Why all the IFISA fuss?
The Innovative Finance ISA - or IFISA – is gaining attention at the moment for a number of reasons, but here are 4 of them;
So just what is an IFISA anyway? Well it is a tax wrapper for UK investors who want to lend money collectively using Financial Conduct Authority (FCA) regulated peer-to-peer (P2P) lending platforms to individuals or businesses.
What that means is that any income or capital gains that you make from your investment (the money you have lent), that is within the IFISA wrapper is tax free. If that doesn’t sound like much it is worth noting that for every £1 in income that you receive from the money that you lent via a P2P platform you pay 40p tax as a higher rate tax payer, 20p as a lower rate tax payer. That cuts your £1 down to 60p or 80p respectively (and to 55p as an additional rate tax payer). Within the IFISA wrapper you receive the full £1.
Why would anyone want to lend money rather than save it? Well because the rates of interest – the income that you can receive – are much more attractive than those of a typical cash savings account. At present you will struggle to receive 2% annual interest rate for a cash ISA, but IFISAs are offering 5% to 15% annual interest.
Sounds like a good deal to me! It does doesn’t it and therein the nub of the concern that many commentators have about IFISAs. They believe that the high interest rates and the ISA brand will seduce savers looking for better returns for their money without realising that P2P lending is a lot, lot, riskier than a cash investment and that an IFISA is not covered by the Financial Services Compensation Scheme (FSCS) – i.e. if you lose your money you lose it, there is no safety net.
OK so what is P2P lending then? It’s a form of investing where people with money who are looking for an income (interest) lend to credit checked individuals and businesses that are looking to borrow. They do so collectively through the P2P lending platforms, which amalgamate the money of those willing to lend.
The platforms source, credit-check the potential borrower, facilitates the loan and automates (as much as possible) the process of lending and borrowing (inclusive of the legal and regulatory requirements) and takes a fee/commission for doing so.
This is what Banks have done with savers (depositors) money for many years, so there is nothing new about the process. What is new is the technology (platforms) which reduces the costs of lending money and creates visibility to the lending/borrowing process so that individuals with money to lend can do so directly.
As a result the interest (income) rates that P2P platforms can offer lenders are higher than those that a Bank can offer. However, cash in a Bank deposit is protected up to the value of £85,000 per person, per Bank. Cash lent via a P2P platform is not protected – if you lose it, you lose it.
I still think an IFISA sounds attractive. The reason that IFISAs sound attractive is that anyone with cash savings from which they are seeking to receive an income will want to maximise the power of their savings and receive the highest possible income from them. Cash savings have low interest rates at the moment, most below 2%, whilst P2P interest rates are much higher, typically upwards of 5%. However, P2P lending is an investment not a savings account and, as with any investment, a P2P loan comes with the risk of losing some or all of your money, so if you cannot afford to lose it you should think twice about investing it.
If you would like to know more about the rates of return, availability of IFISA and default rates for P2P platforms lending to businesses why not check out our comparison table?
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