“Innovative”. Technology? Yes. Scientific method? Yes. Savings? Not so much. And yet this is the word the Treasury chose to describe its most recent addition to the Individual Savings Account (ISA) stable of tax-free options.
The Innovative Finance ISA , the IFISA (not to be said with your mouth full), allows savers to invest up to £15,240 this tax year in peer-to-peer lending platforms for the first time.
The savings geeks may be cheering. But what about the rest of us, who have other things to think about?
Well, if you are saving anyway, then the IFISA could be a nice way to diversify a bit.
And we rather like P2P platforms from a values point of view, because they give you greater control over what your money funds. Generally speaking, this is other individuals or medium-sized UK businesses (not, say, African natural resources, agrochemicals or weapons – big no no’s for the responsible savings crowd that are popular with large banks).
If you reckon you are in the 400,000 odd savers that the industry hopes might take a slice of the IFISA cake, read on.
You can still split your allowance between these jazzy new options and traditional cash and stocks and shares ISAs (so of your total allowance, you can put a bit into each). But you can only pick one lending platform in which to invest your IFISA money (so you couldn’t invest a little bit in all of those listed below).
Because of this restriction (that the P2P platforms are of course, lobbying against) the pressure is on for providers to grab an early share of this new market.
Despite IFISAs technically becoming available in April this year, some of the biggest platforms in the marketplace, such as Funding Circle, Ratesetter and Zopa, don’t have regulatory accreditation to offer them yet. They are gathering “registrations of interest” from prospective subscribers instead. Only three have accreditation from the Financial Conduct Authority already. See below for how they compare.
Those that are already offering IFISA products:
The Abundance IFISA allows investments in “debentures”, a type of loan, usually to renewable energy projects, that Abundance offers.
You can set up an Abundance ISA now and transfer cash into it, which you may later use to invest once the ISA rules for Debentures are finalised. Until then, your cash will earn a return of 2% AER on funds held in the ISA – about the same as the rate on a standard cash ISA.
Abundance was founded in 2012 with the goal to create investment products that offer bank beating, long term income and a positive legacy for the environment and society.
A P2P platform that lends to businesses that pass Crowdstacker’s due diligence – it is currently quoting a return on its IFISA, already available, of 5 to 7 per cent. Crowdstacker says its aim is to make crowdfunding “rewarding and accessible”.
“Our focus is on quality and reliability. So we only consider applications from well established companies who have a compelling proposition and are in solid financial health,” it adds.
This smart platform is offering the highest returns on an IFISA currently available, at an estimated 8.7 per cent APR, tax free, but this figure is quoted before fees and bad debt, so the actual amount is likely to be lower. Like Crowdstacker, Crowd2fund only lends to solid businesses that have passed its due diligence checks.
IFISA? If only…. you can register your interest (but not yet invest) with:
Funding Circle seems the keenest of all to get accredited and start signing people up. It says lenders to its portfolio of British businesses will earn 7.1 per cent a year (although this is likely to be closer to 5.6 per cent after fees and bad debts).
If a higher rate taxpayer lent £10,000 through Funding Circle with an average return of 5.6% after fees and bad debts, their earnings, after deduction of income tax at 40%, would be approximately £336 after one year. By taking advantage of the new Funding Circle ISA, those earnings would increase to £560. Funding Circle prides itself on lending only to British businesses, which is more than can be said for banks.
The latest update on its website says: “RateSetter is in advanced stages of obtaining full authorisation – we cannot confirm a date yet but we can confirm it is progressing well.” If and when full authorisation is granted, Ratesetter is likely to offer rates around the level its personal accounts are offering, of 5.7 per cent.
The platform allows lending from individuals, to individuals. Ratesetter was the first platform to launch a provision fund to protect against bad debt. This policy has worked so far – to date, all investors have received the return they expected and no individual lender has lost a penny since our launch in 2010, but past performance is not a guarantee for the future.
Offering 4.7 per cent over three years or 5.9 per cent over five years, the Lending Works does not anticipate rates will be any different on the IFISA when it launches. The Lending Works has what it calls a “shield” to protect lenders from losing their money, which includes a Reserve Fund that covers missed loan repayments and a unique insurance which helps to protect against borrowers defaulting due to loss of employment, fraud, accident, sickness and death.
Thinnest has a minimum investment of £1,000, so if you invested all of your allowance into Thincats, you would only be able to make up to 15 loans to 15 companies, which might not be enough to diversify your risk. The website is quoting 9 per cent returns on the IFISA when it launches.
Peer-to-peer mortgages and buy to let investments, this is the only property-based platform planning an IFISA. Its website says it plans to launch with a tracker rate product offering 4 per cent a year. The rate of interest is 3.35 per cent above LIBOR* (London Interbank Offered Rate). When LIBOR changes, the tracker rate changes too.
As the biggest P2P platform, Zopa is likely to mop up a fair chunk of the IFISA market through its existing lender base when it does receive authorisation from the FCA. This might be why it doesn’t seem to be promoting the IFISA much or asking for pre-registrations yet. It has launched some new loan products ahead of the introduction of its IFISA. Rates will be the same as lenders currently receive, between 3.8% and 5% depending on the term.