Innovative Finance ISAs (IFISAs) are the latest addition to the ISA family. They present an investment opportunity that can be a useful way of making use of some or all of investors’ £20,000 annual ISA tax allowance. They have a different risk and reward profile to other types of ISAs which means they can be a valuable addition to a balanced investment portfolio.
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, while receiving the usual ISA benefits of tax-free interest and capital gains.
So, by using an IFISA, peer to peer lending income can be taken out of tax completely.
IFISAs are relatively new but there is already a wide variety of types of provider.
The main funded IFISAs include property, green energy, SME lending and consumer lending.
The projected rates of return range from 3% a year to 15% and vary in terms of their risk profiles.
All IFISA providers will have their minimum investment allowance, however it’s vital to take into consideration not only what is affordable but that investments are also spread out equally to provide a balanced and diverse portfolio.
It is vital with an IFISA, or any form of investment, that thorough research is undertaken and where possible an independent financial advisor is commissioned to support and guide you through the choices made into selected investments.
Selecting the right IFISA provider once you have thoroughly researched all of your available options will also depend on your risk appetite. Investors should also take into account the worst case scenarios such as what you can afford to lose.
IFISAs are suitable for investors who are looking for a higher level of risk in their investment portfolio for the potential to earn a better return than is available through other mainstream investments such as a Cash ISA.
As of December 2019, new rules proposed by the Financial Conduct Authority (FCA) state that individuals will not be permitted to have more than 10 percent of their assets in peer to peer investments unless they have demonstrated their understanding of investing through an appropriate test carried out by the P2P platform in which an investment is being made.
These new rules apply to the IFISA market and have been brought into force to prevent everyday investors from taking what the regulator considers to be an excessive risk if they do not understand the investment.
IFISAs can be useful for people such as the retired, who need some degree of certainty in terms of the returns they can expect. That said returns are not guaranteed and capital is at risk.
IFISAs are also a useful addition to any investment portfolio in adding to its diversification and in providing a balancing compromise between higher risk and higher return and lower risk and lower return.
The 2019/2020 ISA tax allowance is £20,000 and can be used to invest into one type of ISA such as an IFISA or spread across different types of ISAs. You can put money into one of each kind of ISA each tax year but can only invest into 1 IFISA per tax year.
There’s no limit on the amount you can transfer from ISA funds accumulated over past financial years into an IFISA, nor the number of approved peer to peer lending platforms with which you can set one up in order to accommodate these old ISA funds.
These old ISA funds were accumulated in previous tax years, and are thus not subject to the restrictions and limitations of the annual individual ISA allowance.
Innovative Finance ISAs are often referred to as the midway point (between Cash ISAs and Stocks and Shares ISAs) in terms of risk and return. They allow the investor to share in the potential returns available from investment opportunities now available in the peer to peer lending sector through debt based securities, which are around double the rates provided by Cash ISAs.
While they don’t offer the same potential rewards as Stocks and Shares ISAs, they can be a safer form of investment.
As they’re in the form of loans and debt based securities, they have a fixed value which is not subject to market fluctuations and they aim to 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 and it is important to understand that with any form of investment, capital is at risk.
It is also important to remember that unlike Cash ISAs which are protected by the FCA for up to £85,000, IFISAs are not protected if the provider was to go bust, and you must feel comfortable with having this level of risk in your portfolio before going ahead with an IFISA.