Peer-to-Peer lending was made eligible for a tax-free ISA in 2016. The aptly named Innovative Finance ISA (IFISA) allows you to lend your savings to individuals or companies and offers tax-free returns based on the interest charged. About £1 billion is expected to have been invested in this type of ISA by the end of this tax year on April 5.
These ISAs boast higher returns than other types, but come with higher risks as there is a danger that the business or individual you lend to cannot meet repayments. With investments starting at £500 and annual returns of up to 7.5% available, innovative finance ISAs will be attractive to the everyday saver who can be left overwhelmed by the investment market… and underwhelmed by cash ISA offerings.
There are only a handful of companies offering innovative finance ISAs, but the pace is gathering. The most recent entrant is Stelios Haji-Ioannou’s Easygroup. The Easymoney ISA invests in bridging loans, which offer short-term finance usually secured quickly against an asset such as property. The ISA, launched in February, offers savers a target annual return of 4.05%.
You can now add a touch of glamour to your savings with the Fyzz ISA, which specialises in funding film and entertainment projects. Fyzz is offering projected returns of up to 5%, paid quarterly, over the five-year term of the investment. Elsewhere, an ISA launched by Oaksmore Portfolios allows people to invest directly in the restoration of historic buildings. The firm claims investors can expect returns of up to 7.5% a year over a five-year term. The minimum investment is £1,000.
Another interesting newcomer is Folk2folk, which invests in rural-based projects with a community interest. At present, investors can put in a minimum of £20,000 (as new money, or transferred from existing Isas) and it offers a projected 6.5% annual return.
What to consider
Whichever might catch your eye, remember to make sure you understand exactly where your money is going, as well as the potential risk to your capital.
You don’t have to just put your money in one type of ISA. You can spread your £20,000 Isa allowance for this tax year between cash, stocks and shares and innovative ISAs. So, you could just dip your toe in. Most experts warn you should only put 10% of your ISA money in this type of account anyway, because of the risks involved.
The Financial Services Compensation Scheme safety net, which protects an individual’s savings of up to £85,000 in a normal savings account and £50,000 for stocks and shares does not apply.
Find out more about the different types of ISAs available with our ISA Guide.