Back in April the dawning of a new tax year gave us several new tax-efficient savings vehicles. One was the Innovative Finance Isa. The latest addition to the Isa family allows you to hold savings in peer-to-peer and crowdfunding companies within an Isa, giving you the potential for tax-free growth.
When they were launched Innovative Finance Isas were heralded as a great new way for savers, who have suffered years of miserable interest rates, to finally be able to get a decent return on their cash. Peer-to-peer lenders offer far higher interest rates than traditional savings accounts with some offering 7 per cent interest.
“The launch of the Innovative Finance Isa will provide a massive boost for investors – we calculate that existing investors could save as much as £376 in tax per year if they are higher-rate taxpayers,” Rhydian Lewis, chief executive of peer-to-peer lender Ratesetter said when the new ISAs launched.
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“Given the potential for significantly better rates on offer, it’s no wonder that one in four cash ISA holders say they are considering opening an innovative finance ISA.”
In the wake of the vote for the UK to leave the European Union and amid speculation the Bank of England could be forced to move rates closer to zero to stimulate growth, this potential return is all the more eye-catching.
The issue is that nearly three months later the take up for Innovative Finance Isas has been far lower than expected.
“The Innovative Finance ISA sounded so promising. You could earn decent interest when the stock market is volatile and other savings returns are at rock-bottom – and all within a tax-free wrapper,” says David Prosser in The Times. “Yet, hardly anyone is offering them. Why is a scheme that the government was so keen to promote looking so lifeless?”
The first problem is the fault of red tape. Before peer-to-peer lenders and crowdfunding platforms can offer Isas they have to be authorised by the Financial Conduct Authority and HMRC. A surge of applications has led to big hold-ups.
So far only three providers – Abundance, Crowdstacker and Crowd2Fund – have got approval. All the big names including Zopa, Ratesetter and Funding Circle are still waiting.
Another problem is that people are worried about the risks associated with Innovative Finance Isas, with many financial advisers loath to suggest them.
“A major concern of advisers is the IF Isa will encourage people to use peer-to-peer (P2P) lending for their retirement saving. The P2P sector is growing strongly and offering attractive returns, particularly when interest rates are at an all-time low, and likely to remain there,” Simon Massey, director of wealth management at MetLife told FTAdviser.
“They need to weigh up the risks particularly when they are looking for more certainty over retirement income and investments.”
With P2P there is always the risk your borrowers will default although the big players have contingency funds to cover defaults and, as yet, no-one in the UK has ever lost money on P2P. But, with returns of up to 6.7 per cent on offer from the most established name, Zopa, P2P is certainly worth a second look.
Innovative Finance ISAs may have launched with a whimper rather than a bang but hopefully soon more providers will get past the red tape and be able to offer savers access to the raciest member of the ISA family.
