In April 2016, the government in the UK introduced the Innovative Finance ISA (IFISA). This ISA enables you to use any amount of your yearly ISA investment allowance to lend via the peer-to-peer market. With between six and eight per cent tax-free interest offered, the IFISA’s rates are higher than normal cash ISAs; however, with the high return comes the higher risk that is tied in to peer-to-peer lending.
What is peer-to-peer lending?
Peer-to-peer lending, or P2P, is a lending and borrowing system that operates between individuals (peers) as opposed to between an individual and a lending institution. P2P websites act as intermediaries through which the loans are arranged. As with regular loans, they are regulated by the Financial Conduct Authority (FCA); in addition, the Peer-to-Peer Finance Association (P2PFA) is a specialised industry body tasked with maintaining high standards of conduct. P2P loans are becoming popular because borrowers can be more successful in applying for one when turned down by regular lenders; in addition, depending on the borrowers’ credit scores, the P2P loans can be cheaper. The Money Advice Service provides more information on the pros and cons of borrowing through P2P.
How does the IFISA work?
For every borrower in P2P, there must be a lender. The money you pay into your IFISA is lent to an individual borrower through the P2P market. These loans may pay lower interest rates compared with an ordinary personal loan, but the lender would receive higher rates than from an ordinary cash ISA. The risk, however, rests on the borrower’s ability to pay back their loan. The Financial Services Compensation Scheme (FSCS) does not cover eventualities such as the borrower defaulting on their loan or a P2P platform failing. Any money you pay in is therefore entirely at your own risk.
While the return on IFISAs is attractive, an independent financial adviser (IFA) will give you some honest advice. With the expert analysis that back office systems for IFAs from vendors such as https://www.intelliflo.com/ can provide, your financial adviser can help you to decide whether an IFISA in the context of your existing investments and personal risk profile is a good idea.
Whatever the nature of the investment you are considering, it is important that you fully understand all the associated risks.