The Innovative Finance ISA and Stocks and Shares ISA are both investment products that are benefited by a tax wrapper, and both accounts typically have a medium/high risk profile. Despite these similarities, they do have some significant differences - differences which are worth considering when deciding which of the two ISAs is the most suitable for you and your investment portfolio.
The IFISA was introduced by the UK government in April 2016 and it allows investors to hold debt-based securities and loan funds through the peer-to-peer lending market without paying tax on any interest or capital gains.
The Stocks and Shares ISA enables investors to allocate money to a range of investments - including individual stocks and shares, unit trusts, and investment trusts.
ANNUAL SUBSCRIPTION LIMIT
Stocks and Shares ISA
Aged 18 and over
Medium / high
Aged 18 and over, most suitable for experienced investors
Medium / high
Any UK resident aged 18 and over is eligible to open both an IFISA and a Stocks and Shares ISA.
When it comes to suitability, and deciding which would be the best option for you, it’s important to look at the risks of both (which are covered in more detail below).
Both an IFISA and a Stocks and Shares ISA can help form part of a well diversified portfolio, but you should be sure that you’re well versed with the risks, and that the type of ISA you choose is matched to your risk profile.
It’s always recommended to talk to an independent financial advisor when deciding which investment product is the best choice for you.
Furthermore, your remaining ISA allowance can impact on your eligibility for the current tax year, as if you have met the threshold already, you will be ineligible to add new funds to either a Stocks and Shares ISA or IFISA until the new tax year begins.
RATES OF RETURN
Both IFISAs and Stocks and Shares ISAs offer higher target returns than a Cash ISA, but because they are investment products, your capital is at risk and returns are not guaranteed.
It’s a widely accepted fact that the higher the potential returns, the higher the risk - and this is the case with both IFISAs and Stocks and Shares ISAs.
IFISAs offer target returns of between 4% and 8% generally - depending on the underlying asset.
Stocks and Shares ISAs often often offer higher potential returns than an IFISA (ranging from 4% per annum upwards), but with increased volatility.
In regards to risks, IFISAs are best placed at the medium/high risk end of the spectrum, while Stocks and Shares ISAs sit at the higher risk end. They’re both investment products - unlike a Cash ISA, which is a deposit product - so your capital is at risk, and returns are not guaranteed.
IFISAs are not covered by the Financial Services Compensation Scheme (FSCS), but Stocks and Shares ISAs are - for up to £85,000 if the firm holding your money goes bust. It’s important to note that the FSCS protection for Stocks and Shares ISAs does not cover investment losses caused by poor performance.
The stock market has its ups, but also its downs, meaning the value of your investments could fall as well as rise. An IFISA on the other hand is not subject to the fluctuations of the stock market, but there is still the risk that a borrower could default on their loans, and you could fail to get back the funds you invested.
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.