If you’ve heard of an Innovative Finance ISA (IFISA, pronounced ‘if-ISA’) but aren’t sure what they are or whether they’re right for you, we’re here to answer some of your questions.
What is an IFISA compared with a regular cash, or stocks & shares ISA?
An Innovative Finance ISA is actually quite different from a cash, or stocks & shares ISA. The only similarities are that you have a maximum allowance each year (currently £20,000 across all types of ISA) and all the income and gains you make are tax-free.
Unlike other types of ISA, where a third party manages your money, with an IFISA your investment is generally collected together with other investors’ money and loaned to an individual or company looking to borrow money. To put it another way, you become a lender and your money is lent directly to borrowers, usually through a crowdfunding or peer-to-peer lending platform.
Those borrowers might range from a small business looking to expand, or a property developer looking to top up bank funding, to a group of people wanting to buy a single buy-to-let property. Some ‘green’ companies also prefer to bypass traditional banks, whose other clients’ activities might not conform to their own ethical criteria.
What’s a typical IFISA return?
Current IFISA returns range from around 4% up to 10% p.a., but it should be remembered that these are target, rather than guaranteed returns. Investors need to do thorough due diligence to ensure that borrowers offering higher returns are in a strong position to deliver these.
What makes an investment IFISA-eligible?
There are only three classes of IFISA-eligible investments: peer-to-peer loans, crowdfunding debentures and cash. A peer-to-peer loan is a loan that bypasses traditional lenders, such as banks, and matches lenders and borrowers directly. Crowdfunding debentures are medium- to long-term debt instruments secured against assets. Large companies tend to use them to borrow money, at a fixed rate of interest.
IFISA-eligible assets tend to fall into the following categories: property projects, loans to individuals or small businesses, and green energy projects.
Why do IFISAs offer such good rates compared with other ISAs?
Unlike other forms of ISA, IFISAs are not protected by the Financial Services Compensation Scheme (FSCS) guarantee and returns are not guaranteed. This makes IFISAs considerably higher risk than a cash ISA, say, as there is the potential to lose all of your investment. IFISAs therefore offer higher returns, as a way of attracting investors. Another reason for IFISAs offering good rates is the fact that, as there are no bank fees involved, lenders tend to get a higher proportion of the interest charged.
Are IFISAs riskier than other ISAs?
Yes, because unlike other forms of ISA, IFISAs are not protected by the Financial Services Compensation Scheme (FSCS) guarantee. (The FSCS guarantees up to £85,000 if a provider collapses.) UK platform providers must be regulated by the Financial Conduct Authority (FCA) and have sufficient reserves and a formal wind-down plan to ensure they can administer any investments until they mature. This is important as they provide the key link between the borrower and the investors, receiving the repayments and distributing them.
The main thing is to try and avoid the risk of a borrower defaulting by doing thorough due diligence before investing. Choose a peer-to-peer or crowdfunding platform with a solid track record (although this is not a guarantee in itself that future loan schemes will be successful). And when choosing which individual project(s) to fund, look for an established company with a proven track record.
Given that IFISA returns are not guaranteed, or covered by the FSCS guarantee, it is highly advisable both to include them as part of a diversified portfolio containing a mix of higher- and lower-risk investments; and to diversify the mix of investments in your IFISA.
Before being allowed to invest, you will be asked to demonstrate that you have understood both the risks and the protections offered by each individual platform. In addition, you should consider whether you might wish to withdraw your money early and if there are any penalties for doing so. For most property and small business lending, you should assume that you can’t exit early.
Can anyone get an IFISA?
Because IFISAs are not protected by the FSCS guarantee (see above) there is a risk that a lender might lose all their investment. For this reason, only sophisticated investors and High Net Worth Individuals, aged 18 or over, are allowed to make unrestricted investments into an IFISA. (If you are not, then you can still invest in P2P loans as a ‘restricted investor’ which means that you must agree not to invest more than 10% of your net assets, excluding the value of your home and pension pot.)
When taking out an IFISA you will be asked to complete a questionnaire demonstrating that you understand the risks involved, and also sign a declaration to show whether you are a High Net Worth Individual, a sophisticated or a restricted investor.
How do IFISA fees compare with fees for other ISAs?
With a cash ISA, there is no fee for investing, and transfer fees are generally either low or not applicable. With a stocks & shares ISA, however, your investment is actively managed and therefore you can expect to pay a monthly management fee plus dealing and withdrawal fees.
With IFISAs there are generally no management fees or fees for transferring in an investment, however you may be charged for transferring out an investment or selling an investment via the secondary market, where this is available. You can check out individual providers’ fees on their website.
Are IFISAs still a bit ‘niche’ or have they come of age?
