Savers can earn a tempting 4.7% tax-free on a five-year innovative finance ISA (IFISA) following the launch of the first product by a major peer-to-peer lender. However, it's important you're aware of the risks before investing your hard-earned cash.
This new type of ISA was announced in 2015, and launched in April 2016, though only two peer-to-peer lending platforms were ready to offer an IFISA on that date.
But Lending Works has now become the first of the eight members of the Peer-to-Peer Finance Association (PPFA) to offer an IFISA product.
Lending Works is offering 4% interest on a three-year IFISA and 4.7% on a five-year one, which is around three times more than the best-buy fixed-rate cash ISAs.
Before you rush off to invest your money, though, it's worth bearing in mind that peer-to-peer lending is riskier than holding your savings in cash. Make sure you're aware of the risks by reading our Peer-to-Peer Lending guide.
What is an IFISA?
Peer-to-peer lending is similar to crowdfunding, in the sense there are no financial middlemen (such as banks) between lender and borrower. As a result all of the interest paid on the loan as well as the original capital goes directly to the lender, with the platform taking a small fee.
Peer-to-peer lending is also covered by the personal savings allowance (PSA), meaning basic-rate taxpayers can earn £1,000 a year in interest tax-free (higher-rate taxpayers £500). ISA interest is always tax-free, however, and doesn't eat into your PSA.
However, there are risks involved in this type of investment: it is riskier than holding savings in cash – as you're lending money to individuals as opposed to banks so returns aren't guaranteed – and there's no protection from the Financial Services Compensation Scheme if firms go bust.
All companies offering the IFISA must be fully regulated by the Financial Conduct Authority (FCA) and registered as ISA managers with HM Revenue & Customs (HMRC), which has proved a stumbling block to several providers which are still waiting for full authorisation.
Who else offers an IFISA?
Other than Lending Works, only three smaller peer-to-peer providers offer an IFISA – Abundance, Crowdstacker and Crowd2Fund (none of which is a member of the PPFA).
We asked all seven of the other members of the PPFA when they'd be launching their IFISAs. One, Landbay, told us it had received approval from HMRC in January, and is planning on launching its IFISA "within the next couple of weeks".
Zopa, Ratesetter and Funding Circle, the UK's three largest peer-to-peer companies, all told us they were still waiting on full FCA authorisation, and didn't have an indication of when they'd be able to launch – though Ratesetter added that all the infrastructure is in place for it to launch its IFISA as soon as it gets ISA manager status.
MarketInvoice told us it's not planning on launching an IFISA, while all the rest are still waiting for authorisation.