'P2P ISA' is hitting the headlines
From 6 April 2016, British investors can seek to build future wealth by buying peer-to-peer (P2P) loans inside the forthcoming Innovative Finance Individual Savings Account (IF ISA). As with existing ISAs, the IF ISA allows savers to generate tax-free income, safe from the taxman's grasp.
What's more, the maximum annual deposit into an IF ISA will be the same as that for Cash or Stocks & Shares ISAs (which is £15,240 in the 2015/16 tax year). At typical P2P lender interest rates of around 6% a year, this means that British investors could potentially earn over £914 a year in tax-free interest income from P2P loans inside an IF ISA.
As the first radically different ISA since the original tax shelters were launched in April 1999, the IF ISA is attracting lots of interest in the financial press. Let's find out what personal finance journalists and investment experts have written recently about ISAs:
Complex ISAs may muddy investment waters: Spiers
Writing in FTAdviser on 10 December 2015, Simoney Kyriakou writes that John Spiers, chief executive of wealth manager EQ Investors, warns that the new IF ISA "risks muddying the ISA waters by including more complicated investments within the tax wrapper."
Mr Spiers warns that, from April, ISA investors will "need to be more careful as more complex and higher-risk assets become eligible for inclusion inside ISAs." Stating a different case, Chris Budd, principal of Bristol-based Ovation Finance, says, "I'd say it [the new IF ISA] is a good thing, as long as there is a mechanism to properly explain the risks and illiquidity of each investment."
How the banks' miserly ISA rates have robbed savers of £2 billion interest
Writing for Money Mail in the Daily Mail on 9 January, Holly Black shockingly reveals that British savers have been short-changed of £2.33 billion due to plunging Cash ISA rates. Holly writes that the average interest rate paid by Cash ISAs has fallen to a record low of 0.85% a year. With £262 billion now held in Cash ISAs, savers have been paid interest of a mere £3.66 billion in the past year.
Two years ago, savers earned interest of £5.17 billion on £225 billion, at an average rate of 2.3% a year. At a similar rate, savers would have banked £5.99 billion in the past year and, therefore, have lost out on a whopping £2.33 billion of interest.
Incredibly, with table-topping current accounts now paying deposit rates as high as 3.91% a year (before tax), Holly admits that most ISA investors would be better off keeping some of their spare cash in their everyday bank accounts.
P2P providers shrug off your concerns about new Isa
Writing in FTAdviser on 14 January, Katherine Denham reveals that "P2P platforms have said they are not fazed by reluctance among advisers to push the IF ISA, but admit work needs to be done to persuade the intermediary community to embrace it."
In a survey for FTAdviser, many financial advisers admitted that they would consider promoting the new IF ISA to clients, but are wary that P2P lending is not currently covered by the Financial Services Compensation Scheme (FSCS). In other research, three in five Cash ISA holders (60%) said "they were unhappy with their current interest rate and a quarter were already interested in moving to a new IF ISA." Clearly, lack of adviser support is an issue the P2P-lending industry needs to overcome for the IF ISA to succeed.
P2P technology provider slates new Isa for stifling choice
Again writing for FTAdviser, this time on 19 January, Katherine Denham writes that the IF ISA has been criticised for "giving investors access to just one provider and failing to allow them to spread risk." She quotes Jake Wombwell-Povey, managing director of P2P platform technology provider Goji, who has written to HM Revenue & Customs urging the taxman "to amend the draft legislation so that investors can spread their risk across different P2P lenders."
Wombwell-Povey suggests the IF ISA "should allow investors to choose from a number of P2P lenders through an 'aggregator platform', similar to existing arrangements in place for Stocks & Shares ISAs. It seems that this choice will be greatly limited by requiring an Isa investor to only gain an exposure to the investments offered through a single authorised P2P provider." Improving market choice will lead to better competition and innovation among P2P platforms, Wombwell-Povey argues.
New Isa to push P2P lending among retired investors
Finally, Katherine Denham (clearly FTAdviser's expert on P2P lending) reveals on 20 January that "a quarter of investors aged over 55 will consider moving their cash onto P2P-lending platforms when the IF ISA launches."
Denham quotes Kevin Caley of P2P platform ThinCats, who argues, "The IF ISA's attraction to the older generation rests on the tax benefits, especially for higher earners, as well as with the trust and credibility that the tax wrapper affords." Caley adds, "The stage is set for a transformation in this fast-growing sector, especially if those later in life decide to capitalise on P2P’s traditionally high interest rates, which are so well-suited to regular retirement income."
Summing up this recent coverage, Stuart Law, co-founder and CEO of Assetz Capital, adds, "For all of us at Assetz Capital, the launch of the IF ISA on 6 April is an important landmark for P2P lending. We expect many tens of thousands of first-time P2P lenders to flock to the market in 2016/17, drawn by the higher interest rates, tax benefits and improved authority that this new investment vehicle will provide!"
WEALTH WARNING: "As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if borrowers were unable to repay their loans. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan, with the added benefit of a discretionary Provision Fund for some of our investment accounts."
- February 10, 2016