Grow your cash with innovative Isa deals

FOR most of the last 20 years savers looking for a home for their annual Isa allowance simply chose between risky shares and safety-first cash.

But with the rates on cash accounts stubbornly low (1.5 per cent at best) and stock markets looking uncertain, many are feeling that they are stuck between a rock and a hard place.

Since 2016 there has been a third option – the ‘ innovative finance’ Isa – that can help savers diversify their Isa portfolio and potentially solve a dilemma for those fearful of equities and disgruntled with cash returns.

The innovative finance option is where savers invest their money via a peer-to-peer platform. In turn, the platform lends their money to others – either individuals who perhaps want to pay for a new car, holiday or home improvements, or to businesses needing cash to expand their operations or purchase equipment.

The platform charges the borrowers interest and after taking a cut pays a return to the lender – usually paying rates at least three or four times the level paid on traditional cash accounts.

By holding the investment in an Isa, returns are tax free.

Peer-to-peer investments are not risk free as the borrowers can – and do – default. There is the potential to lose all of your investment.

But to reduce the risk for investors, lending platforms spread money among many borrowers so that investors are not dependent on the financial strength or weakness of a single borrower.

This third way is gaining traction with nearly £3 billion lent through platforms last year.

About £290 million of this was invested via innovative finance Isas in the last tax year – an eightfold increase on the sums invested in the tax year before. But this all pales into insignificance compared to £40 billion put in cash and £29 billion in stocks and shares Isas.

One of the most well- established platforms is Zopa. Launched 14 years ago, it lends money to low-risk individual borrowers. Zopa has target rates of return of between 4.5 and 5.2 per cent. Other big players include RateSetter and Funding Circle. Andrew Lawson, from Zopa, says: ‘The innovative Isa represents an excellent middle ground for investors put off by increasingly turbulent equity markets or disappointed by pitiful returns from cash Isas.’

Other styles of peer- to- peer investments allow investors to lend their cash to specific types of project. For example, platform Relendex issues loans to commercial and residential building projects, while an innovative finance Isa from Oaksmore directs lenders’ money towards property restoration. Abundance Investing gives access to renewable energy projects.

Investors who want to spread their risks across different platforms in a single Isa can consider buying their Isa through an aggregator providing access to several peer-to-peer providers.

Orca Money has just launched, offering access to Isas across five platforms – Lending Works, Assetz Capital, Landbay, Octopus Choice and Lending Crowd. Investments start from £100 and provide a return of up to 5.3 per cent a year.

Iain Niblock, chief executive, says: ‘Investors’ funds are automatically spread across some of the country’s leading peer- topeer platforms. This spreads the investment across a broad range of asset classes and risks.

Investors can choose from two portfolios – Orca Pure aiming for a 4.3 per cent annual return and Orca Plus (5.3 per cent).

Mario Lupori, of RateSetter, believes his company’s platform also provides diversification. He says: ‘Our platform has the advantage of automatically diversifying every investor’s risk across all our £850 million worth of active loans – resulting in steady returns averaging 4.4 per cent a year. Investors’ money is spread across more than 250,000 loans, no matter how much they have invested. You get the same level of risk if you invest £10 as you do £100,000.’

Savers can only contribute to one innovative Isa from a single provider each tax year, though they can switch existing Isas into one.

Andrew Hagger, of financial consultancy Moneycomms, says: ‘I would only recommend peer-to-peer as part of a wider portfolio. You need to do your homework and understand how your money will be used, the expected level of bad debts, and how you can get your money back if needed. Do not be lured in simply because of the attractive advertised return.’

He adds: ‘I’ve invested in a number of peer-to-peer schemes and to date have not lost any money. But there have been occasions when repayment has been later than originally agreed.’ Wealth manager goes in search of new clients. Read more at thisismoney.co.uk/ newinvestors