IFISAs have only been around since 2016, but the market has been growing steadily. In 2018/19, the amount of money invested in IFISAs grew from £352 million the previous year to £648 million, and is now thought to be in excess of £1 billion. During lockdown, many people were able to save money and take the time to think about their finances, fuelling interest in IFISAs still further. The number of IFISA providers is increasing each year, however investors would be well advised to choose a provider with a proven track record.
What are the benefits of an IFISA?
For an investor/lender, an IFISA offers a wide range of benefits:
all your gains are tax-free
you can earn higher rates of interest than you would from other types of ISA, bonds, or most savings accounts
you can choose which projects to fund, giving you greater control over your investment
you can choose to invest ethically
the process is very quick and easy, and you can monitor your investment(s) online
you can diversify your portfolio into a range of investments offering different risk/return profiles.
For a borrower:
peer-to-peer lending might offer more attractive interest rates than traditional banks or building societies
for individuals or small businesses with low funding requirements or low credit ratings, peer-to-peer funding might be the best option
if you have a relatively niche funding requirement, you can simply go to a peer-to-peer platform and see if anyone is prepared to back you without having to go through a formal bank application procedure
some platforms will allow borrowers to pay off a loan early or make an overpayment with no penalties
since the entire process is managed online, it can be quicker and easier than going via a bank.
Where can I get an IFISA?
The number of IFISA providers is growing each year. Mostly these are crowdfunding or peer-to-peer lending platforms. Wherever you decide to invest, ensure you do thorough due diligence beforehand, particularly with new market entrants.
How many investments can I put in one IFISA, and can they be with different providers?
You can add new money to one IFISA per tax year, with a single provider. However, you can invest as much or as little as you like with that provider, in terms of monetary value or number of investments, up to a maximum of £20,000 in the current tax year (providing you haven’t taken out any other ISAs in the same tax year).
Can I have an IFISA and a cash, or stocks & shares ISA at the same time?
Yes, you can hold multiple ISAs at the same time as long as you invest no more than the annual allowance (currently £20,000) in one tax year and only have one of each type for the current year.
You can only open one new IFISA per tax year, with a single provider. The £20,000 current annual allowance covers all your ISA investments for the year. So, for example, if you put £5,000 in a cash ISA and £10,000 in a stocks & shares ISA in the same year, you will only be able to put the remaining £5,000 in an IFISA that same tax year, and no more.
You could, say, have five cash ISAs and five stocks & shares ISAs taken out in the last ten years, plus one IFISA, one cash ISA, and one stocks & shares ISA totalling £20,000, taken out in 2022.
How many IFISAs can I have at one time?
You can take out one IFISA per year and keep it for as long as you like. So you could have one IFISA from 2016 (the year they launched) and every subsequent year since.
Can I transfer investments into an IFISA?
Yes, and no. You can transfer money from a cash, or stocks & shares ISA into an IFISA. However you can only transfer the full amount, and if you transfer from a stocks & shares ISA the equities will need to be sold and then converted to cash before the transfer.
Also you can’t transfer peer-to-peer loans straight into an IFISA. To do so, you would have to sell the loan, pay any early exit fees, and then make the loan again at the prevailing market rate.
Note that you can transfer any amount to an IFISA from an ISA you’ve taken out in a previous tax year, without affecting your £20,000 current annual allowance.
What’s the minimum I can invest?
The minimum investment varies considerably between providers. Some will let you invest from as little as £1; for others, the minimum may be £10, £100, £500, £1,000 or £5,000.
How does ethical investing fit in with an IFISA?
Since an IFISA allows you to choose which companies, individuals or industries to fund, they are a perfect way to invest ethically (or ‘for impact’) i.e. earn money while, at the same time delivering a positive social, economic or environmental benefit.
For example, you could provide finance to a green energy supplier, a recycling project or a charity that provides housing for people with learning disabilities. This type of company might have relatively small funding requirements that fail to meet banks’ lending criteria; or they may actively choose to bypass traditional banks on the grounds that banks lend to a range of businesses that might breach their own ethical criteria.
Is an IFISA allowance the same as other ISA allowances?
Yes, the current allowance for all types of ISA in total is £20,000 per year.
Once I’ve taken out an IFISA do I have to actively manage it?
No, you can simply choose which projects to fund and then sit back and wait for returns. However, given the higher risks involved in lending through an IFISA you would be well advised to keep a close eye on your investment.
Can I get a flexible IFISA?
Flexible ISAs enable you to withdraw and reinvest money without affecting your annual ISA allowance. They were introduced at the same time as IFISAs in April 2016 and many providers do offer flexible IFISAs. It will clearly state on a provider’s website whether the IFISAs they offer are flexible.
For more information on our IFISA-eligible investment opportunity, simply call us on 0800 138 5400 and one of our helpful team members will be on hand to answer your questions.
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