Time to look again at ISAs!

Posted on: 27 March 2019 by Anthony Page

Money doesn't grow on trees but as Tony Page explains the Innovative Finance ISA could help you feel like it does.

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It's 20 years since the Individual Savings Account (ISA) was introduced and many savings conscious Brits have, over the years, put their money in during the annual frenzy of ISA promotion in March of each year to take advantage of the individual Tax Free Allowance.

Over the past decade savers, especially those mindful about how they will maximise their retirement income, have seen interest rates bottom to virtually nothing. Indeed, it could be argued that older savers bore the brunt of the economic downturn and austerity years. People who had been used to a 5% plus return on basic saving accounts have come to the realisation that those days are gone and are unlikely to return in the foreseeable future.

In real terms cash ISAs have not kept up with inflation, so the investor is actually losing money. During a period of so little available choice, some savers have been seduced by 'short term investments' promising returns of 20% (on investment) and 'guaranteed exit structure' for putting their money in forestry. As the old saying goes, money doesn't grow on trees and in the case of Global Forestry Investments, it was true.

Stories like this have led those for whom the stock market and share-based ISAs are too high risk to shy away from investing, but the key here is to look what happens in the middle, you'll be out of your comfort zone at the extremes - low risk means low reward, while high risk, well, see the above.

Managing risk versus reward

Whether you are looking to use up your annual allowance or are keen to get a better return on savings sitting in flat ISA products, there is a middle ground product that is gaining popularity; the Innovative Finance ISA (IFISA). The IFISA can help you earn tax-free interest on Peer-to-Peer lending (p2p) and it hits the investor 'sweet spot' by offering good annual return with comparative low risk.

One such company offering IFISA is Zopa Limited. For those who haven't heard of the company, they began life (founded in 2005) as the world’s first Peer-to-Peer lender.

What is Peer-to-Peer lending?

In simple language, you invest your money with a Peer-to-Peer platform and they, in turn, lend it on the customers in the form of consumer loans to pay for cars, home improvements, weddings and in some cases, debt consolidation.

Returns are between 4.5%  to 5.2% (on Zopa Core and Plus products) - pretty good, when a deposit account with most banks gives between 1.5% and 2.7%. Of course, your bank does give a guarantee for your money up to £85,000.

ISA investments aren’t covered by the Financial Services Compensation Scheme –  so have a look at the Zopa web site. It’s easy to understand and gives you an excellent view of the integrity of the company – they have 62,000 investors and score 9.7/10 on Trust Pilot. Over the past years they have lent more than £3.9 billion!

Remember you can move non-performing ISAs to Zopa and you have £20,000 ISA Allowance to use before 3rd April and a further £20,000 Allowance for the tax year of 2019/20. Transfers of existing ISAs generally take around 20 days to complete.

So considering where I'd put my money, I think the Zopa IFISA is safer than investing in Brazilian timber forests!

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