IS A BIG RETURN WORTH THE RISK?

BRITAIN’S long-suffering savers hunting returns may be tempted by the eye-catching rates of up to 11pc paid by Innovative Finance Isas (Ifisas) — but experts warn that you should look before you leap, as these investments can be very risky.

With interest rates at a low of just 0.1pc following last week’s emergency rate cut by the Bank of England, savers will be looking for new ideas on generating inflation-beating income.

Andrew Hagger, from personal finance site Moneycomms, says: ‘It’s important to look beyond the Ifisa headline rates. Tempting as they may seem, the reason they are so much higher than cash savings rates is that you are taking a much higher level of risk.’

More than £588million of savings has already been stashed into Ifisas, reports trade body the Peer-to-Peer Finance Association. And with people fed up with miserly rates on cash Isas but worried about putting money in a stocks-andshares Isa with markets so volatile, this figure could rise sharply.

Launched in 2016, Ifisas allow savers to make loans through peerto-peer lenders. They match up people who have money they’re willing to invest with borrowers — perhaps individuals who want to pay for a new car or home improvements, or fledgling businesses needing cash to expand their operations or purchase equipment.

While they can offer big returns — which, since they are in an Isa, are tax-free — the risks are far greater and the returns not guaranteed.

Mr Hagger says: ‘Investments of varying risk are available. A general rule is that the higher the return offered, the higher the risk.’

The Financial Services Compensation Scheme (FSCS) doesn’t protect peer-to-peer investors, so this means that investors can lose everything — and some already have.

The Lendy platform was offering returns of 12pc before it collapsed last May. In 2014, it started crowdsourcing funds from retail investors to write secured loans to property developers.

There was a sharp rise in defaults before its collapse, at which point about 9,000 investors were owed nearly £152 million.

A Lendy action group plans to raise a legal challenge over how the insolvency is being handled.

James Daley, of consumer champion Fairer Finance, says: ‘The peer-to-peer sector has lost public trust over the past year, as a number of lenders have gone bust or run into liquidity problems.

‘But not all of these companies are the same. Some did not have adequate measures in place to protect investors’ money, and several were not well enough prepared to deal with a sudden swell of withdrawals.’

Indeed, many peer-to-peer providers boast a zero default rate, where no one has lost any money, and pay good rates of return to their investors.

One of the most well-established platforms is Zopa. Launched in 2005, it lends money to low-risk individual borrowers and currently offers up to 6 pc interest.

Another big player in individual loans is RateSetter, launched in 2010, which has a zero default rate. It currently pays up to 4 pc.

Other styles of peer-to-peer investments allow investors to lend to specific types of project.

For example, Relendex lends to commercial and residential building projects, currently offering 11pc.

Abundance Investing gives access to renewable energy projects. There’s a five-year project offering 8 pc at the moment.

Peer-to-peer lenders have recently seen a surge in demand from investors wanting to withdraw their cash in response to the coronavirus outbreak.

The City watchdog, the Financial Conduct Authority (FCA), has voiced much concern over the peerto-peer industry, and in December introduced new rules requiring firms to disclose more information to ensure investors know what they’re getting into.

Individuals now have to answer multiple choice questions to prove they understand the risks. You will be asked if you are aware your savings could be lost, that returns are not guaranteed and if you know what will happen if the portfolio becomes insolvent.

An important consideration with Ifisas is access to your cash. Many platforms offer investors the chance to sell their loans early, but once you are invested, there is no guarantee you’ll find a willing buyer.

You could get hit with charges, too. Last year, Funding Circle introduced a 1.25 pc exit penalty.

Experts recommend that Ifisas should comprise a maximum of 10 pc of your overall investments.

Mr Daley says: ‘Lenders such as Ratesetter and Zopa, who have been around for years, have maintained liquidity and continue generating good returns for investors. They remain a good option for savers who are looking for a better return than a savings account and are willing to take a little risk.’

Mr Hagger says investors who have done their homework could consider placing money with multiple platforms, rather than being wholly exposed to one.