Innovative Finance ISAWritten on July 13, 2016 by Kirk Rice LLP
The Question:
Should I include peer to peer lending in my ISA to get a better return than on my Cash ISAs?
Kirk Rice LLP answers:
If you put your money in a UK bank it pays you interest out of the fees and interest they earn from lending it to UK borrowers. If the bank should go bust you are assured of up to £75,000. Traditionally businesses would borrow to fund their growth. Over the last decade or so, increasingly stringent Regulatory Standards required banks to protect the banking system from failure by building up capital reserves. This led to a change to the banks’ appetite for risk and higher interest rates on loans. This has led to new lending opportunities.
Peer to peer lending introduces you directly to one, or better still, a large number of potential borrowers. Each scheme operates differently and the size of loans can vary. The matching process means your money will earn you interest only when loans are made. You should ask about costs and what happens if a borrower defaults and who meets the expenses of any attempt to recover assets. The providers generally do not have the level of cash reserves that banks must maintain and any financial shocks or cash flow issues might be more likely to put the firm out of business.
Peer to peer providers have to hold insurance to cover pursuing any debts on your behalf in the event they go out of business. Peer to peer providers are regulated by the Financial Conduct Authority so you can expect the information and risks to be clear, although there is no compensation scheme. To reflect the increased risk the interest rates offered will be very attractive compared to normal deposit accounts, but they are clearly not comparable products. You can now include peer to peer lending in your ISA as an Innovative Finance ISA which means you do not pay income tax on the interest earned.
An alternative traditional way to lend to companies, which you may already be doing, has been to pool your money in investment funds that buy corporate bonds. Bonds are issued by listed companies as an alternative source of funding their growth. Listed Companies are widely researched and publish regular updates to enable them to be classified into bands of risk and reward. If an investment company goes bust, you are protected by the Financial Services Compensation Scheme up to £50,000. You need to consider if you are comfortable with the specific risks with your money. If losing some or all of your money would have an adverse impact on your lifestyle you should continue to do your best with available deposit accounts.
Any reader interested in discussing this topic further can telephone Michael Powell on 01344 875000 ore email michael.powell@kirkrice.co.uk
If you would like to receive Money Matters electronically, simply email info@kirkrice.co.uk stating Money Matters Article in the subject heading and we will add you to our distribution list.
The value of investments and income from them may go down. You may not get back the original amount invested. Some funds will carry greater risks in return for higher potential rewards.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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