In 2015, the then-Chancellor George Osborne introduced a new flavour of ISA to the world, the Innovative Finance ISA (IFISA), allowing interest earned through eligible peer-to-peer (P2P) platforms to be included within the much-loved tax-free wrapper. The IFISA was expected to wreak a popularity boom in this fast-growing area of the market. Some analysts predicted over 400,000 new investors would enter the sector, with total lending growing to £30.3bn by 2022. So far, though, it’s fair to say it’s been a slow start.
The new tax wrapper first came online in April last year, but as of early-February 2017, only 30 companies were authorised to sell them – with very few actually doing so. The approval process for providers is a long and thorough one, with most of the sectors’ largest players still yet to receive it. To be able to offer an IFISA, companies need to navigate two obstacles. The first, and most lengthy, is to receive authorisation from the Financial Conduct Authority (FCA). Next, it’s a matter of acquiring ISA manager status from HM Revenue and Customs. It’s a journey that many have found longer than perhaps they expected. But there might be another reason why the uptake has been a bit slow.
Investors currently only get to invest in one IFISA platform a year. Given that most current IFISA providers aren’t very well-known – and they only get one bite at the cherry – it’s made the decision pretty difficult. But, as more and more IFISAs begin to creep onto the market – including our very own, which is due to be launched this summer – it’s important investors know what they’re getting into.
So, here’s our quick guide of what you need to know about the IFISA, and what to consider when choosing one.
Secured vs unsecured
Not all P2P loans are the same. Some providers, for example, have IFISAs with rates of up to 10-12%. However, these are typically unsecured loans with a high element of risk – if the borrower fails to repay, you’re very unlikely to get all of your money back. Other options, however, invest in loans backed up by an underlying asset, such as property, which is much less risky.
At Octopus Choice, for example, all our loans are backed by bricks and mortar, and the underlying asset can always be sold should the very worst happen.
A number of products also come with various types of safeguard for investors, such as a provision fund – a pot of money that can be used in the event of default as a sort of insurance policy. But providers don’t necessary contribute to the provision fund they offer, with borrowers often being the ones to pay in. We think there’s something to be said for having skin in the game – so we suggest you check if a provider has anything to lose, too, should the loan go bad.
At Octopus Choice, we invest 5% in each loan with you. This aims to add an extra slice of protection, as you’ll get all your investment back before us, and receive all your interest before we do, too.
Easy to get out?
Some IFISAs will charge you to make a withdrawal, while others also restrict you from making any withdrawals at all, under a fixed term agreement. This might not give you the kind of flexibility that you’re comfortable with. This isn’t the case for all platforms, though.
Octopus Choice charges no fees, and customers can request a withdrawal at any time – though, of course, instant access can’t be absolutely guaranteed.
A lot of IFISA providers are relatively new to the game, so make sure to do your research and check they’re credible lenders. Of course, past performance isn’t a reliable indicator of future results, but here at Octopus, we have a team of expert property lenders that has, since 2009, lent over £2 billion and lost less than 0.1%.
Do I really need one?
Us Brits love an ISA. In fact, we have around £500 billion tied up in them. However, it’s important to ask the question: is it always the right option for me? The cost-effectiveness of an ISA really depends on the tax that you pay, and many basic rate taxpayers could actually lose money as a result. That’s because the Personal Savings Allowance lets them earn £1000 of interest tax-free.
So unless you’re earning more than that in interest each year – which many basic rate taxpayers may not be – it might not be worthwhile choosing an IFISA if there are better non-ISA options out there. ISAs are of course a great way for those earning above this threshold to pick up some tax-free interest, however. And, now that P2P investments are included in the ISA wrapper, it means investors can potentially get even better returns.
Octopus Choice is set to launch its take on the IFISA this summer. Thousands of people are already earning money with us, and soon they’ll be able to do so tax-free. It’ll be going live to our current customers first, so make sure to get on board to be amongst the first to try it!
It’s something we’re really proud of, and would love you to be involved, too. You can sign up for an Octopus Choice account here.
Your capital is at risk if you lend through Octopus Choice and lending is not covered by the Financial Services Compensation scheme. Tax treatment is dependent on an individual’s circumstances and may be subject to change in the future.
Read the full risks here.
http://www.p2pfinancenews.co.uk/2017/03/02/great-ifisa-conundrum/ HMRC, ‘Individual Savings Account (ISA) Statistics’, August 2016