What is an IFISA?
An Innovative Finance ISA – or IFISA – is one of the four different types of ISA available to UK investors.
The four types of ISA are: cash ISA; stocks and shares ISA, lifetime ISA, and Innovative Finance ISA.
An ISA is simply known as an individual savings account which has HMRC approval to shield all earnings from taxation. For example, if you have saved £100,000 in an ISA which returns 10 per cent in a year, your £10,000 earnings will not be subject to any taxation, and won’t count towards your overall tax bill.
Over time, and with the added value of compound interest, ISA savings and investments can grow significantly, meaning that these tax-free benefits will only become more valuable. However, the ultimate value of your ISA will vary greatly depending on how you choose to invest your funds.
You can shelter up to £20,000 each tax year in an ISA. This limit resets on 6 April every year. The only exception to this rule is the lifetime ISA, which has a £4,000 annual investment limit.
Investors can choose to invest in one, two, three or all four types of ISA during each financial year. However, the IFISA stands alone in several key ways.
- Investors can only open one new IFISA each financial year. However, there is no limit on the number of ISA transfers which can take place.
- IFISAs were created specifically for the P2P and crowdfunding sector, which has been labelled as a ‘higher risk investment’ by the Financial Conduct Authority. As a result, everyday investors are advised to invest no more than 10 per cent of their wealth into IFISA accounts.
- Before opening a new IFISA account, investors must complete an appropriateness test which aims to ensure that all IFISA investors are educated on the risks involved.
- In comparison to the other types of ISA available on the market, the IFISA is not well known and there are relatively few options for investors.
According to Peer2Peer Finance News research, for the 2022/23 financial year there are just 41 IFISA accounts available to investors. The vast majority of these accounts are offered by alternative investment platforms, rather than household names such as banks. This can make it harder for newcomers to navigate the market.
Furthermore, each of these 41 IFISA managers have their own risk models, target returns, and investment minimums, which means that it is especially important for retail investors to carry out due diligence before committing to a new investment.
Once these hurdles have been passed, the rewards are clear. While cash ISA returns have languished at under two per cent for years, and stocks and shares ISAs are subject to extreme macro-economic volatility; IFISA returns have remained remarkably consistent over the years. Our research has found that average annual IFISA returns have ranged between 7.8 and nine per cent over the past five years, exceeding the rate of inflation in every year other than 2023.
So how do you invest in an IFISA?
First of all, you need to choose your IFISA manager. Check out Peer2Peer Finance News’ regularly updated IFISA guide for data on historic returns and minimum investment thresholds. To find out more about an individual IFISA provider, you can visit their website and read through the ‘About Us’ and ‘Statistics’ pages.
Next, think about the sorts of loans you would like to invest in. IFISA investments back everything from green energy projects, to consumer loans, to property developments, to British businesses. For added security, look for investments where the P2P lending platform has a first charge against a key asset such as a property. This means that if the borrower defaults on a loan payment, the platform can intervene and sell the property to recoup the capital investment on your behalf.
Read more: ISA season: Where to find the highest IFISA returns
Finally, consider liquidity. Many IFISA investments relate to bonds, which typically come with a fixed term commitment of six months to five years. If you think you may need to access your money before the end of the loan term, you will need to ensure that your IFISA provider offers an exit strategy or access to a secondary market where you can sell your loan to other investors.
Read more: Property IFISAs: Backing bricks and mortar
Once you have chosen your IFISA provider, it is time to open your account. This is where you will be asked to complete an appropriateness test, where you will be asked some basic questions about risk and investing. Once passed, you can use open banking technology to quickly open an account and start adding money to your IFISA. Depending on your chosen platform, you may have to wait for a new investment opportunity to be listed before you can start allocating your money. On bigger platforms, you should be able to invest straight away via an auto-lending account which automatically diversifies your money across a number of different loans.
Remember, you can only open one new IFISA account per year, but there is nothing stopping you from transferring funds from your existing cash ISA or stocks and shares ISA accounts. Just make sure that you understand the risks, and check in with your platform regularly to ensure that you are still happy with your IFISA portfolio and comfortable with the platform’s management.
Happy investing!
