Easier to access, but are they worth the risk?
Elizabeth Anderson takes a closer look at the innovative finance ISA
Innovative finance ISAs really are a niche product, and likely to become less appealing*
Innovative finance ISAs will be expanded from next month as part of the government’s wider aim to make ISAs simpler to access and understand, but are they worth the risk? Innovative finance ISAs were launched in April 2016, allowing savers to invest in peer-to-peer loans through a tax-free wrapper. Peer-to-peer lending is where you, as an investor, loan money to businesses or individuals. You are then repaid over time, with interest.
Despite having been around for eight years, the innovative finance ISA remains a niche product.
Unpopular choice?
Just 17,000 were opened in the 2021-22 tax year compared with
7.1 million cash ISAs and four million stocks and shares ISAs.
From next month, a wider range of investments will be allowed inside the innovative finance ISA and you can now include long-term asset funds and open-ended property funds with extended notice periods
A long-term asset fund allows you to invest in illiquid assets such as property and private equity – assets that are difficult to sell quickly. Open-ended property funds invest in commercial property such as shopping centres or office blocks.
Peer-to-peer lending is higher risk, as borrowers could default and not repay the money. Innovative finance providers are not covered by the Financial Services Compensation Scheme (FSCS), so your money could be at risk if your provider goes out of business.
When interest rates were at
0.5 per cent, these higher-risk investments may have been more attractive as some providers were offering returns of up to 6 per cent through peer-to-peer. However, now interest rates have risen it is possible to get returns of around 5 per cent on a “safe” cash ISA.
“Innovative finance ISAs really are a niche product, and are likely to become even less appealing now savers can get more reasonable rates from traditional savings accounts, including cash ISAs,” says Laith Khalaf, head of investment analysis at online investment platform AJ Bell.
When choosing an innovative finance ISA, be aware that many providers have withdrawn from the market in recent years, including Zopa, Funding Circle and RateSetter, and not many exist.
Examples of providers currently offering innovative finance ISAs include Kuflink and CrowdProperty.
When choosing a provider, check they are registered with the FCA’s Financial Services Register.