Peer-to-peer lender Zopa is jacking up rates on its ‘innovative finance’ Isas, following the Bank of England’s decision to increase the base rate in August, with its top-rate account targeting 5.2% a year. But is this type of Isa right for you?
Peer-to-peer lending is similar to saving with a bank, but involves a higher level of risk and pays much better rates of interest. They are websites that match up savers, who are willing to lend, with borrowers – either individuals or small businesses.
By cutting out the middleman and not having the overheads of traditional banks, peer-to-peer sites can often offer you more favourable rates, whether you’re a lender or a borrower who has struggled to get a personal loan elsewhere.
Zopa is one of the oldest players in the peer-to-peer lending market. Find out how its accounts work – and whether they’re right for you.
What is an ‘innovative finance’ Isa?
Available since April 2016, an innovative finance Isa – sometimes called an Ifisa – is a tax-free investment account that contains peer-to-peer loans instead of cash (as in a cash Isa) or stocks and shares (as in an investment Isa).
It forms part of your overall Isa allowance, which is £20,000 in 2018/19, meaning you can hold savings in a cash, stocks and shares and innovative finance Isa all at the same time.
Your savings grow free of income tax, capital gains or dividend tax in the Isa wrapper.
Find out more in our full guide to innovative finance Isas.
What Isas does Zopa offer?
Zopa offers two Isa products – the Core account and the Plus account.
They pay projected, or targeted, rates of return, rather than a guaranteed rate. This is because borrowers could default on their loans, meaning they fail to pay pack what they’ve borrowed.
The Core account previously targeted an annual return of 4% – now this has been increased to 4.5%.
The Plus account is higher risk, and previously targeted an annual return of 4.6%, which has now been increased to 5.2%.
The loans your savings are invested in are for terms ranging from one to five years, but investors can withdraw money at any time (for a 1% fee).
How are my savings invested with Zopa?
When you lend money through Zopa, it splits up the amount you invest into £10 chunks and spreads them across many different loans – meaning you’re exposed to a very diverse tranche of borrowers rather than having all your eggs in one basket.
It has six risk markets – A* through to E, representing different types of borrowers.
A* and A market borrowers have excellent credit histories, while D and E market borrowers may have a patchier credit record, and therefore are higher risk borrowers.
The Core product invests in A* to C markets, meaning you are lending your money to people are at a lower risk of default. The Plus product invests 20% of your money in D and E risk markets, meaning you’re exposed to borrowers who have poorer credit history.
This group will be charged higher interest to borrow, so the returns on offer are higher. But there is a greater risk of default.
Can I lose money?
By being connected directly to someone who wants to borrow, the most immediate risk to your money is if a borrower fails to repay what you’ve lent them.
Like any investment, there is a risk that you could lose some or all of your money. As an extreme example, a financial crisis could cause people to default on their loans en masse, meaning your investment cannot be returned.
Zopa used to have a reserve fund, which would cover borrower defaults. That no longer applies to new investors in its products.
Most importantly, peer-to-peer sites aren’t covered by the Financial Services Compensation Scheme (FSCS) which guarantees your savings with banks and building societies up to the value of £85,000.
What are the best cash Isa rates?
If you don’t like the idea of putting your capital at risk with a peer-to-peer lending Isa, you could go down the traditional cash Isa route.
Rates of return are lower, but your savings are protected under the Financial Services Compensation Scheme, up to £85,000 per provider. And your savings won’t go down in value, although if your Isa rate is lower than inflation (currently 2.7%), their spending power will diminish.
We’ve taken the top cash Isa rates from Which? Money Compare, which allows you compare Isa accounts both on rate and the quality of service provided by banks and building societies. The table shows accounts that are available nationwide with no restrictions, including on withdrawals in easy-access accounts
|Al Rayan Instant Access Cash Isa||Instant-access Isa||1.35% expected profit rate|
|Al Rayan 12 Month Fixed Term Deposit Cash Isa||One year fixed-rate||1.6% expected profit rate|
|Al Rayan 24 Month Fixed Term Deposit Cash Isa||Two year fixed-rate||1.8% expected profit rate|
|Paragon Bank 3 Year Fixed Rate Cash Isa||Three year fixed-rate||1.86% AER|
|Hodge Bank 4 Year Fixed Rate Cash Isa||Four year fixed-rate||1.8% AER|
|Shawbrook Bank 5 year Fixed Rate Cash Isa||Five year fixed-rate||2.15% AER|
|Aldermore 30 Day Notice Cash Isa||Notice cash Isa||1.3% AER|
|Furness Building Society Regular Saver Isa||Regular saver Isa||1.5% AER|
Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of an Isa provider before committing to any financial products.
Should I even bother with a cash Isa?
Savers are turning away from cash Isas in droves. The number of people who opened new cash Isa accounts in 2017/18 tumbled by 697,000 in comparison to the previous year, according to the latest government figures.
Most returns on standard non-Isa savings accounts offer higher rates than cash Isas.
And, thanks to the personal savings allowance, which allows you to earn interest up to £1,000 interest tax-free if you’re a basic-rate (20%) taxpayer, or £500 if you’re a higher-rate (40%) taxpayer, the tax advantage of a cash Isa have vanished for most savers.
It’s worth bearing in mind that the personal savings allowance will protect your interest from tax this year – but it is a tax perk that future governments could choose to scrap. If you’re growing savings over the long term once they’re in your Isa they’ll be tax free forever.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.