The ‘innovative finance’ Isa is being hailed by some as the answer to years of miserable interest rates. We look at who’s offering them and how they work
It’s the new type of Isa offering returns of up to 12% – or perhaps even 20% in future. But are rates like this simply too good to be true? Things have been pretty grim for Britain’s savers for a long time now, with many people desperate to find ways to give their finances a boost. However, some experts are predicting that this is the year that a new tax-free account for peer-to-peer lending and crowdfunding will shake up the savings market and bring some much-needed better news on returns.
Peer-to-peer websites match borrowers (individuals or companies) with investors or lenders. They cut out the banks by putting people with money to lend in touch with those who want to borrow.
The so-called “innovative finance” Isa – one of the latest additions to the individual savings account family of products – actually went live last April, but it is only now that there are some accounts to choose from.
The selection at present, however, is limited, with few well-known names. That’s partly because many of the biggest players in the peer-to-peer lending sector – including Zopa, RateSetter and Funding Circle – are still awaiting the final go-ahead that they need in order to offer these new Isas. It is looking increasingly likely that many of these companies will end up missing out on the 2016-17 Isa season because they won’t get their full approval from the City regulator in time.
Also, this is a lot more risky than sticking your cash in the bank or with National Savings & Investments. Your capital is at risk and, crucially, peer-to-peer isn’t covered by the official Financial Services Compensation Scheme, though many of the websites have their own safeguards in place.
The news this week that inflation rose to 1.8% in January – its highest level since June 2014 – dealt a fresh blow to savers, as the vast majority of the accounts on the market pay rates that are below this. Data provider Moneyfacts says: “Savers are clearly running out of options for an inflation-beating return, unless they lock their cash away for the long term or are prepared to place their funds in more risky investments.”
So what is this new Isa?
There are three types of Isa: the cash Isa, the stocks and shares Isa, and now the innovative finance Isa, which allows investors to earn tax-free interest on their peer-to-peer loans when they are held within the Isa “wrapper”. Late last year the rules were extended so that these new products can also include debt-based crowdfunding, thereby allowing investors to lend money to things such as renewable energy projects and enjoy tax-free returns.
During the current tax year you can save up to £15,240 in one type of Isa or split the allowance across two or all three types. For example, you could save £10,240 in a cash Isa, £2,000 in a stocks and shares Isa and £3,000 in an innovative finance Isa. From this April, the total amount you can save each year into all Isas will increase to £20,000.
Who can offer them?
Companies must jump two hurdles: they require full authorisation from the Financial Conduct Authority, plus the approval of HM Revenue & Customs, to act as an Isa manager.
How do they work?
What will typically happen is that the (predicted) returns on the Isas will be the same as those available on firms’ standard products – the only difference is that the Isa returns are tax-free. For example, Zopa says all three of its products – Access, Classic and Plus – will be available within the Isa wrapper, with customers able to choose to spread their allowance across all three products.
You will only be able to earn tax-free interest on new investments that you make. Also, it is not possible to “subscribe” (add new money) to more than one innovative finance Isa within the same tax year. However, you can transfer money from existing Isas accumulated in previous financial years over to an innovative finance Isa.
Who’s offering what?
In the peer-to-peer and crowdfunding markets there are several companies offering Isas – though some are, to put it bluntly, firms you have probably never heard of.
Two of the best-known are ethical investment platform Abundance, which allows people to get a return on their cash by funding renewable energy projects, and peer-to-peer platform Lending Works. The latter launched its Isa on 8 February and claims to have taken in around £2.5m within the first 24 hours. Its current rates are 4% for three-year lending and 4.5% over five years.
Others offering Isas include LandlordInvest, which lets people invest in residential buy-to-let mortgages and bridging loans, and is holding out the prospect of returns of “up to 12% per annum”; and LendingCrowd, which matches investors with small and medium-sized businesses seeking loans, and is offering a “target rate of return of 6% a year”.
Crowdfunding platform Crowd2Fund has an Isa and is quoting an estimated average return of 8.7% before fees and bad debts, while fellow crowdfunding site Money & Co, founded by City “superwoman” Nicola Horlick, says it aims to launch its Isa by early March. Another player, Landbay, says it is launching its offering “very soon”.
Other firms that have been fully authorised but don’t appear to be marketing Isas yet include Folk2Folk, Peer Funding Limited, Crowd for Angels, British Pearl, Crowdstacker, Octopus Choice and CapitalStackers. The last of these companies lets people lend to property investors and developers, and says returns range from 5% up to 15%-20%. CapitalStackers adds that last August, investors in one of its schemes pocketed returns of up to 22.5%.
What about big companies?
Zopa (which is offering rates between 2.9% and 6.1%), RateSetter (up to 5.3%) and Funding Circle (6.9%) are all still waiting for the final green light. It’s not clear why they haven’t been given the go-ahead when some less well-known players have been. One industry insider told Guardian Money that because of the apparent delay, there was a worry that investors who wanted to take advantage of the new Isas now were effectively being steered towards signing up with smaller, less-tested players.
So these Isas are risky?
Yes. In February 2016 the former City regulator Lord Turner told the BBC: “I strongly suggest that the losses on peer-to-peer lending which will emerge in the next five to 10 years will make the worst bankers look like absolute lending geniuses.” He said advertising for the lenders should have clear warnings and that only people who can afford to lose their money should take part.