The InnovativeFinance ISAwas launched in April, but you probably havent given it much thoughtsince then and with good reason, because there are only a handfulto choose from. However, that isabout to change.
Meet your peers
Youre going to hear a lot more about theInnovative Finance ISA, with City regulator the Financial Conduct Authority (FCA)nowprocessing 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%.
Heres someadvice to anyone who is tempted: approach with caution.
The Innovative FinanceISA, or IFISA, allowssavers using peer-to-peer (P2P) lending platforms to taketheir 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 thebest known. It has attracted more than 2.14bn, from 63,000 individuals, since launch in2005, and currently offers between2.9% and6.1% a year, which varies according to the termand risks you are willing to take. Ratesetter, which pays up to 4.1%, has attractedalmost 1.8bn while fellow pioneer Funding Circle tops2.1bn.
All three will be launching an Innovative Finance ISAsoon. Of the few already out there,Lending Workstargets 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 meansyou could getmore than 10 times the rate onthe average cash ISA, which is currently a measly 0.82%, according to Moneyfacts.co.uk. Hard-up savers keento chance their luckneedto understand exactly what they are getting into.
Take Crowd2Fund. Like many P2P platforms, itlends 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 withdue diligence, this is like spinning aroulette wheel.
Taking stock
The targeted income on P2P sitesis not guaranteed, and neitheris your capital. Sites are regulated by the FCA, but you haveno 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 curvewith the Innovative Finance ISA, and could slip up. Also,stock market investorsarent 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 outpacesevery rival form of investing. By all means take a spin onP2P, 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 lessto fear.
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