Though they both benefit from the generous ISA tax wrapper, the Cash ISA and IFISA are very different products. Firstly, the Cash ISA is a savings product, while the IFISA is an investment product. They also differ in regards to eligibility and risk profile, among other things.
The IFISA allows investors to hold debt-based securities and lend funds through the peer-to-peer lending market without paying tax on interest or capital gains. On the other hand, the Cash ISA is a savings account designed to hold only cash, and any interest earned on cash savings is tax free.
As previously mentioned, the main similarity between an IFISA and a Cash ISA is their tax wrapper, but there are many ways in which they differ.
ANNUAL SUBSCRIPTION LIMIT
Aged 16 and over
Aged 18 and over, most suitable for experienced investors
Medium / high
To be eligible to open an IFISA, you must be 18 years old or over. However, you can open a Cash ISA from the age of 16.
Cash ISAs could be a good choice for those who are risk averse - as your capital is not at risk. On the other hand, an IFISA - which is an investment product, meaning your capital is at risk and returns are not guaranteed - is generally most suitable for an experienced investor (sophisticated, high-net-worth or professional) with a medium/high risk appetite.
RATES OF RETURN
The potential rates of returns offered by a Cash ISA and an IFISA are notably different. To match their low risk, the returns from a Cash ISA are low - generally sitting at below 2% per annum. These returns are often not inflation-beating, meaning savings can be eroded by rising prices.
On the other hand, an IFISA can offer target rates of between 4% and 8% (depending on the underlying asset). These higher rates of return are met with a medium/high risk profile though.
As briefly mentioned above, Cash ISAs and IFISAs have different levels of risk. Cash ISAs sit at the lower risk end of the spectrum, while IFISAs are medium/high risk. This means, of course, that IFISAs can offer better returns (see above), but your capital is at risk and returns are not guaranteed.
Cash ISAs have lower risk, and because they’re a savings product - not an investment product - you will always get back the money you deposited, though with rates barely keeping ahead of the rate of inflation, the value of the capital may be eroded.
Cash ISAs, unlike IFISAs, are also covered by the Financial Services Compensation Scheme (FSCS). This means that if your Financial Conduct Authority (FCA) authorised ISA provider was to fail, your savings would be protected up to £85,000.
MAVEN Bonds are an IFISA provider specialising in fixed term property bonds.
Against a backdrop of low interest rates and a volatile stock market, the IFISA can provide an attractive investment opportunity for experienced investors.
With the ability to hold peer-to-peer loans and debt-based securities, IFISA investments have the potential to generate higher rates of return than more traditional investment routes for investors with a greater appetite for risk.
To find out more, download our free IFISA guide.