The Individual Savings Account (ISA) allows individuals to save as much as £20,000 per annum into cash deposits, shares or peer-to-peer (P2P) loans – and take the benefits of their investments tax-free. The deadline for investing is the end of the tax year, on 5th April, and we are now entering what’s known as the “ISA season” when certain companies push their ISA products very hard.
Money&Co. has recently been asked by the media if we plan to promote our Innovative Finance ISA this season. Recent moves from the financial watchdog, the Financial Conduct Authority, to protect inexperienced investors have prompted some to wonder whether the ISA season is set to become something of a damp squib this year.
Our view, as previously expressed and on which we will be expounding shortly, is a conservative one. Here are the words of Nicola Horlick, as recently quoted in the trade press:
“I think it is necessary to have these safeguards to protect consumers. The internet has made it much easier for less experienced investors to buy products that may be totally unsuitable for them. P2P loans are totally illiquid, and some are very high risk.
“Our loans are not high risk as we ensure that there is asset backing to protect our lenders.
“Nonetheless, I think that these are only suitable investments for high-net-worth and sophisticated investors and should not be the subject of expensive consumer advertising campaigns.”
Historical Performance And IFISA Process Guide
That figure is the result of over £24 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2020/21 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.