As the tax year is drawing to a close, you will undoubtedly have seen several reminders to make the most of your valuable 2017/18 allowances – it’s “use it or lose it” after all! This push has been across the board for many financial products including Pensions, ISAs, and – more interestingly – Innovative Finance ISAs.
Innovative Finance ISAs (or “IFISAs”) were introduced by the Government in April 2016 to a relatively small fanfare. In fact, you might not have even heard of them. What you might have seen, though, are some exciting headlines offering you very nice tax free investment returns – often in excess of 5% a year!
On closer inspection, these are more likely than not to be Innovative Finance ISAs.
So, what exactly is an IFISA? Put simply, an IFISA is similar to any other ISA wrapper. Investments into an IFISA count towards the standard ISA allowance (£20,000 for 2017/18 and 2018/19) and the investment returns available are 100% tax free. So far, so good, but with Cash ISA rates still only around 1% per annum, what “innovative finance” is being used to target such high returns?
The vast majority of IFISAs involve “peer-to-peer lending”. This is where a facilitating platform allows you to provide cash directly to those individuals or businesses who require loans, cutting out the middle man (usually the bank). As a consequence, peer-to-peer lending allows you to achieve a much higher rate of return than is available via your standard savings accounts.
However, the downside (and it’s a big one), is that your money is at much greater risk. Unlike savings in a Cash ISA or investment in a stocks and shares ISA, peer-to-peer lending is not currently protected by the Financial Services Compensation Scheme (FSCS).
Essentially, if the borrower defaults on your loan, up to 100% of your money could be lost.
Although many IFISA providers claim that the likelihood of default is very low, and several have forms of internal protection in place, the reality is that you would often be lending to customers the bank doesn’t want. If the banks aren’t willing to take on the risk, should you be?
Magenta has chosen not to be regulated by the FCA to give advice in the peer to peer lending space – it is new and untested and some of the quoted returns may fall into the “too good to be true” category.
Magenta is not authorised to give advice on IFISAs and the information above is for guidance only.