Peer-to-peer ISAs paying up to 8% tax free interest. Are they worth it?
Last month, the first ever ‘Innovative Finance’ or ‘Peer-to-peer’ ISAs entered the marketplace, potentially offering up to 8% interest on personal investments of up £15,420 per annum.
“HOW MUCH?” I hear you saying, “I’m only getting between 1% and 3% on my Cash ISA – where do I get one?!”
But before you head online to put your hard-earned cash into one of these new products, let’s take a quick look at what they are and how they work. As always, while the potential returns look great, there’s a catch. It’s the usual risk versus reward equation.
What are ‘Innovative Finance’ ISAs?
At their simplest, the new ISAs allow you to make tax-free investments in peer-to-peer loans. These are loans made by individuals via certain accredited online providers, such as Ratesetter, Zopa, Funding Circle, Crowdstacker, Landbay and Saving Stream.
These companies have been operating for some time and have grown in popularity. The idea is that you invest money, which is then lent to other people at better interest rates (for both borrower and lender) than you can easily get anywhere else.
You also get flexibility. You can either invest at the site’s market rate, or you can lend at your own level of interest. If you choose the latter route, your money remains available but earns you no interest until a borrower chooses to accept it on your terms.
What the new ‘Innovative Finance’ ISA model does is allow you to make an investment in these ways using an ISA ‘wrapper’, which means the returns you get are tax free.
How do Peer-to-peer ISAs work?
Peer-to-peer ISAs are coming onto the market thick and fast, and they offer you up to four investment timeframes: meaning you can put your money into them for a month, a year, three years or five years. However, if you take your money out early, you will only get the interest applicable to the shorter period. So if you invest £2,000 for three years, but withdraw it after only two, you’ll get the interest that would have been payable for a one-year investment.
Are the investments safe?
Up to a point. You don’t get protection from the Financial Services Compensation Scheme (although these products are covered by the Financial Conduct Authority), but some sites such as Ratesetter protect you via their own provision fund. However, it’s worth remembering that only one of the peer-to-peer companies existed at the time of the 2008 financial crisis – meaning that most haven’t had to weather adverse financial conditions. Last year, one platform – TrustBuddy – which had lent some £23m, filed for bankruptcy. Investors are still trying to get their money refunded.
Can I transfer my other ISAs?
Yes, you can. So if you already have a cash ISA or a stocks and shares ISA, you can transfer it to the new peer-to-peer ISAs on top of your £15,240 annual allowance. That means you can invest more than £30,000 straight away.
Should I invest?
Whether you invest is up to you. There are some excellent rates of interest available, but the key point to bear in mind here is that rather like stocks and shares ISAs returns are not guaranteed. But if you are comfortable taking a bit of risk with your capital and you choose one of the more established players, Peer-to-peer ISAs could provide a better alternative to the much lower interest rates offered by the traditional cash ISA.
There are plenty of people who are making money from these organisations at the moment – and you could well become one of them. However, it’s always a good idea to get sound, independent financial advice before making any investment. If you would like us to introduce you to a registered Independent Financial Advisor, we are happy to help.
And don’t forget, we can also help with you business and tax advice when you need it. If you’d like to make an appointment to see one of our advisors, please get in touch.