Watch out, savers, there’s a new ISA in town. They’re calling it the Innovative Finance ISA (IFSA), and it differs from other types of ISAs in several ways.
And because of that, if you’re looking to open an ISA account, you need to know how the IFISA works, and if it’s right for you.
Even if you don’t currently use one, you’ve probably heard of ISAs – there are seven of them about, ranging from the Basic ISA to the Help to Buy ISA to the Junior ISA for parents looking to save money for their children.
The most common ISA in the UK is the Basic ISA – the sort high street banks general advertise. Savers can stash their cash or invest the money in stocks and shares, totally tax-free up to a limit of £20,000 (until April 2018, where the limit will increase).
The issue many savers have with the Basic ISA is that it’s, well, basic, so the money invested or saved doesn’t work terribly hard for them – a fact compounded by not particularly generous interest rates.
Enter the IFISA.
How does it work?
The IFISA’s first big change is that it’s designed to cut out the middle-man: The bank. Instead, they’re run by peer-to-peer lenders who open up a channel between the saver and the borrower. The saver then directly lends to borrowers. More bang for your buck, as it were, as the borrower pays back both the initial sum plus a higher interest rate interest.
Who am I lending to?
There are three categories of borrowers that savers can lend to: Small and medium-sized businesses, property developers and investors, and consumers. For SMEs, the money helps them grow their businesses, while property loans allow for – what else – property development, including refurbishment or buy-to-let properties, as well as personal mortgages. Money invested through consumer lending can be considered a form of small, unsecured loan.
Is my money safe?
As with any type of financial transaction, it pays to consider the risks against the rewards – it’s your money, after all. The biggest concern is that your money isn’t guaranteed by the independent Financial Services Compensation Scheme. That means that should a borrower default on repayments, or the company you lend to closes, there’s no recompense. To offset any potential loss, savers are advised to spread their savings across multiple borrowers. It’s also worth noting that some peer-to-peer lending platforms like Lending Works, who connect lenders with borrowers, offer insurance designed to protect lenders against certain types of borrowing.
Is it worth it?
Since we’re talking peer-to-peer, the system relies on a certain level of take-up on both sides for it to be worth it. And so far, early indications show take-up is strong. Lending Works, the third largest consumer peer-to-peer lender, has already seen an investment level of nearly £9 million – so it’s already proving popular, particularly for males at retirement age. Nick Harding, Lending Works’ founding CEO, said:
Take-up has been stronger than expected, particularly given that we have not even started advertising the product to new customers yet. Many of our lenders are vastly experienced, savvy investors, and to have them voting so emphatically with their feet in favour of the Lending Works ISA tells us that a very bright future lies ahead for peer-to-peer lending and ISAs.
The company’s own research, carried out over the 57 days since IFISA’s launch, also revealed that 38% of those with traditional ISAs were also taking advantage of by transferring their money into peer-to-peer IFISAs. A case, then, of the more the merrier.