This year has seen an explosion of new innovative finance Isas attempting to lure ordinary savers with the promise of bumper returns.
However, the higher rewards come with a higher risk – for one, they are not covered by the Financial Services Compensation Scheme.
Capital is also at risk because essentially, the accounts – offered by peer-to-peer lenders which, through their websites, match savers and borrowers – could be hit by loan defaults.
For that reason, experts suggest that if you do get involved, make it a small part of your portfolio and spread around the risk – and treat more like an investment account that a savings one.
Innovative finance isas are becoming increasingly commonplace with new providers launching all the time, but it remains the investing Wild West and you should be cautious
Should you dive in?
Iain Niblock, Orca’s chief executive, says that this product ‘can be the gateway to the P2P market for everyday investors’.
However, while the product certainly offers a level and speed of diversification it could otherwise take you five years to achieve, it’d still take you a decent amount of time to understand the ins and outs of all five products to the extent that you’d have a good understanding of what exactly you were putting your money in.
After all, having five platforms in one gives you five times as much work to do.
What’s more, it’s not strictly true that just because a loan is asset-backed or property-backed it is necessarily more secure – as Orca suggests for its Orca Pure product.
All the different platforms have their own individual rates of return and particular risks, which are then rolled into Orca’s final average rate of return.
This means you’d probably need to judge all the component parts of the Isa that you were investing in in order to work out whether or not 4.3, or 5.3, was a good rate of return.
For example, if your portfolio contains a larger percentage of Octopus Choice, which offers higher-risk bridging finance and commercial loans, then is a return rate of 4.3 per cent worth that risk – even if there is an element of diversification.
It’s an interesting product and it’s certainly worth keeping an eye on to see if it catches on with other providers, but if this is your first rodeo in the IFISA Wild West it might not be for you – and with no protection, the Orca Isa could end up being a killer for your cash.