Peer to Peer Lending and Innovative Finance ISA (IFISA)

With the introduction of the new Innovative Finance ISA (IFISA), peer to peer lending is becoming an even more attractive investment option. But how will it affect the P2P space? How are existing firms gearing up for the change? And why should new P2P investors take the opportunity to invest?

The Innovative Finance ISA, also known as Innovative ISA and Peer-to-Peer ISA, is a stimulant in the P2P lending market. This is what makes peer-to-peer lending even more difficult to ignore. Experienced investors will likely to expand their ISA portfolio across the three prominent ISAs (Cash, Stocks & Shares and IFISA) and early adopters may feel relative ease from a Government backed policy providing tax-efficiency on their P2P investments.

We have seen noticeable growth in the peer to peer lending industry in its 10 years (though many will believe it’s only been in existence for just three years!). Last year, there was 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 chance for you to start growing the returns you make on your capital.

When consultation started around the Innovative Finance ISA, a clear change was on the horizon. In the Summer of 2015 the UK Government announced the inclusion of P2P investments in a new, ISA-wrapper, called IFISA. Listed below are the significant takeaways from this announcement:

·         IFISA arrives 6th April 2016.

·         £15,240 annual allowance.

·         Allowance can be spread between available ISAs.

·         P2P 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 P2P lenders can offer Innovative Finance ISAs presently.

Therefore, peer-to-peer lending is a practical alternative for your investments, obviously. How can the Innovative Finance ISA fuel the industry and how will it work for the investor?

With this new tax environment, ISAs could be significant for your tax-efficient portfolio. Initially, 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. If you include the couple’s allowance of £30,480 which can be held in an ISA, and 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 each year through your Innovative Finance ISA.

It is worth evaluating the risk involved in a P2P investment. But as peer-to-peer lending is not covered by the Financial Services Compensation Scheme (FSCS) and you could lose all your money, despite the Financial Conduct Authority (FCA) regulations enforced.

P2P Lending Risks

Default is the first concern. Borrowers could default on their loan repayments, and they could lose their money. However, peer to peer platforms implement security measures to moderate this risk.

·         Diversification – Capital is split between several borrowers, and for different durations.

·         Asset security – Some peer-to-peer platforms hold borrower’s assets over the loan, which can be sold if the repayments stop, hence paying back the investor.

·         Provision fund – Numerous peer-to-peer platforms hold back funds in a fund which pays out, at the discretion of the Directors usually, when a borrower defaults.

These are a few things you should look out for when making an investment through your IFISA. It is ideal to ask with your given P2P lender when investing to make sure you are comfortable before investing.

P2P platforms gear up for change

Most of the big players in the P2P market will be offering IFISAs in April while other investment firms are not particularly favourable of this change in ISA regulations for they believe that the industry is still very young.

Before you commit to a given platform and product, make sure you’ve done a research on Peer to Peer lending. Each peer-to-peer lending platform has different rates and protective measures. On top of that, financial products are never without their risks despite regulation in the industry and UK Government policies. So, take time to compare peer-to-peer platforms.

To find out more about us, Stratopshere peer to peer lending, please take the time to review our website, starting with a quick ‘How peer to peer lending works’ video on the home page  and understand our product range and that our risk is greatly reduced due to the simple fact we only take solid security from any borrower wishing to raise funds through our platform.

Happy investing and welcome to the new ‘fiscal’ year