Disappointing launch for peer to peer ISAs

21st September 2017
Disappointing launch for peer to peer ISAs

Individual Savings Accounts, or ISAs as they are ubiquitously known, have been the savings and investment account of choice for many since their launch in 1999.

What’s not to love? They offer tax efficient returns, a generous allowance of £20,000 for the current tax year, and they are (relatively) easy to use and understand.

There have been a few ISA launches of late that have expanded the ISA family, such as:

  • Lifetime ISAs
  • Help to Buy ISAs
  • Innovative Finance ISAs

Many haven’t heard of the latter, and even less have used one, according to the launch statistics compiled by H M Revenue & Customs (HMRC).

Innovative Finance ISAs give tax-free returns on peer to peer (P2P) investments; a sector that has only been regulated by the Financial Conduct Authority since 2014.

Peer to peer lending has been cited as a route to high returns by some, and a disaster waiting to happen by others. So, how many people are using Innovative Finance ISAs? And how do they compare to other methods of investing?

A slow start

Data from HMRC shows that in the first year of their existence, Innovative Finance ISAs have had a total of £17 million put into them. This is significantly less than other types of ISA, as the 2016/17 tax year saw:

  • £22 billion put into Stocks & Shares ISAs
  • £39 billion put into Cash ISAs

The number of Innovative Finance ISAs accounts opened is estimated to be 2,000, with an average of £8,500 held by each individual. To put this into perspective, other types of ISA saw:

  • 5 million Stocks & Shares ISAs opened (with an average of £8,623 deposited)
  • 4 million Cash ISAs opened (with an average of £4,622 deposited)

Whilst Innovative Finance ISAs received significantly less attention than other ISAs, it is important to note that only 14 providers offered the product in the year after its launch. The overall number of ISAs being opened has also been declining steadily since the 2010/11 tax year.

What exactly is an Innovative Finance ISA and why are people avoiding them?

Announced in the 2015 Summer Budget as a way to spark investment in small business, Innovative Finance ISAs allow people to invest in peer to peer lending arrangements. Whilst these loans come with risk attached, any returns are protected by the familiar tax-free wrapper of an ISA.

Peer to peer lending is a system of loaning money to individuals and businesses, and any interest charged gets paid to the investor who is lending the money. Whilst the returns are generally higher, if a borrower defaults on their repayments, the lender could lose money.

The low level of interest could be down to a number of reasons:

Lack of awareness: Most Innovative Finance ISAs are offered by specialist peer to peer providers, so many consumers wouldn’t encounter them whilst looking for saving options in banks, or on best-buy tables.

ISAs in general have declined in popularity: The introduction of the Personal Savings Allowance (PSA) means that savers now have an allowance that they can earn in interest without paying tax. The main draw of an ISA was the tax-free nature, but the PSA gives:

  • Basic-rate taxpayers a £1,000 tax-free allowance
  • Higher-rate taxpayers a £500 tax-free allowance
  • Additional-rate taxpayers no allowance

Lack of understanding: Peer to peer lending is a relatively new concept for most savers and investors. The higher level of risk, compared to Cash ISAs, may seem daunting, and the product itself may seem too complex.

Levels of saving are down: The savings ratio is at an all-time low (Source: Guardian), meaning many people aren’t saving money, let alone investing. One in four UK families has less than £95 saved (Source: Guardian), making risky investments low on the priority list for many households.

Is an Innovative Finance ISA right for me?

Peer to peer lending isn’t always covered by the Financial Service Compensation Scheme, making it suitable for those who can afford the relatively high level of risk. Anybody who wants a guaranteed or known rate of growth will be better suited with a Cash ISA, or traditional savings account.

Put simply; Innovative Finance ISAs come with a lot of unknowns.

As Innovative Finance ISAs have only been available for a year, it is too early to speculate on how popular they might become. One thing is certain, however; advice should be taken to ensure that your investment choices match your personal circumstances and attitude to risk.

For more information about peer to peer lending, and other forms of investing, get in touch using the phone number at the top of the page.