personal finance

Fortune favours brave savers but beware of risks


This is an eye-catching reward at a time when the average easy access cash Isa pays less than 1 per cent, while Government backed National Savings & Investments has just cut the rate on its Direct Isa to 0.75 per cent.

The appeal of the Ifisa is clear but make sure you understand the risks.

Surge

The total amount invested in Ifisas has jumped 700 per cent in a year, from £36million in 2016/17 to more than £290million in 2017/18, while the numbers opening an account jumped from 5,000 to more than 25,000.

Andrew de Candole, chief executive of investment firm easy-Money, said the banks appear to be killing off cash Isas with unattractive rates.

“The Ifisa is growing at a massive rate, while the numbers with cash Isas have fallen for five years in a row,” he said.

New cash Isas dropped by 697,000 in the last tax year but they remain dominant, with 7.78 million paying in £39.8billion.

Personal finance expert at MoneyComms.co.uk, Andrew Hagger, said savers remain cautious about the Ifisa, which is a new concept to most: “Many will be instinctively wary when they see the high returns on offer, wondering if there is a catch.”

High return

The UK Government introduced the Ifisa in April 2016, which allows savers to lend money through the peer-to-peer (P2P) lending market, pioneered by Zopa in 2005.

Sometimes called crowdfunding, P2P platforms attract relatively small sums from large numbers of savers, then lend the money to businesses while cutting out the banking middleman to give both sides a better rate.

You can put some or all of your £20,000 Isa allowance into an Ifisa in return for tax-free interest and capital gains.

EasyMoney, Landbay, Lending Works, Money & Co, London Capital & Finance, RateSetter and others offer Ifisas and the numbers continue to grow.

Lion’s share

Paul Sonabend, commercial director of P2P exchange Relendex, which pays up to 6 per cent, said the Ifisa offers a higher return than cash Isas but without the risk and volatility of investing in stocks and shares.

“These returns are not magical, they are produced by taking the banks out of the picture and paying the lion’s share of the interest directly to savers,” he said.

EasyMoney offers two rates of 4.05 per cent or 7.28 per cent with its P2P loans, which are secured by a legal charge against UK-based property.

Start small

Ifisa providers are regulated by the Financial Conduct Authority but your money is not protected under the Financial Services Compensation Scheme, which covers the first £85,000 in a standard savings account.

Neil Faulkner, co-founder and managing director of Ifisa ratings firm 4thWay, said if tempted, diversify with different Ifisas to match your own attitude to risk. “Assetz Capital pays between 10 and 15 per cent which will tempt some but is too risky for most,” he explained.

Hagger said: “These are not cash savings products, they are investments and there’s an element of risk. Check out the Ifisa’s track record, how long it has been in business, who it lends to, how much it has lent, the level of defaults and bad debts and how it protects your money.”

Lending Works offers insurance cover, while RateSetter has a provision fund to cover losses.

Hagger said also check for penalties in case you want to exit early: “If tempted, invest a small sum until you get a feel for the lender and how it operates.”



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