Half of all customer deposits at peer-to-peer lender Zopa since the start of the year have come via its Innovative Finance Isa, despite only launching the tax-free accounts in June 2017, This is Money can reveal.
Zopa, which was the first to offer the new style Isa product, said 12,000 customers have opened one of its two Isas, which offer up to 4.6 per cent interest.
Innovative Finance Isas are quickly gaining in popularity, largely due to the comparatively high rates many offer and their peer-to-peer lending ethos.
New Isa: Many innovative finance Isa offers come with high returns – but no FSCS protection
Most offer better returns than cash alternatives, but they come with enhanced risk – they are not Financial Services Compensation Scheme protected.
For savers with a cash Isa, the FSCS offers protection of up to £85,000 per banking licence. This means that if something goes wrong with the bank or building society where you have deposited your money, you will never lose the first £85,000.
Meanwhile for those with a stocks and shares Isa, the first £50,000 is protected, as long as the provider belongs to the scheme.
This scheme is not available for those with savings in an Innovative Finance Isa, which means that savers could lose everything if something goes wrong.
Experts say savers should put not more than 10 per cent of the money set aside for an Isa into this type of account.
An IF Isa contains peer-to-peer loans instead of cash or stocks and shares. Peer-to-peer, in a nutshell, matches investors wanting to lend with borrowers, mainly businesses or individuals.
There are a number of companies offering these type of Isa and the pace is gathering.
For example, last month, Stelios Haji-Ioannou’s easyGroup launched an easyMoney Isa that aims to deliver 4.05 per cent a year and today, it has launched a second version offering 7.28 per cent. Cash is put into short-term loans to property investors.
Some of the Innovate Isas that have sprung up are offering even higher returns of up to 15 per cent.
They range from property, green projects and even TV and film projects.
As with all investments, it is imperative you do your research and remember that cash is at risk.
Just because it is an Isa wrapper doesn’t mean you get any extra protection.
Zopa – the longest established peer-to-peer firm – says that investments into one of its Isas functions the same way as any non-Isa investment does now.
Money is invested into the same personal loans to the same types of borrowers in an Isa product as with the non-Isa equivalent. The difference is simply ring-fencing the returns from the taxman.
Competitor RateSetter launched its Isa offering last month, which advertises ‘average’ interest rates of three to six per cent depending on what a saver picks.
FundingCircle, which lends to businesses, also offers two Isas paying between a projected 4.8 and 7.2 per cent, depending on risk appetite.
The Zopa offering accepts transfers in and is also a flexible Isa, meaning money can be withdrawn and replaced in the same tax year.
However, thanks to its popularity, it currently has a waiting list to open an account – although it says you could start investing in two weeks, which would now mean for the 2018/19 financial year.
Andrew Lawson, chief product officer at Zopa, says: ‘With Isa season fast approaching, it can be tough to know which one to choose – not every Isa will suit your long-term goals or appetite for risk.
‘We’ve always believed that by offering retail investors a well-diversified portfolio of low risk loans, we can provide them with a reasonably predictable, stable, and attractive return on their investment.’
It is worth pointing out that you can only contribute your annual allowance to one IF Isa per tax year.
However, you may transfer any historic Isa balances to multiple IF Iisas.
Your historic balances can only be moved via the Isa transfer process. If you simply withdraw funds or close an existing Isa, you may lose its Isa-wrapped status.
Zopa says that the average return on £20,000 with a typical easy-access cash Isa is £148 compared to £920 with its Zopa Isa Plus, which offers 4.6 per cent.
Its Zopa Isa Core offers four per cent, meaning £800 interest.
However, as previously pointed out, money in innovative finance Isas is not protected by the FSCS and interest rates are not always guaranteed.
Not all IF Isas are the same – with some you are taking on considerably more risk than others. Riskier investments tend to offer the highest interest rates as an incentive to investors, but this is not always the case.
The HMRC approve IF Isas, according to the Financial Conduct Authority.
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