The Fixer: innovative finance ISAs

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Dear Fixer,

I am interested in investing some money tax efficiently and have been reading about new innovative finance ISAs, which seem a good way to earn more interest than with a bank account.

However, I am a bit worried about how safe they are as it seems there is a risk I could lose money in one.

Can you explain the risks involved? Thank you for your help.

G Brazier, Stockport

Dear Mr Brazier,
Innovative finance ISAs are an alternative to traditional ISAs, with which you can invest in cash or stocks and shares.

With ISAs of this kind, the money you invest is lent out to companies or individuals at a fixed interest rate.

The rate you receive depends on the risk profile of the person or business to which you offer the loan.

A company with a good credit profile, for example, might pay 4%, while an individual with an average credit rating might pay 6%.

But should the person or business you lend to default on the loan, you could lose some or all of your investment - just as you could when investing in a company on the stock market.

The peer-to-peer lenders offering the accounts will manage the risks by lending your money out to lots of different people or businesses. This way, even if one or two default, the loss will not eat up all your cash.

However, you will not qualify for the protection of the Financial Services Compensation Scheme, which guarantees the first £75,000 (or £150,000 for joint accounts) held with any one savings licence holder.

The provider going bust is another risk to take into account as a result.

The Fixer

Whatever your financial problem, write to themoneyfixer@aim.com and The AOL Money Fixer will get on the case.