After years characterised by dwindling rates and worthless deals, Isa season has been given a shot in the arm with the launch of a raft of new products paying impressive returns of 6% and more. But are they the right investment for you this year?
A glut of innovative finance Isas have come onto the market as the tax year comes to a close, offering savers the kinds of rates that haven’t been seen in the traditional Isa market since before the financial crisis of 2008.
Last week, Ratesetter launched an Isa paying a top rate of 5.8%, while yesterday (24 February), Easyjet founder Stelios Haji-Ioannou launched an tax-free account aiming to pay 4.05% per year.
Other innovative finance Isas are currently paying returns as high as 16% a year.
Innovative finance Isas are riskier investments than normal cash Isas – you could lose some or all of your money if the investments go bad, and they are not protected by the Financial Services Compensation Scheme.
Which? takes a look at these super-charged savings products to see whether they’re worth investing in.
What is an innovative finance Isa?
An innovative finance Isa – sometimes called an Ifisa – is an Isa that contains peer-to-peer loans instead of cash (as in a cash Isa) or stocks and shares (as in an investment Isa).
Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers.
And because you’re cutting out a bank by investing your money through an online portal – known as peer-to-peer lenders – you tend to earn higher rates of interest than a traditional savings account.
Innovative finance Isas have been available since April 2016, but it’s only this year that some of the biggest players in the market have started to offer deals to investors.
Why is an innovative finance Isa riskier than a cash Isa?
The big risk with peer-to-peer lending is that the people you’ve lent your money fail to repay what they’ve borrowed.
While borrowers are credit-checked by both the peer-to-peer lenders and credit reference agencies, that doesn’t necessarily mean that they won’t default on their repayments.
Some peer-to-peer lenders lend your money to businesses or for property deals, which can be riskier than lending to individuals who need to borrow – and as a consequence tend to pay higher rates of interest to compensate you for the extra risk you’re taking on.
While it may be easy to be seduced by an Isa paying potentially double-digit return, you will be taking on some significant risks in order to do so.
Remember that, despite paying an ‘interest rate’ similar to that of a cash savings product, an innovative finance Isa is an investment. And if you don’t feel comfortable putting your capital at risk, these are unlikely to be the products for you.
What are the top innovative finance Isa rates?
Ratesetter, along with Zopa and Funding Circle, is one of the biggest peer to peer lenders in the UK. Its is currently offering Isa rates of 3.1% on a rolling monthly basis, and 5.8% if you lock your money in for five years.
Zopa is currently paying between 4% and 4.6%. Zopa exclusively lends to individuals, Ratesetter lends to both individuals and businesses whereas Funding Circle lends exclusively to small businesses. The latter’s innovative finance Isa is only available to existing customers, but is projecting an annual return of 7.5%.
The EasyMoney innovative finance Isa, backed by Stelios Haji-Ioannou, invests in property-backed peer-to-peer loans, putting it on the racier side, compared to the traditional big players. Its projected return is 4.05% per annum, but it may be difficult to get your money out of a property-based investment quickly.
The highest-paying innovative finance Isa we found was on offer from a company called Funding Secure. Its Isa is paying projected rates of 16%, but this is a very risky investment – Funding Secure lends money to people who can’t get finance elsewhere, perhaps because they have a bad credit score or have defaulted on a loan in the past.
You can see a list of deals and rates in our complete guide to innovative finance Isas.
What rates are traditional cash Isas paying?
The table below shows the best cash Isa rates currently available on the market. None beat inflation, which currently sits at 3%.
There are a handful of accounts that do pay rates of 5%. First Direct, HSBC, M&S Bank and Santander all offer regular savings accounts – which require you to make a monthly saving and leave your money untouched for at least 12 months – which pay interest at 5%.
The amount you can pay into these accounts is capped, however:
- First Direct allows you to pay a maximum of £3,600 over a year;
- HSBC and M&S Bank allow you to pay a maximum of £3,000 over a year;
- Santander allows you to pay a maximum of £2,400 over a year.
These aren’t cash Isas, but unless you’re an additional-rate taxpayer (meaning you earn £150,000 or more a year), you won’t pay tax on the interest.
This is because the first £1,000 of interest earned by a basic-rate taxpayer, and the first £500 of interest earned by a higher-rate taxpayer, is paid tax-free. This tax-free deal is known as the personal savings allowance.
The maximum interest you can earn with First Direct’s account £96.77 – way below the personal savings allowance.
Note that these accounts are only available if you have another product with the banks in question.