Higher rates come with risks, so don't relax too much
(Image credit: Credit: AF archive / Alamy Stock Photo)
Last year's financial damp squib could be this year's firework. The new innovative finance individual savings accounts (IF Isas) raised just £17m in the 2016-2017 tax year, their first year of operation, but the figure for 2017-2018 looks set to be a lot higher, says HM Revenue & Customs. IF Isas enable savers to use their annual Isa allowance to invest through peer-to-peer (P2P) lending platforms, which match investors looking for income with borrowers who need a loan.
Although IF Isas got off to a slow start, the three biggest P2P platforms now either have IF Isas available or are on the verge of launching one. In all, more than 30 platforms now offer the product, and providers report high demand so much so that the market's potential size in 2017/2018 may be limited only by the platforms' ability to source enough borrowers who want to take out loans from investors wanting to lend.
For example, Zopa, the longest-established platform, has only just reopened to new customers after a prolonged shutdown prompted by an imbalance between borrowers and investors.
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Given these pressures, would-be IF Isa investors must do their homework some platforms may be tempted to accept borrowers they might previously have turned away as too risky, in order to provide sufficient opportunities for investors. Importantly, unlike cash savings, you can lose your money through P2P lending, as with any investment.
Some platforms have compensation funds to provide extra protection, but at the end of the day, if borrowers default, investors lose their cash and there is no recourse to the Financial Services Compensation Scheme. Also be aware that the often-tempting headline rates of income quoted don't include defaults.
So if you decide to invest, you should build a diversified portfolio of loans and ensure you understand the nature of the loans you're making; the extent to which platforms have assessed credit risk; what credit risk you're exposed to; and whether your loans are backed by any assets that could be called upon in the event of a default. Also be aware that rising interest rates in the broader market could make the rates on IF Isas seem less appealing over time.
Tread carefully with the VCT Isa
Should you use your individual savings account (Isa) allowance to invest in venture-capital trusts (VCTs)? The question arises from an innovative feature of the Octopus Titan VCT, which this year includes a facility enabling investors to transfer money invested in Isas in previous tax years into the fund.
The feature appears to have buoyed Titan, which has raised more money than any other VCT so far this tax year. In practice, however, it's difficult to see why you'd do this. Certainly, there's no additional tax advantage, as while investments held in an Isa are tax-free, VCT shares are tax-free too.
"The only benefit seems to be that you can invest more than £200,000 in VCTs in a single tax year," says tax adviser Ben Yearsley. This is the usual cap on VCT investment, but transfers of previous years' Isa investments wouldn't count towards it. However, "anything above £200,000 doesn't get the 30% upfront income-tax relief that new VCT shares qualify for".
Tread carefully, in other words. VCT shares are permissible Isa investments for both this and previous years' Isa allowances and you have a choice of funds if you use a self-select Isa that you manage yourself; but there may be better uses for the allowance.
More retirees are cashing in their pensions
Almost 775,000 people withdrew £6.5bn from their pension savings last year, reports HM Revenue & Customs, as the numbers taking advantage of the pension freedom reforms introduced in April 2015 continued to increase.
However, while 2017's total was a sharp increase on 2016, when 550,000 people took £5.7bn out of their savings, the size of the average withdrawal was around £2,000 lower than in the previous year, falling to £7,586. That may suggest that savers are getting used to the new system which makes it easier to withdraw cash direct from a pension fund without buying an annuity and are acting sensibly to avoid running out of savings.
What is potentially more worrying is that, according to some advisers, the number of people withdrawing all their pension savings in one go, as the rules now allow for, is also increasing. Depending on the amount withdrawn, this could expose them to a substantial tax hit, as well as potentially leaving them without a source of future retirement income.
That said, many of these could simply be individuals who are fully withdrawing pots with relatively negligible amounts in them, and relying on other sources of income to sustain them. In truth it will be years before we know exactly how the reforms have changed retirees' behaviour the main thing is to ensure that you know your options thoroughly before you access your own pension.
Tax tip of the week
If you're cashing out profits from trading in bitcoin, don't forget the tax implications. HMRC's most recent brief on cryptocurrencies was back in 2014, and there have been some rather hopeful reports in the press that a "loophole" in the law means bitcoin gains are tax-free (as speculating on cryptocurrencies could be regarded as a form of gambling). But this is very unlikely to be the case.
"It is difficult to see how the profits on mainstream cryptocurrencies... could be seen as gambling profits," says Robert Langston on the Tax Journal website. Cryptocurrencies are "intangible assets that carry certain rights, and can be bought and sold". Hence profits from investing in them are "likely to be subject to CGT".
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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