Investors have had to grow accustomed to low rates of return on their money over recent years. This is because, since the Lehmans crash and the credit crunch, interest rates have barely been hovering above zero.
This has the effect of lowering yields on other assets, making the job of an investor seeking a decent return so much harder and, at the same time, has lured some people into unwise, high risk investments.
In this environment, therefore, it’s important that you should leverage any tax breaks that are available. Receiving investment income that’s exempt from income tax will immediately save you 20% if you pay at the basic rate, which gives your investment a head start.
In the UK, one of the most generous allowances for the ordinary saver is that available on Individual Savings Accounts, ISAs.
What is the 2019 ISA allowance?
Your ISA allowance in 2019 is £20,000, so you can pay up to £20,000 a year into an ISA, without incurring any tax liability on the income the investment earns or on capital gains through any increase in its value.
If you leave income in the ISA to be added to the capital, the compounding effect makes it a powerful investment tool. No surprise that ISAs, originally set up in 1999 to encourage saving and investment, have proved to be a popular savings and investment vehicle. As with all types of ISAs there are benefits and drawbacks to each, of which is covered within this article.
How can you diversify investments?
As with any other type of investment, it’s important that you diversify your investments. That’s a technical way of saying: don’t put all your eggs in one basket. Spreading your investments across different types of asset, investing in different industries and even different parts of the world, spreads your risk, so that gains in one asset class can compensate for losses in another.
In June 2019 the FCA brought in new rules aimed at new retail investors, restricting the amount they can invest into P2P lending and as a result will promote building a more diverse portfolio.
Following consultation in June 2019, the new rules brought about by the Financial Conduct Authority (FCA) are designed to prevent harm to investors, without stifling innovation in the peer-to-peer (P2P) sector.
The new rules which must be implemented by P2P platforms by the 9th December 2019 will see the FCA placing a limit on investments in P2P agreements for retail customers new to the sector. This limit is set to 10 percent of the investable assets for new retail investors as a means of ensuring that they do not over-expose themselves to risk.
How to use your ISA allowance in 2019
Fortunately diversification is easily achievable with ISAs, as their variety allows the building of a diversified portfolio. There are seven types of ISA, the main four being: Cash ISAs; Stocks and Shares ISAs; Lifetime ISAs; and now, Innovative Finance ISAs (IFISA). An individual can invest into one of each kind of ISA each tax year – up to the total £20,000 limit.
Basic Cash ISA
A Basic ISA can be a Cash ISA or a Stocks and Shares ISA. A Cash ISA is made up of cash savings and, as such, is one of the safest forms of investment, not being at the mercy of market conditions – other than inflation – and not based on a business which could fail. However, the price for security in investment is usually lower returns and, as we’ve mentioned, interest rates are at historical lows and are barely keeping pace with the rate of inflation. Unlike stocks and shares ISAs, Cash ISAs are FCA protected and unlike IFISAs, cash can be accessed relatively easily.
Stocks and Shares ISA
Stocks and Shares ISAs, on the other hand, contain investments in equities and have the potential for a higher rate of return in capital gains - if the value of the shares increases - and also in dividends. Another benefit of the Stocks and Shares ISA is that you can sell the assets held in your Stocks and Shares ISA at any time and there is no minimum length of time you need to hold it. However if you do cash in some or all of your ISA, you can only reinvest this money into another ISA to the extent that you have unused available ISA allowances.
The flip side of this is greater potential risk. The value of stocks and shares will fall if the business behind them does badly and, even if the business is sound, the shares could still lose value in the event of a general market downturn. It’s true that over the longer term, the value of stocks and shares tends to rise, but there can be some sharp falls along the way and investors can get their fingers burnt.
Investment is all about balancing risk and return. Now, the investor who is looking at how to use their ISA allowance in 2019, has another option.
Innovative Finance ISA ( IFISA )
The Innovative Finance ISA, or IFISA was introduced in 2016 as a way of extending the ISA tax umbrella to the growing peer-to-peer lending market. The IFISA allows individuals to use some, or all, of their annual ISA investment allowance to lend funds through the peer to peer lending market and buy other debt based securities and they’ll still enjoy the ISA benefits of tax-free interest and capital gains.
In terms of risk/reward profile, IFISAs sit between Cash ISAs and Stocks and Shares ISAs.
With an IFISA, the investor can take advantage of the opportunities presented by some of the high growth businesses raising funds through the peer to peer lending sector. The returns from these are often higher than the rates provided by Cash ISAs.
While better than cash, these returns tend to be lower than those available from Stocks and Shares ISAs, but they can be safer due to many being asset backed. They’re in the form of loans and debt based securities, so they have a fixed value which isn’t subject to market conditions and they pay a target rate of return which isn’t affected by company performance.
Of course, there’s always the danger that the business which borrows the money could fail, but many of these IFISAs can be used to invest into asset backed bonds such as property bonds, which can be secured against property assets. The downside to IFISAs is that returns are not guaranteed, should there be a market downturn this could have a negative impact on investments. However that is not to say that all investments would be lost.
How to Invest into property bonds with an IFISA
A bond is a form of IOU, a fixed income certificate that represents a loan. Property bonds are bonds issued by a company to fund property projects, including the purchase of land or properties, development finance and planning finance.
Property bonds are debt instruments, meaning that the investor lends their money to the issuer, which commits to repay the amount loaned – the face value of the bond – when it matures, typically after between two and five years.
The bonds also pay interest, at a fixed rate and the investor may have the option of having the interest paid quarterly, or of having it rolled up to be paid in total at maturity.
The important thing is that these bonds can be secured against the property asset whose acquisition or development they’re funding. This means that, even if the bond issuer goes bust, the bond holder or lender still has the reassurance that the underlying asset can be sold and some or all of their investment returned.
One downside to IFISAs however is the fact that the return figure quoted as a headline rate by many IFISA providers is that this is a targeted rate of return and past performance is not an indication of future performance across all forms of investments. However with the right operators, healthy returns can be achieved in line with the targeted headline rate but this is not guaranteed.
Now that peer to peer property bonds are available in an IFISA wrapper, investors can use some of their ISA allowance in 2019 to diversify by investing in the property market, with all the ISA tax benefits, while enjoying a better rate of return than offered by a Cash ISA, but with more security than in a Stocks and Shares ISA. So, when considering how to use your ISA allowance in 2019, look carefully at the potential of IFISAs.
However, as with any investment, there’s still an element of risk. For this reason, it’s vital investors complete their own due diligence and ideally take professional financial advice before making any form of investment to ensure it’s as well suited to their portfolio requirements as possible in terms of risk versus reward.
MAVEN Bonds IFISA
MAVEN Bonds provide investors with access to fixed-term investments by generating returns from making secured loans available to the UK property sector.
Maven Capital Partners, in conjunction with Growth Capital Ventures, have combined traditional fund management values and property track record with a new tax-efficient investment product - MAVEN Bonds.
The MAVEN Bonds investment platform offers investors the opportunity to access tax-free returns of up to 7.75% per annum by investing through the MAVEN Bonds Innovative Finance ISA. Monies raised from investors is used to provide finance across a portfolio of secured projects – primarily into property deals led by either the Maven or GCV team. Security (either first or second ranking) will always be taken over borrowers assets.
For more information about MAVEN Bonds please download our investors guide here or to speak to a member of our investment team please contact us by clicking here.
Your capital is at risk. MAVEN Bonds are asset-backed but an economic downturn could affect returns and you may not get back the amount invested. In the event of default the security held doesn't guarantee the return of your capital. Enforcing your security may take time and your returns may be delayed. Investment is not covered by the Financial Services Compensation Scheme (FSCS).