Major UK peer-to-peer lender Zopa has finally launched its Innovative Finance ISA (IFISA). We take a look at how it stacks up against the competition.
Zopa, one of the major peer-to-peer lenders in the UK, has rolled out its Innovative Finance ISA (IFISA) offering returns of up to 6.1%.
The IFISA is a new type of ISA that allows you to shield peer-to-peer investments from the taxman.
It launched in April 2016, but it’s taken a while for them to take off as many big names have had to wait to get the green light from regulators.
Zopa is one of the oldest and largest peer-to-peer platforms around. Since 2005 it has helped investors lend money to individual borrowers in need of a loan at competitive rates for both parties.
So, it’s probably fair to say that the Zopa IFISA is the one many peer-to-peer investors have been holding out for.
But was it worth the wait?
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Zopa IFISA rates
Zopa has revamped its product range to make way for its IFISA wrapper option.
The new Zopa Core deal joins Zopa Plus, while the Zopa Access (offering returns of up to 2.9%) and Zopa Classic (3.7%) deals will close by 1 December 2017.
Investors can put cash into these two products and opt to hold them in an IFISA wrapper.
|
Product |
Risk Markets |
Target return |
Minimum Investment Amount* |
|
Zopa Core IFISA |
A*, A, B, C |
3.9% |
£1,000 |
|
Zopa Plus IFISA |
A*, A, B, C, D, E |
6.1% |
£1,000 |
*New customers
To cope with the expected high demand, the Zopa IFISA option is being rolled out in stages.
Existing customers got priority access to the new tax-free investment wrapper from 15 June.
From July, they will be able to sell their current loans and re-purchase similar loans in an IFISA wrapper and by August transfers in of existing ISA investments with other providers will be permitted.
Zopa says it will offer the IFISA to new customers once it has met the demand from existing customers, though it has not yet set an exact date.
Zopa IFISA and Safeguard
The new Zopa Core product lends in the same risk markets (A*-C) as Access and Classic did, but, crucially – like Zopa Plus which launched in March 2017 – it will not be covered by the Safeguard fund.
Safeguard was introduced in 2013 as a provision fund to cover losses for lender, in a similar way that the FSCS protects traditional savings.
Zopa says the primary reason it launched Safeguard was to ensure that investors only paid taxes on net interest income from borrowers, but many have come to see it as protection from losses should a borrower default, making Zopa a bit safer than other peer-to-peer platforms.
From December 2017, no new investments will come with Safeguard protection and Zopa expects that the entire fund – which stands at £13 million – will be retired from December 2022, when all loans covered by Safeguard would have matured.
Zopa says it’s scrapping Safeguard as tax laws have changed, allowing investors to claim tax relief from bad debts, so it’s no longer needed, plus it emphasises retiring Safeguard will provide greater expected returns and make products easier to understand.
Andrew Lawson, Zopa’s Chief Product Officer (pictured, top), said: “Safeguard was introduced in 2013 to deal with a tax anomaly that had led to peer-to-peer lenders being unfairly penalised.
"Since winning our campaign to change the tax rules, we no longer need Safeguard – as customers have proved by flocking to Zopa Plus.”
How does the Zopa IFISA compare?
Lending Works is Zopa’s closest rival with an IFISA option. It also allows investors to lend to individuals, but it expects lower returns of 3.3% over three years and 4.4% over five years, after fees and bad debts.
However, Lending Works offers safety through its Lending Works Shield. This helps protect investors from missed loan repayments and defaults using an insurance policy against loss of employment, accident/sickness or death and a reserve fund. Read more in: Lending Works review: the safest UK peer-to-peer lender around?
Most of the other peer-to-peer platforms set up to offer an IFISA wrapper allow investors to put their money towards helping businesses. The greater risk means returns on investment here can be much higher.
The Crowd for Angels IFISA for example offers returns of up to 9%. This crowdfunding platform raises cash for companies wanting to expand, diversify or develop their business through crowd bonds and shares.
Rivals in this space include the Crowd2fund IFISA , which can earn you 8.7%, the Crowdstacker IFISA offering rates between 5-7% and LendingCrowd IFISA offering 6% returns.
There are also a range of peer-to-peer platforms offering an IFISA which give you the opportunity to invest in property. These platforms offer some extra protection against defaults as investments are secured against an asset.
Peer-to-peer platforms in this market include Landlord Invest (offering rates of up to 12%), Relendex (10%) and Landbay (3.75%).
If you're happy to take on more risk you could try Abundance, an ethical peer-to-peer platform raises money from investors for green energy projects.
Its latest deal is a three-year bond from The Green Deal Finance Company (GDFC) Group, which will pay 12% a year and can be held in an IFISA. This top return depends on the project succeeding, so make sure you read the offer document to get clued up about all the risks before investing.
For more on IFISAs take a look at: Innovative Finance ISA: what it is, how it works, rates and providers.
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