THE INNOVATIVE FINANCE ISA
THE INNOVATIVE Finance Isa is likely to catch the eye of many hard-pressed savers by targeting rates of 6 per cent a year, and sometimes even more.
It won’t be hard to see the appeal at a time when even the very best cash Isas are paying just 1 per cent, but make sure you understand the risks.
The Innovative Finance Isa, sometimes called the IFISA, was launched in April last year and extends tax-free Isa benefits to online peer-to-peer (P2P) platforms. Sites such as Zopa.com, RateSetter.co.uk and FundingCircle.com match ordinary savers with individuals and small businesses who want to borrow money, cutting out the banking middlemen to get both parties a better rate.
So far City watchdog the Financial Conduct Authority has only approved a handful of Innovative Finance Isas, but that is set to change, with more than 80 applications in progress. Lending Works was the first major platform to receive authorisation, and launched its Innovative Isa in February, paying between 3.6 per cent to 3.5 per cent over three to five years.
Crowd2Fund Loans targets a tempting 8.7 per cent a year, while CrowdStacker Loans aims for between 5.43 per cent and 7 per cent.
CrowdStacker has attracted £1 million a month, with the average investment just over £7,000, and co-founder Karteek Patel says: “We hope awareness will grow as more providers introduce their IFISAs.”
Andrew Hagger, personal finance expert at MoneyComms.co.uk, says make sure you understand all the risks. “Your money is not protected by the Financial Services Compensation Scheme, which protects the first £85,000 of savings if your bank or building society goes bust.”
Some platforms, including Zopa and RateSetter, have their own contingency funds to cover losses, but there are no guarantees, Hagger warns. “Most sites also reduce the risk by spreading your money between scores of carefully vetted borrowers.”
The latest breed of P2P “crowdfunding” platforms ratchet up the risk a level or two by investing in start-up businesses, which have a high failure rate. The riskiest “equity-based” platforms are currently not eligible for the Innovative Finance Isa.
You can transfer existing Isa balances into an Innovative Finance Isa if you wish.