Cash ISAs operated by UK banks and building societies are covered by the Government’s Financial Services Compensation Scheme. This means that if the bank or building society were to fail, the saver would remain entitled to receive back their capital – which is effectively underwritten by the Government – up to a cap of £85,000 per person, per banking institution.
Conversely, the online lending sector is not governed by the FSCS. There is no guarantee that any amount of the capital that an investor deploys into online lending will be recovered in the event that either the borrower or the platform were to fail or otherwise fall short of their repayment obligations.
Cash ISAs are currently paying relatively low interest rates which, given inflation, often results in a negative ‘real’ return to the saver because prices may be rising faster than the Cash ISA is paying interest. Higher target rates of interest are available from online lending platforms like Ablrate than from cash saving. Indeed, Ablrate offers targeted returns frequently in excess of 10%.
Ablrate seeks to mitigate risk by making sure loans are asset-backed, i.e. we seek to secure the loan over a freehold property or other significant asset which could be sold off in the event that the borrower was to default on the repayment obligations. However, it would be wrong to assume that the two forms of investing, online lending and cash saving, carry identical risk profiles.
The position is such that each individual will need to assess his or her own risk appetite towards the relative merits and risks that are associated both with Cash ISA saving and the Innovative Finance ISA.
Each individual who engages in online lending will need to make a balanced assessment of how great a proportion of their capital, if any, should be deployed into lending vs (for example) cash saving, equities, bonds and any other asset class that the individual may be considering. You should consider the risk of investing in loans on Ablrate. You can read about those risks here.
PLEASE REMEMBER, REGARDLESS OF THE TAX BENEFITS, CAPITAL IS AT RISK
Whether investments are held within a IFISA or in a general account, they are not covered by the FSCS; the government backed deposit insurance scheme that protects bank deposits including Cash ISAs.