With several recently launched products offering interest rates that overshadow savings and cash ISA rates, the innovative finance ISA (IFISA) landscape is continuing to grow. While the new breed of innovative ISAs offers attractive rates of returns, they are not without risks. In fact, they bring with them additional risk.
To determine whether the new wave of high interest fixed rate IFISAs are right for them, savers need to understand both the advantages and risks associated with these ISAs. Put simply, there is a good side and a bad side to IFISAs and it is important to find out if the good side outweighs the bad or if it’s the other way around.
What’s Good About IFISAs?
Announced by the Government in April of 2016, the innovative finance ISAs or IFISAs give ordinary savers the chance to invest in growing UK businesses. This opportunity is provided via the growing peer-to-peer (P2P) lending market, also known as crowdlending. These platforms cut out the banking middleman to offer both the savers/investors and the borrowing businesses a better rate.
With the introduction of Innovative finance ISA, savers can now put money into the sector and take their returns free of income tax and capital gains tax. Some IFISAS such the easyMoney ISA have been launched this year. Launched by finance brand easyMoney, easyMoney ISA distributes the funds of investors into multiple property-backed P2P loans. All loans are secured by a first legal charge over a property. easyMoney ISA has a targeted return of 7.28%, which is one of the higher rates out there.
As evident here, IFISAs can give high interest rates tax-free, but savers need to be aware that it is an investment and not a savings account.
The Risks Associated with IFISAs
While P2P platforms try their best to minimize risk by carrying out credit checks on prospective borrowers, there is always the risk that the businesses seeking investments from savers will go bust or default.
Additionally, like most P2P lending activities, the IFISA is not covered by the Financial Services Compensation Scheme (FSCS), which puts the lender’s capital at risk.
Another risk for savers is the difficulty in accessing their capital. While some providers of IFISAs allow lenders to ‘sell’ their loans, such mechanisms generally require that a willing buyer is found for every part of the loan.
Since there is no guarantee against investors’ capital, it would be beneficial for savers to review and understand risk within P2P lending. It would also be useful to diversify portfolio to get the best returns and minimize risk.