Innovative Finance ISA: be afraid, be very afraid

The Innovative Finance Isa is coming your way. Approach with caution, says Harvey Jones.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Innovative Finance ISA was launched in April, but you probably haven’t given it much thought since then — and with good reason, because there are only a handful to choose from. However, that is about to change.

Meet your peers

You’re going to hear a lot more about the Innovative Finance ISA, with City regulator the Financial Conduct Authority (FCA) now processing more than 80 applications, many of which should be authorised from next month. They will pay rates ranging from 5% to 15% a year, in a bid to seduce savers who are struggling to get just 1%.

Here’s some advice to anyone who is tempted: approach with caution.

The Innovative Finance ISA, or IFISA, allows savers using peer-to-peer (P2P) lending platforms to take their returns free of income tax. Platforms match ordinary savers with individuals and businesses who want to borrow money, cutting out the banking middlemen to give both parties a better rate.

Zopa on a rope

Zopa is probably the best known. It has attracted more than £2.14bn, from 63,000 individuals, since launch in 2005, and currently offers between 2.9% and 6.1% a year, which varies according to the term and risks you are willing to take. Ratesetter, which pays up to 4.1%, has attracted almost £1.8bn while fellow pioneer Funding Circle tops £2.1bn.

All three will be launching an Innovative Finance ISA soon. Of the few already out there, Lending Works targets returns of 3.6 per cent over three years and 4.5 per cent over five. CrowdStacker Loans targets between 5.43% and 7%, while Crowd2Fund Loans estimates a dizzying 8.7%.

Start me up

This means you could get more than 10 times the rate on the average cash ISA, which is currently a measly 0.82%, according to Moneyfacts.co.uk. Hard-up savers keen to chance their luck need to understand exactly what they are getting into.

Take Crowd2Fund. Like many P2P platforms, it lends to growing businesses looking to expand, which is a sector with a high failure rate. Current offerings include a cookery school, digital printing company, outdoor toy business and an alloy wheel refurbishment business. One company, Ethos Technology, offers 13% a year. Even with due diligence, this is like spinning a roulette wheel.

Taking stock

The targeted income on P2P sites is not guaranteed, and neither is your capital. Sites are regulated by the FCA, but you have no protection under the Financial Services Compensation Scheme. Stocks and shares are also risky, but investors have had years to absorb the dangers. They face a rapid learning curve with the Innovative Finance ISA, and could slip up. Also, stock market investors aren’t seduced by talk of double-digit annual returns, which could mislead the unsuspecting.

Everybody knows there are no guarantees with the stock market, only the historical evidence that, over the longer run, it outpaces every rival form of investing. By all means take a spin on P2P, but only risk a small part of your portfolio. The majority should still be spread across a balanced portfolio of stocks and shares, across diversified mix of companies, sectors and regions for added safety. That way you should have a lot less to fear.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »