Innovative Finance ISAs - Are they worth considering?

[BluePenguin]

Following on from the threat about banking. Does anyone have any experience with Innovative Finance ISA’s? I have spoken to a few people and nobody seems to have heard of them.

As a nation we are going through tough economic times. Everyone's circumstances have been affected in this year. Interest rates on cash ISAs and savings accounts have dropped considerably recently with some now offering less than 1%. Most Stocks & Shares ISAs are offering better returns although not as much as they used to. The one I currently have offers a reasonable 3%.

I was having a browse online and came across various websites offering Innovative Finance ISAs at very attractive interest rates ranging from 4% to 12%. The money invested into them is loaned to borrowers on a peer to peer basis. Most of the platforms say they will pay if someone defaults.

I have always been very sensible when it comes to money, although it seems with a little measured risk comes great reward. None of the providers of the Innovative Finance ISA’s I came across are backed by the Financial Conduct Authority. How significant this protection is I am not sure but is usually something that provide peace of mind to people.

Are these ISAs worth investing up to £20,000 of your allowance for the year? Or best avoided unless you have money you can afford to lose? The general consensus from online reviews seem to neither endorse or object either way. The typical response when it comes to financial products is the usual "look at all options and consider whether it is for you". Such neutral statements are not helpful and provide no useful advice to allow anyone to actually weigh up the pros and cons based on their individual circumstances.

Here are the name of providers I came across in case anyone would like to do their own research and investigate the options: RateSetter, Crowd2Fund, Quanloop, Money Farm, Funding Circle and Kuflink. As you are only allowed to pay into one Cash ISA and one alternative ISA each year, you cannot even spread the risk by investing in more than one of these platforms

Good face to face advice is hard to find these days, especially at banks which only cover their own products. Everything is moving online. Hopefully, the wise experts on here can help myself and many others to make an informed decision by discussing the pros and cons.

 

[MarlowDonkey]

Here are the name of providers I came across in case anyone would like to do their own research and investigate the options: RateSetter, Crowd2Fund, Quanloop, Money Farm, Funding Circle and Kuflink.

The peer to peer market is contracting, whether tax sheltered in an ISA or otherwise.

Peer-to-peer lending: ‘I’m 19,050th in the queue to get my savings back’

A surge of requests to withdraw funds amid the Covid pandemic has led to a huge backlog

www.theguardian.com

from which

A surge of requests to withdraw funds amid the Covid pandemic has led to a huge backlog
The coronavirus crisis has been the biggest challenge P2P platforms such as RateSetter have faced.

A saver who has been trying to get her money out of the UK’s biggest “peer-to-peer” (P2P) website since August has been told her request is 19,050th in the queue for withdrawals.
Michelle Johnson* signed up with RateSetter in 2019 and invested a total of £1,000. After changes at the firm in the summer, she asked to withdraw her money – but months later she is still trying to get hold of the bulk of her cash.
“Please could you investigate what is going on at RateSetter?” she asked us this week. She told us she was in a queue of thousands of people to remove her money, adding: “I’m scared I’ll never see it again.”

 

[najaB]

None of the providers of the Innovative Finance ISA’s I came across are backed by the Financial Conduct Authority. How significant this protection is I am not sure but is usually something that provide peace of mind to people.

Regulation by the FCA is important if you're dealing with money that you'll need to get back. If it's money that you've already emotionally distanced yourself from (it could disappear and you wouldn't give it a moment's thought) then it's significantly less so.

 

[Djgr]

I thought of writing a long piece on this but I have decided to sum it up as follows:

Don't do it.

 

[maniacmartin]

The projected returns are higher because the risk is higher. I personally wouldn't put my money in peer to peer lending.
With peer to peer lending, you will lose money if the person the money is lent to defaults, and it can be harder to get your money out in a hurry.

Also, I'm not sure what you mean by your Stocks & Shares ISA "offering 3%". Surely the returns will depend on how the stock market performs for what you've invested in?

 

[radamfi]

There is a lot of negativity written about peer to peer lending, a lot by people who didn't understand what they were getting into, but IMO it is a useful halfway house between stock market investing and savings accounts. Savings accounts are basically useless nowadays except for short term "emergency" funds. Peer to peer has kind of replaced bonds as the medium risk investment of choice, especially once they were allowed to be in ISAs. I've been in Zopa for a few years and returns have been in line with expectations. But it is really a bit of a niche product as long term investment needs to be in the stock market, whereas peer to peer is unsuitable for short term saving because you cannot guarantee that you can get your money out quickly as someone needs to buy your loans off you. If you are happy just to wait for your borrowers to pay you interest and capital as scheduled then it might be a reasonable option.

== Doublepost prevention - post automatically merged: 27 Oct 2020 ==

With peer to peer lending, you will lose money if the person the money is lent to defaults, and it can be harder to get your money out in a hurry.

You need to have a portfolio of borrowers. Similar to why you shouldn't put all your money in one share. Some borrowers will default. That is inevitable. The idea is that you will get sufficient interest from the ones who don't to make up for it.

== Doublepost prevention - post automatically merged: 27 Oct 2020 ==

Here are the name of providers I came across in case anyone would like to do their own research and investigate the options: RateSetter, Crowd2Fund, Quanloop, Money Farm, Funding Circle and Kuflink. As you are only allowed to pay into one Cash ISA and one alternative ISA each year, you cannot even spread the risk by investing in more than one of these platforms

You don't have to put all your investments in an ISA, so that way you can have multiple providers with one in an ISA and the rest outside. In the second year you can open an ISA with a different organisation. Some providers will transfer an existing investment with them into an ISA. If you don't earn over £1,000 interest a year then a basic rate taxpayer won't pay any tax anyway. The only hassle is that you have to report this income to HMRC. If you already do a tax return then that's not a big deal, but if you don't then you have to contact them every year to tell them of your non-ISA peer to peer income.