Innovative Finance ISA: P2P Lending Risks for UK Savers
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The Innovative Finance ISA (IFISA) lets you wrap peer-to-peer lending in your ISA allowance, earning interest tax-free. Promised yields of 6–10% sound great. The risks are real and often understated.
How IFISAs Work
You lend money via a P2P platform to:
- Small businesses (debt-based)
- Individuals (personal loans)
- Property developers (development finance)
- Renewable energy projects
Your money is essentially a debt investment, often unsecured or with limited collateral.
The Yields That Make People Look
- Property-backed IFISAs: 6–9% target yields
- Consumer-backed IFISAs: 4–7% target yields
- Business-backed IFISAs: 7–11% target yields
These often beat traditional ISAs, but the risk is fundamentally different.
The Risks Most Investors Underestimate
1. Default risk Borrowers can fail. Some platforms have 5–15% lifetime default rates. Even with recovery efforts, you lose significant capital.
2. Platform risk The platform itself can fail. Lendy, Funding Secure, MoneyThing — multiple UK P2P platforms collapsed 2019–2021, leaving lenders with significant losses.
3. Liquidity risk Many IFISAs have minimum hold periods (1, 3, 5 years). Even where withdrawal is “possible,” secondary markets can dry up in stressed periods.
4. Concentration risk If your IFISA spreads across 100 loans, but 30 are to the same sector, a sector downturn hits you hard.
FCA Protection Limits
Unlike Cash ISAs (FSCS up to £85,000), Stocks & Shares ISAs (FSCS up to £85,000), or pensions (FSCS up to £85,000), IFISAs are NOT covered by FSCS for investment losses.
The platform may have client money protection for cash sitting in the account, but the loans themselves are at-risk.
When IFISA Could Make Sense
- You have £100k+ in safer ISAs already
- You can absorb a total loss of the IFISA portion
- You can hold loans to maturity (no liquidity need)
- You understand the underlying borrowing and security
When to Avoid
- This is your emergency fund or near-term savings
- You’re under 40 and need long-term diversification (stocks/bonds better)
- You don’t understand the platform’s underwriting standards
- The platform is newer than 3 years (track record matters)
Due Diligence Checklist
Before putting money in any IFISA:
- FCA registration check — is the platform regulated?
- Track record — how many years operating?
- Default and recovery statistics — published transparently?
- Audited financial statements — is the platform itself healthy?
- Asset-backed lending only — better protection than purely personal loans
- Concentration limits — diversified across borrowers and sectors
The “Auto-Diversification” Marketing Trap
Platforms advertise “automatic diversification across 100+ borrowers.” This sounds protective but if all borrowers fit the same risk profile (e.g., subprime consumer loans), correlation is high. Real diversification needs different lending categories.
Tax Treatment
Interest earned within the IFISA is tax-free, like other ISAs. Capital losses can be offset against future gains, but only within the IFISA wrapper.
Better Alternatives for Most Savers
For 95% of UK savers, the risk-adjusted return of IFISAs doesn’t beat:
- Stocks & Shares ISA with global index fund (long-term)
- Premium Bonds (mid-term)
- High-yield Cash ISA (short-term)
⚠️ Reality Check: “Up to 10%” yields almost always mean “less than 6% after defaults and platform failures.” Be honest about realistic returns.
