNOVATIVE FINANCE ISA

HE NEW BREED of Innovative Finance Isa offers savers far more generous rates of income, but you will not be surprised to hear that it also comes with additional risk. You have to understand both the potential rewards and the risks to judge whether this is the right home for your money.

The Innovative Finance Isa, or Ifisa, was announced by the Government in April 2016, giving ordinary savers the opportunity to invest in growing British businesses free of tax through the growing peer-to-peer (P2P) lending market, sometimes called crowdlending.

P2P platforms connect people who money to save with individuals or smaller businesses who want to borrow money, offering both sides a better rate by cutting out the banking middleman.

Thanks to the Innovative Finance Isa, savers can now put money into the sector and take their returns free of income tax and capital gains tax. Scheme, which protects the first £85,000 of traditional cash Isa savings.”

There is always the danger that one of the individuals or businesses you lend money fall into arrears, default or go bust, and you lose some or all of your money.

However, all platforms must be regulated by City watchdog the Financial Conduct Authority, which means they have all been scrutinised carefully before being authorised.

Most platforms work hard to minimise risk, carrying out credit checks on prospective borrowers and in some cases spreading your money between a large number of different individuals or companies.

Hagger said: “Every platform adopts a different approach, so check what your choice does to minimise risk.” Innovative Finance Isas all offer different prospective returns, with higher target interest rates typically reflecting higher risk.

Landbay targets 3.54 per cent, Zopa aims for 4.6 per cent a year, Ratesetter offers between 3 and 6 per cent and Money&Co an average of 8.6 per cent. At the riskier end of the scale the RebuildingSociety is aiming for 9.7 per cent.

Andrew Lawson, chief product officer at Zopa, said the Ifisa offers an important middle ground between safe but unrewarding Cash Isas and the greater volatility of Stocks and Shares Isas.

“By offering retail investors a well-diversified portfolio of low-risk loans, an Ifisa can provide a reasonably predictable, stable, and attractive return on your money.” So-called “City superwoman” Nicola Horlick has entered the sector by launching an Innovative Finance Isa through her new venture Money&Co, and says it offers savers relief after years of near zero interest rates.

“You have the freedom and flexibility to choose exactly which companies you want to put your money into, adjusted to match your own personal attitude to risk.”

Some sites allow you to invest from as little as £10, which allows to get a feel for the sector without putting too much of your money at risk, others set a higher minimum of £1,000.

You can invest your full £20,000 Isa allowance if you like, and even transfer underperforming Isas from previous years.

You can only take out one Ifisa each year, but you can also invest in cash and stocks and shares Isas as well.

This is an entirely new area, and undoubtedly an exciting one. The interest rates are hugely tempting but, before you decide it’s for you, just make sure you understand all of the risks.