Cash ISA savers make the switch to Innovative Finance

Stuart Lunn

LendingCrowd, which launched in late 2014 and has facilitated over 610 loans to SMEs, was one of the first platforms to offer an Innovative Finance ISA (IFISA) and now has three different investing options, all of which can be held within the same tax-free wrapper.

LendingCrowd is regulated by the Financial Conduct Authority and specialises in lending to established British business. Its analysis shows that, since launching its IFISA in February 2017, 66 per cent of transfers have been from Cash ISAs.

Meanwhile, Stocks & Shares ISAs accounted for 18 per cent of transfers to LendingCrowd, and the remaining 16 per cent were from IFISAs previously held with rival fintech platforms. In value terms, Cash ISAs made up 68 per cent of the total transferred to LendingCrowd, while Stocks & Shares ISAs accounted for 23 per cent and IFISAs 9 per cent.

IFISAs, which were introduced by the UK Government in April 2016 and can only be provided by platforms that are authorised by HM Revenue & Customs, enable investors to earn tax-free* interest and income on peer-to-peer loans.

According to a survey by trade body TISA (Tax Incentivised Savings Association), over £620 million was invested in IFISAs by February 2019. That is more than double the £290 million that HM Revenue & Customs (HMRC) said was held in IFISAs at the end of 2017/18 tax year.

HMRC data shows that the average investment in an IFISA last tax year was £9,355 – that compares with the average Cash ISA subscription of £5,114. The number of Cash ISAs opened each year has been falling steadily for the past decade – from 12.2 million in 2008/09 to 7.8 million in 2017/18.

With inflation currently running at 1.8 per cent, money held in many Cash ISAs is actually falling in value once the cost of living is taken into account. According to personal finance data provider Moneyfacts, the highest rate offered by an instant-access Cash ISA is 1.5 per cent.

LendingCrowd’s Growth ISA targets a return of 6 per cent a year by automatically creating a diversified portfolio of business loans. Capital and interest repayments are automatically reinvested in additional loans, increasing diversification over time. The platform’s Income ISA works in a similar way, with the key difference being that investors can withdraw their interest while their capital repayments are reinvested.

For sophisticated investors who have the time to hand-pick the business they want to lend to, LendingCrowd offers a Self Select ISA. Lending rates range from 5.95 per cent to 14.25 per cent, depending on the borrower’s credit rating.

Stuart Lunn, founder and CEO of LendingCrowd, said: “It’s clear that Cash ISAs are falling out of favour among savers who are tired of seeing the value of their money eroded by inflation. Our IFISA is proving extremely popular, and we expect demand to continue rising rapidly as more people realise their money could be working much harder for them.”

LendingCrowd is backed by Scottish angel syndicate Equity Gap, the Scottish Investment Bank (the investment arm of Scottish Enterprise) and a number of prominent investors from Scotland’s finance and entrepreneurial scene.