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Looking to maximise your income with this year’s ISA allowance?

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21 March 2016

David Prosser discusses why it might be worth considering peer-to-peer loans.

For many investors pondering what to do with this year’s individual savings account (ISA) allowance as the 2015-16 financial year draws to a close, the priority will be maximising their income. If so, it’s worth at least considering peer-to-peer platforms – and contrary to popular opinion, you can do so right now within an ISA.

The rapid growth of these platforms – online portals that enable investors to make loans to consumers or small businesses – last year prompted the Government to announce the launch of the Innovative Finance ISA. From next month, investors will be able to hold loans they’ve made through the peer-to-peer platforms within their ISAs, sheltering their precious income from tax. But if you’re keen to use this year’s ISA allowance to build up this sort of exposure, the investment companies industry can help.

Over the past two years, no fewer than six investment companies have come to market offering investors access to professionally-managed portfolios of peer-to-peer loans. They’ve proved popular and are collectively now capitalised at around £1.6bn – and, since the Government changed the rules last July, these funds have been permissible ISA holdings.

In other words, these closed-ended funds enable investors to shelter peer-to-peer investments from tax even before the Innovative Finance ISA comes along. And with target yields that range from 6 to 10 per cent, they could be a popular option – it’s difficult to find another asset class, whether cash, bond or equity-based, that can match this.

This is why each of the funds in question – P2P Global Investments, VPC Speciality Lending, GLI Alternative Finance, Funding Circle SME Income, Honeycomb Investment Trust and Ranger Direct Lending – proved popular with investors on launch. Interestingly, however, while shares in these funds traded at a premium to the value of their underlying assets for much of last year, several of them have slipped to a discount in recent months. That partly reflects a widening of discounts across the whole investment company universe, but is also a reaction to the recent collapse of TrustBuddy, a Swedish peer-to-peer platform whose bankruptcy spooked some investors.

Might these discounts be a buying opportunity for investors? Well, that depends on your views about the riskiness of peer-to-peer lending more generally. There are those who fear the sector has grown too quickly and could be heading for a bust – including the former city regulator Lord Turner, who made headlines last month with a warning on how exactly that is possible.

The peer-to-peer platforms, however, point to their very low levels of defaults and insist they’re choosy about who they allow to use them to borrow money. Platforms in the SME sector often ask for security against borrowing.

It’s certainly important to be circumspect – and all the funds investing in peer-to-peer loans are building different types of portfolio, focusing on different types of lending and in different geographies. Investors and their advisers will need to do their homework before taking the plunge.

Nevertheless, this is a potentially interesting area for income-seeking investors that has developed quickly somewhat under the radar. While such investors are having to look beyond cash deposits for extra income, given the super low level of interest rates, the peer-to-peer sector may give them valuable diversification away from equities. The fact that these funds are already ISA permissible is an added bonus that not everyone will have spotted.

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