On 6 April, 2016, everything’s changing for savers.
Previously, to earn interest on your money without paying tax, you had to place it in an Isa – and you were limited to £15,240 a year.
But, from 6 April, lower-rate tax-payers will be able to deposit money in any savings account, current account, or peer-to-peer lending site and enjoy earning up to £1,000 in tax-free interest a year.
What’s more, there’s a new product on the horizon for UK savers and investors: the Innovative Finance Isa – or Ifisa.
Ifisas will let peer-to-peer lenders put a tax-free wrapper round their investment, up to the annual Isa limit of £15,240.
The Isa is dead
The mathematically inclined might have spotted the anti-climax in the Ifisa concept already. If you can earn £1,000 in interest before paying tax, then what’s the point in bothering with an Isa at all?
You could squirrel away £50,000 in a savings account at 2% AER before paying any interest – and 2% is a pretty competitive savings rate these days.
In fact, if you saved your annual £15,240 Isa allowance outside an Isa, you’d need to achieve an interest rate of around 6.5% AER before having to pay tax.
With Bank of England statistics showing that, in January, average rates on no-notice Isas were at a dismal all-time average low of 0.81%, such returns seem improbable.
Of course, Isa fans will argue that their very point is to let you amass a nest egg, rolling it over each year to build a substantial tax-free sum.
But with the very highest easy access rates hovering below 1.5%, you could be looking at diligently saving your £15,240 each year for more than four years before the Isa wrapper becomes worthwhile.
Long live the Isa!
So does this mean the Ifisa is a hollow victory for peer-to-peer platforms?
Perhaps not, when you examine just how much the rates outstrip those offered by Cash Isas.
Peer-to-peer lending firm Zopa has already unveiled three new lending products set to launch in March – all eligible for Isa status – with expected rates of between 3% and 7%. On 26 February, Funding Circle estimated its annual returns at 7.1%.
If you can expect 7% AER, your £15,240 would benefit from Isa treatment right from year one, while higher-rate taxpayers would find additional benefits.
But the drawback is, nothing’s guaranteed in the world of peer-to-peer. You’re investing, not saving.
Many peer-to-peer lending products look a bit like savings, and act a lot like them, but you could fail to achieve the predicted returns, or even lose money if your peer-to-peer platform goes under – though most operate a reserve fund system to attempt to mitigate the risk.
So here’s where we really take a step into the unknown on 6 April – with such attractive returns, are we looking at a situation where hordes of diligent savers will pour many years’ worth of Isa subscriptions into Ifisas?
And, if so, could this derail the peer-to-peer lending model, forcing returns to nosedive?
Zopa’s Mat Gazeley thinks not, based on investor behaviour: “What tends to happen with most of our customers is they start out lending small amounts to test it out,” he explained.
“Very rarely do we get someone who comes along and drops £100,000 or £10,000 in one go. Typically we get people putting small sums in – around £1,000, £500 – and then adding more when they see the money coming back on a monthly basis.”
Even if there is a significant influx of lenders, Luke O'Mahony, Ratesetter’s PR manager, is confident that the peer-to-peer model, by its very nature, can respond.
“The rate is set by tens of thousands of investors and borrowers in the Ratesetter market," he said. "If more investors start to lend (for example by investing in Ifisas), the supply of money increases and – all other things being equal – the rates that borrowers pay should fall as a result.
“That means the rates become more attractive for borrowers, whose demand pushes the rates back up.”
As for how strong Ifisa demand will be, RateSetter research from December 2015 found that one-in-four Cash Isa holders were interested in moving to Ifisas.
HMRC statistics in August 2015 showed more than 10 million Cash Isa accounts were subscribed to over the previous year, so it’s perhaps fair to expect demand for Ifisas to exceed two million accounts.
The big 'if' for Ifisas
But there’s still one big uncertainty over 6 April.
At the end of February, peer-to-peer platforms are still waiting on regulatory approval.
“Getting a licence is down to the resource at the FCA,” said Zopa’s Gazeley. “I think they’ve got about 30 or 40 applications and maybe a team of three looking at them.
“I think there’s pressure on the FCA to deliver this so we can all go out at the same time on a level playing field. It doesn’t make sense to let one platform go out before others.”
If the industry doesn’t receive authorisation in time, it’s entirely possible we could see a false dawn for Ifisas, meaning that potential peer-to-peer investors will have to wait a bit longer to sign up.
You can compare all sorts of savings, including Cash Isas and peer-to-peer platforms, at Gocompare.com - get to it!