A whole generation of investors have grown up with ISAs, now firmly established on the
UK investment scene. Individual Savings Accounts, to give them their full title, were introduced in 1999 and were themselves a replacement for Personal Equity Plans, PEPs, launched as long ago as 1986.
The government set them up to encourage saving and investment by offering generous tax breaks. With an ISA you can invest up to £20,000 a year without paying tax on the investments. Since the introduction of the original ISAs, the government has introduced other types, so that there are now seven and the main four are: Cash ISAs; Stocks and Shares ISAs; Lifetime ISAs; and now, Innovative Finance ISAs.
You can invest into one of each kind of ISA each tax year – up to the total £20,000 limit.
This is an extremely useful tax shelter which can turbo-charge the growth of a portfolio. So, not surprisingly that ISAs have proved extremely popular.
According to a HM Revenue and Customs report of April 2019, at the end of 2017-2018 the market value of Adult ISA holdings stood at £608bn, a 4% increase compared to the value at the end of 2016-2017. Cash ISA holdings accounted for 44% and Stocks and Shares ISAs accounted for 55% of the market value.
ISAs have earned and retained this position of popularity because they offer such attractive tax benefits but also because the government has adapted them and expanded the offer according to developments in the investment environment. The latest addition to the ISA stable is the Innovative Finance ISA, or IFISA.
The background to its introduction in 2016 was the growing peer to peer lending market. More investors were taking advantage of the opportunities offered by high growth businesses raising funds on the peer to peer platforms but were required to declare their income from these investments, typically through their self–assessment return and any gains were taxable.
Now, however, 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, getting the usual ISA benefits of tax-free interest and capital gains.
As the name suggests, a Cash ISA is made up of cash savings. The attraction of a Cash ISA, for some investors, is - apart from its simplicity - that cash is one of the safest forms of investment. On the other hand, as is often the case with investments, what you gain on the swings of security, you lose on the roundabouts of returns. The price you pay for security is having to put up with lower potential returns as, in general, the safer an investment, the lower the returns. This is particularly the case with cash at the moment as interest rates are at historical lows.
Stocks and Shares ISAs, being made up of investments in equities usually offer a higher rate of return than cash, both in terms of capital gains, when the value of the shares increases, and also in regular dividend payments. However, there’s greater risk. Stock markets fluctuate and, although the long term trend might be upwards, there can be severe short term falls.
IFISAs could be seen as a compromise between the risk/reward profiles of Cash ISAs on the one hand and Stocks and Shares ISAs on the other. Included in the assets you can buy for an IFISA are property bonds, issued by a company to fund property projects. The issuer of the bond commits to repay the amount loaned – the face value of the bond – when it matures after a set number of years. The bonds also pay interest, at regular, set intervals, at a fixed rate. They’ll typically pay a higher rate of return than cash but lower than stocks and shares. This can make them a valuable addition to a diversified portfolio.
But how do you go about choosing the best IFISA provider?
First, decide what kind of IFISA you need. You must be clear on how much risk you want to take with your investments, balancing your need for security with your desire for returns. You also need to weigh up your investment ambitions and goals, whether you need a fixed income, easy access to your funds and whether you want to be actively involved in the management of your investment.
Once you have these issues clear in your mind you can take a look at the IFISA providers to see which ones are offering products which most closely match your requirements. Here’s how:
Undertake thorough research and commission an independent financial advisor to guide you through the choices made into selected investments.
Even though IFISAs are relatively new there’s already a wide variety of types of provider. The main funded IFISAs include: business; green energy; infrastructure; property development; crowdfunding small businesses; and buy-to-let mortgages. The projected rates of return range from 3% a year to 15% and vary in terms of their risk.
All providers have a minimum investment allowance. You have to consider not only what’s affordable but that your investments are also spread out to provide a balanced portfolio.
Take time to research a provider. Does it have an online platform where you can view the progress of individual investments? Has it been established long and has it featured in the media? Does it have a track record in managing the kind of investment you’re considering?
Take into account the worst case scenarios. What can you afford to lose? Finally the type of sector where the investments are made could influence the likely returns or risk.
With property bonds in an ISIFA, the investor can put together a diversified portfolio containing a number of bonds, paying at different intervals to provide a fairly constant income stream and, if they have different maturity dates, the investor can have a rolling series of redemptions which helps liquidity. Investors must always ensure they don’t tie up all their capital so that there’s none available for an emergency.
The best IFISA will differ from one individual to another, but two things remain constant – do your research and take advice from independant proffesionals.