Five IFISA mistakes to avoid
Investing in an Innovative Finance ISA (IFISA) is easy. But it is still possible to make a few costly mistakes.
From breaking the ISA rules, to failing to maximise your tax-free earnings, we have listed some of the most common mistakes that IFISA investors make… and how to avoid them!
- Not investing in an IFISA
This is by far the biggest mistake most ISA investors are making, but it is easy to understand why. The IFISA is the least famous member of the ISA family, and Financial Conduct Authority (FCA) regulations mean that most IFISA managers are unable to advertise their IFISA benefits as openly as they might like.
However, Peer2Peer Finance News has a deep pool of resources designed to help to guide you through the IFISA market and learn how to invest. Take a few minutes to learn about the benefits (and risks) of IFISA investing, and learn which IFISA may be right for you.
- Investing in more than one IFISA a year
While there is no limit on the number of P2P lending accounts that you can hold, it is worth remembering that retail investors are only allowed to invest in one new IFISA account each financial year. This makes it especially important to choose your IFISA wisely. From 6 April, all new money that you wish to invest into an IFISA must be invested into the same IFISA.
Read more: IFISA returns on the rise
Having said that, there are no restrictions on ISA transfers. Open banking technology has made it easier than ever for investors to transfer funds between one financial services provider and another. Any previously-invested ISA money which is sitting in a stocks and shares ISA or cash ISA can be easily transferred in to an IFISA with just a few clicks. This is a great way to reorganise your ISA investing portfolio without breaching HMRC rules.
- Investing too much in an IFISA
Each UK taxpayer can invest up to £20,000 into an IFISA account each financial year, with the figure resetting on 6 April.
However, this £20,000 limit also applies to all ISA investments in general. So If you have invested £15,000 into your stocks and shares ISA so far this year, you will only be able to invest a maximum of £5,000 into your IFISA.
By investing too much, you risk being hit with a surprise tax bill or another HMRC penalty, and causing confusion on your accounts.
- Not diversifying your IFISA investments
IFISA diversification means making sure that you aren’t putting all your eggs in one basket. Or all your money into one loan.
In theory, the more loans that you are invested in, the lower the likelihood of capital losses. And if you can invest in multiple platforms across a variety of lending segments (e.g. consumer, business, and property), all the better!
Read more: ISA season: Savings rates versus IFISAs
Most P2P lending platforms have both manual and automated investing options. Manual lending is where investors hand pick the individual loans or bonds that they want to fund, and build their own portfolio accordingly. However, this can result in a lack of diversification.
Auto-investing is where the lending platform automatically invests lender money across a range of investment opportunities in a process known as fractional investing. Loans are sometimes bundled together due to similarities in their risk profile. This option offers instant diversification but investors have less control over the specific projects that their money is funding.
Over time, it is wise to further diversify your IFISA portfolio by opening multiple IFISA accounts with different types of platforms.
- Missing the ISA deadline
In the UK, every financial year ends on 5 April, and every new financial year begins on 6 April. That 5 April deadline has a habit of sneaking up, and we know from past experience that many investors leave it to the very last minute to make their ISA contributions for the year.
Read more: 39 million adults set to miss tax-free ISA deadline
Up to £20,000 can be sheltered in an ISA each year, but unused funds do not roll over to the next year. If you have £10,000 in your existing investment portfolio and only £5,000 is wrapped in an ISA, you only have until 5 April to get that remaining £5,000 into an ISA account. Make sure that all of your ISA-eligible investments are properly protected from taxation before you lose your chance.
Click here to read our guide on all of the IFISAs on the market.
