The success of the Innovative Finance Isa

Published by Ruth Jackson on 08 August 2017.
Last updated on 10 August 2017

The success of the Innovative Finance Isa

It seems that every year a new type of individual savings account (Isa) is launched. But, while plenty has been written in the wider media about Help to Buy Isas and Lifetime Isas, Innovative Finance Isas (IF Isas) have been largely overlooked, partly because few companies have offered them until now.

A recent survey by peer-to-peer firm Crowdstacker found that more than half of us have no idea what an IF Isa is. Despite this, a lot of money is being invested in IF Isas by savers who understand that by taking on a little more risk they could massively increase their returns.

IF Isas were launched in April 2016 and allow you to invest up to £20,000 a year into peer-to-peer lending via a tax-free Isa wrapper. Peer-to-peer lending enables savers to lend their money out to individuals or companies in a bid to earn a higher return than they could get if they put their cash in a standard savings account or cash Isa. You get a bigger return on your savings but run the risk of the loan you make not being paid back.

With returns of up to 14%, millions of pounds have poured into peer-to-peer since it first appeared in the UK back in 2005. IF Isas are proving equally popular with providers reporting that the number of accounts being opened has far exceeded their expectations. 

“Peer-to-peer investing sits nicely on the risk curve between lower risk savings products and higher risk equity investments, providing investors with greater choice when building an investment portfolio,” explains Mike Allan director of operations at peer-to-peer firm LendingCrowd.

That is why he believes IF Isas are proving popular. “The fact that these investments can now be wrapped in a tax-free earnings product only further improves returns and legitimises the sector as a valid alternative investment strategy,” he says.

“LendingCrowd is seeing Isa transfers from both Cash Isa investors looking to move up the risk curve for higher potential return and from Stocks and Shares Isa investors seeking to diversify and potentially reduce the volatility of their returns.”

When it launched its IF Isa in February 2017, Lending Works, which won the Best P2P (peer-to-peer) Lender for Savers category at the Moneywise Customer Service Awards 2017 reported that £1.5 million was invested in just 24 hours. “With £17.8 million having been put into Lending Works Isas so far, this now makes up roughly 50% of our consumer lenders’ portfolios,” says Nick Harding, chief executive of Lending Works. “We have almost 1,479 active Isa customers, which again equates to roughly half our total number of lenders.”

Mr Harding also points out that a large amount of the Isa money flowing into Lending Works is coming from other types of Isas.

“Roughly 60% of all Isa capital lent through our platform has come from customers transferring Isas from other providers to Lending Works. It pleases us to see transfer after transfer coming from banks and investment platforms that are quite simply not providing Isa customers with what they want – a fair return on their money.”

According to Crowdstacker, 4% of all potential Isa money is expected to be invested in IF Isas in the 2017/18 tax year. With around £80 billion invested into Isas each year, that means roughly £3.2 billion is expected to be paid into IF Isas this year.

“Customer interest in IF Isas is small but growing,” says Kris Koik, managing director of peer-to-peer lender and IF Isa provider, Flender. “The UK government and P2P lending industry could both do a better job of making people aware of the opportunity that IF Isas offer.”

The people who are investing in IF Isas are also putting more in on average than is paid into traditional cash Isas. Crowdstacker’s statistics show that the average annual investment in an IF Isa is £7,013 compared to £5,810 for a cash Isa.

The amount being paid into IF Isas is likely to increase substantially this year as the big players finally launch their tax-free accounts. There has been a drag on the success of IF Isas because so few providers have offered them. At present, there are fewer than 40 IF Isas on the market – compared to more than 350 Cash Isas.

This is because to offer IF Isas peer-to-peer lenders must have regulatory approval from the Financial Conduct Authority (FCA), and getting that paperwork in place has meant big delays.

“Regulatory hurdles aside, the IF Isas are relatively complicated for P2P platforms to deliver,” says Mr Allan of LendingCrowd. “It requires technical and operational change to calculate and record Isa subscriptions, to manage Isa transfers, to set up HMRC reports and to have processes in place to deal with HMRC.”

It has been the smaller firms that have managed to get regulatory approval first and adapt their systems to offer IF Isas. This means it is relatively unknown names offering IF Isas at present, which could put off some potential investors.

A recent survey by peer-to-peer firm Flender found half of people wanting to invest in an IF Isa were waiting for bigger firms to launch accounts. That is now starting to happen with bigger names such as Lending Crowd, Lending Works, and Zopa all launching IF Isas this year.

“We’ve seen a high level of interest from investors since launching our IF Isa in June this year,” says a spokesperson for Zopa, which won Most Trusted P2P Provider at the Moneywise Customer Service Awards 2017.

Just remember, FCA approval doesn’t mean your money is safe – peer-to-peer lending still isn’t covered by the Financial Services Compensation Scheme.

The bigger names offering Innovative Finance Isas

Smaller firms led the charge in offering IF Isas, with Landbay, Abundance, Crowd2Fund, and Crowdstacker among the first to launch the tax-free accounts.

But the number of peer-to-peer lenders offering IF Isas is steadily growing and, finally, one of the biggest firms – Zopa – has launched a tax-free account. However, Zopa is limiting its IF Isa to existing customers for the moment.

When you are looking for an IF Isa read the small print carefully. Some providers only allow you to invest your full Isa allowance – that’s £20,000 this year. Here are four of the better-known firms that offer IF Isas.

 Provider

Targeted return

Notes

Crowdstacker

5%-7%

No minimum investment. Accepts Isa transfers.

LendingCrowd

5.95%-12.25%

£1,000 minimum Isa investment. Accepts Isa transfers. Lenders will receive cashback of £150 for the first £2,500 invested before 31 August 2017.

Lending Works

4%-5%

Accepts Isa transfers. Currently offering a special incentive of up to £100 on investments of at least £5,000, which runs until Sunday 20 August 2017.

Zopa

3.9%-6.1%

Only available to existing customers at present. Accepts Isa transfers.

 

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