Peer-to-Peer Lending (P2P) is becoming an even more attractive investment option with the introduction of the new Innovative Finance ISA (IFISA). But how will its introduction in April affect the P2P space? Will the investor number spike? How are existing firms gearing up for the change? Why should early adopters take the opportunity to invest? All will be explored.
While IFAs may be reeling at this stimulant in the peer-to-peer lending market, it is becoming ever more difficult to ignore the presence of P2P lending. Experienced investors will look to diversify their ISA portfolio across the three prominent ISAs – Cash, Stocks & Shares and IFISA – and early adopters, or new P2P investors, may feel relative comfort from a Government backed policy providing tax-efficiency on their peer-to-peer investments.
The Innovative Finance ISA dedicated to peer-to-peer lending, is a game changer for millions of Brits who have suffered from poor returns since the financial crash. It signals that P2P lending has become a mainstream way for people to invest for their futures.
- Giles Andrews, Zopa Founder and CEO
Low interest rates drive alternative investment
The peer-to-peer lending industry has seen exponential growth in its 10 years. Last year saw a 106% increase in lent funds from Q3 2014 to Q3 2015 (UK P2P market) and with an expected industry value of almost £5bn in 2016 it could be a great opportunity for you to start increasing the returns you make on your capital.
When consultation commenced around the Innovative Finance ISA – also known as ‘Innovative ISA and ‘Peer-to-Peer ISA’ – it was clear change was on the horizon. In Summer 2015 the UK Gov’t announced the inclusion of P2P investments in a new, ISA-wrapper, the IFISA. Here are the key takeaways from this announcement:
- IFISA arrives 6th April 2016.
- £15,240 yearly allowance.
- Allowance can be spread between available ISAs.
- Peer-to-peer lenders can act as ISA Plan Managers without legally owning or co-owning the loans.
- ISA transfers and withdrawals adapted to fit illiquid nature of P2P investments.
- Only peer-to-peer lenders can offer Innovative Finance ISAs presently.
So, peer-to-peer lending is a viable alternative for your investments, evidently. How can the Innovative Finance ISA stimulate the industry and how will it work for you the investor?
How the IFISA can benefit you
With this new tax environment, ISAs could be great for your tax-efficient portfolio. Firstly, from April 6th almost all UK adults will be able to earn £500 or £1000 interest tax free (depending on their tax bracket) with their personal savings allowance. That’s a good start. If you include the couple’s allowance of £30,480 which can be held in an ISA, plus a top-up of £10k at an average peer-to-peer lending rate of 5% you could be looking at returns of over £2,000 per annum through your Innovative Finance ISA.
It’s worth assessing the risk involved in a peer-to-peer investment however, as P2P lending is not covered by the FSCS and you could lose all your money, despite the FCA regulations enforced.
Risks in Peer-to-Peer Lending
Default is the number one concern. Borrowers could default on their loan repayments, and you could lose your money. However, P2P platforms implement security measures to mitigate this risk. Some key mitigation procedures are:
- Diversification – capital is split between numerous borrowers, often around 100.
- Asset security – some P2P platforms hold borrower’ assets over the loan, which can be sold if the repayments stop, thus paying back the investor.
- Provision fund – many P2P platforms hold back funds in a fund which pays out, at the discretion of the Directors typically, when a borrower defaults.
These are a few things you should look out for when making an investment through your Innovative Finance ISA. It is best to enquire with your given peer-to-peer lender when investing to make sure you’re comfortable before investing.
P2P platforms gear up for change
Most of the big players in the peer-to-peer market will be offering IFISAs in April, including Zopa, RateSetter and Funding Circle. Other investment firms, like Tilney Bestinvest for example, are not particularly approving of this change in ISA regulations claiming “the industry is still very young”. In saying that, Hargreaves Lansdown came out last year indicating a move into P2P lending could come about towards the mid-end of 2016.
The IFISA is a positive step in increasing consumer awareness and trust in the sector, as well as providing a tax efficient way of benefitting from the platforms’ offerings.
- John Goodall, CEO Landbay
The innovative finance ISA is scheduled to launch on 6 April 2016, and RateSetter is working hard to build a market-leading ISA product for our investors.
- Colin Hodges, Head of Investor Operations, RateSetter
P2P investor numbers to rise
The FT published stats last year gather by Consumer Intelligence relating to the introduction of the Innovative Finance ISA, these are their findings:
- 1 in 5 of 1,020 UK adults say they will save in an ISA henceforth.
- 89% say they will seek to take advantage of the changes in ISA regulation.
- 405,000 new P2P investors expected with introduction IFISA.
It is important to research peer-to-peer lending before you commit to a given platform and product. Rates and protective measures vary, and despite regulation in the industry and UK Government policies, financial products are never without their risks. Compare peer-to-peer platforms online and start earning higher interest rates.
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