what the heck is...

What the heck is… an Innovative Finance ISA?

By Oliver Smith 2 March 2016
Jaidev Janardana Zopa
[ssbp]
Zopa CEO Jaidev Janardana.
Summary

Explaining the buzzwords of the moment: What is an Innovative Finance ISA and is it a good investment?

Our weekly series What The Heck Is… exists to shed light on the strange unexplained acronyms and unfamiliar buzzwords that creep into our everyday lives.

The world of ISAs, current accounts and savings is already a confusing mess of buzzwords and acronyms, and now there’s another one coming to add further confusion.

Last July Chancellor George Osborne revealed a new initiative to include peer-to-peer lending under the existing tax-free Individual Savings Account (ISA) scheme.

The change means that from 6 April you’ll be able to invest up to £15,240 a year onto platforms like Funding Circle, RateSetter or Zopa (led by CEO Jaidev Janardana, pictured above), which in turn lend out your money to borrowers, and pay you interest on these loans completely free of tax.

But if you’re a new saver, or have an existing ISA, why should you care?

Don’t worry, we’re here to help.

So what the heck is an IFISA?

Essentially it’s a more tax-efficient way of investing your hard-earned cash with “alternative” investments.

Peer-to-peer lending, where anyone can put up cash for borrowers and receive interest on loans made, has been growing in popularity.

Personal loans, business lending and even getting a mortgage to buy a house, all of these are now available via peer-to-peer lending.

One UK lending platform RateSetter recently passed a huge £1bn in loans taken out, and for the everyday lender’s fronting the cash for these loans they earn interest on their investments, which they have to pay tax on.

But under the new Innovative Finance ISA (IFISA) investments in peer-to-peer lending can be covered by a tax-free wrapper.

According to RateSetter this could add up to additional savings of as much as £376 on their platform, which already boasts annual returns of as high as 6.1% depending on your investment.

Funding Circle co-founders Samir Desai, James Meekings & Andrew Mullinger.
Funding Circle co-founders Samir Desai, James Meekings & Andrew Mullinger.

“The IFISA should be seen as huge step forward for the alternative finance industry,” Anil Stocker, CEO of MarketInvoice (which is not technically covered by the new IFISA) told The Memo. “It represents a genuine commitment from the Government that alternative finance is here, and it’s here to stay.”

Read more: Fresh funds for disruptive business lender MarketInvoice

And as peer-to-peer lending generally has a far higher rate of return than cash ISAs or traditional stocks and shares ISAs, because you’re cutting out the middle man and lending directly to borrowers via the platform.

“The fact that alternative finance now has its own ISA is really important from an education standpoint. It’s key that consumers realise that investing in peer-to-peer platforms is a completely different kettle of fish to the financial markets.”

So should I invest?

There is a downside of course. As with any investment, the greater the potential rewards and interest offered, the greater the level of risk.

Also most peer-to-peer lending platforms have fixed lengths of investment, meaning your money is tied up and you could risk losing some or all of your money should the investment go sour.

That said, to date most of these platforms like Zopa and RateSetter have very low levels of default, borrowers failing to pay back to lenders, and also have money set aside which covers lenders in some circumstances.

For now your best bet is to keep your eyes on Funding Circle, RateSetter, Zopa and other peer-to-peer lenders from 6 April when the Innovative Finance ISAs start to launch.

Our weekly series What The Heck Is… exists to shed light on the strange unexplained acronyms and unfamiliar buzzwords that creep into our everyday lives.