IFISAs enable you to earn interest on peer to peer lending in a tax-free wrapper. Many companies offer IFISAs, and the interest rates vary depending on the company. If you are looking for an alternative to traditional bank savings or bonds, then you have come to the right place.
What is an Innovative Finance ISA or IFISA
With Innovative Finance ISA or IFISA, you can make a tax-free investment in peer to peer lending. With IFISA, the interest you earn through investment is not taxed, and it isn’t added up to your Savings Allowance. With ISA there’s a limit on how much you can contribute each year to ISA, called ISA annual limit. This limit for the year 2020 is £20,000. You can invest your total allowance in an IFISA, or you can spread it across different ISAs.
You can transfer your existing ISA money into an Innovative Finance ISA as well. But your savings from the previous tax year don’t pass on to the next year’s annual savings allowance. Hence, this way, you can increase your total investment and make the most of your returns. The interest rate offered by Innovative Finance ISA providers is usually double compared to cash ISAs providers.
Regular peer to peer lending vs. IFISAs
Peer to peer lending mechanic within IFISA is generally the same to those behind regular peer to peer lending.
In simple words, no matter which product you pick, you will be investing funds through the same method. So, you can get similar interest rate and risk, features and advantages. However, all these financial solutions have some key differences:
- While the non-ISA returns may be taxed, the interest made through an Innovative Finance ISA is never taxed depending on several different conditions, for example, whether you have used your PSA.
- The annual savings allowance and the other types of ISA products limit the amount of money you can subscribe to an Innovative Finance ISA. But there is a cap on the amount that you are allowed to invest in a non-ISA peer to peer.
- You can transfer IFISA funds to other types of ISA into the next tax year without adding to your existing annual savings allowance, which further shelters your funds from taxation. However, with the limitations, you cannot transfer your other funds (non-ISA) into any type of ISA.
Does the Financial Conduct Authority regulate IFISAs?
Peer to peer lending platforms needs to have full authorization from the FCA to provide IFISAs. This ensures that the right protections are in place for the investors/lenders and borrowers. Also, the FCA authorization ensures that the providers comply with the rules and that all financial products are provided transparently and fairly to customers. There are additional regulations regarding the handling of customer’s funds and complaints process.
Is Innovative Finance ISA risky?
Like any other type of investment, IFISA involves some risk. Borrowers could default on repayment, and the p2p provider could go bankrupt. In either case, there is also no cover from the FSCS (Financial Services Compensation Scheme). However, p2p platforms must have wind-down measures in place, and several have backup providers who manage loans if the platform unable to do so.
Who provides IFISAs?
There are a lot of providers available in the marketplace offering IFISA. However, all Innovative Finance ISA providers have to be authorized by the FCA (Financial Conduct Authority). Each Innovative Finance ISA allows you to loan money to businesses, consumers or developments, and you get to enjoy returns in a tax-free wrapper. There is more diversification within the Innovative Finance ISAs, and as this market continues to grow, a wide range of Investment options become available for investors.
Nearly every provider specializes in a type of P2P lending, while the type on loan varies along with the interest rates. Innovative Finance ISA providers who provide a very high-interest rate probably make the investment riskier or don’t diversify your funds across different loans. There are three common types of loans that IFISA specialize in are:
1. Property loans
Some peer to peer platforms provides property loans, varying in risk depending on the project. For example, it is less risky financing buy-to-let loans than funding development of the property. Usually, loans are secured against a property. However, you cannot reach the same diversification as you can with consumer loans.
2. Business loans
Some peer to peer providers offers loans to companies. These business loans can be unsecured or secured. Sometimes the interest rates are high, but only because Business loans are open to projects that have high default risk. It is possible to accomplish diversification, however, not like consumer loans.
3. Consumer loans
Many P2P providers offer unsecured loans to individuals, and the investment is well-diversified across multiple loans. The market for consumer peer to peer loans is very stable.
How to open an Innovative Finance ISA?
Opening an Innovative Finance ISA is a simple process. There are three necessary steps that you have to perform before you can pay into your account.
1. Check eligibility
You have to be 18 or above and a UK resident taxpayer to subscribe to IFISA. Almost every provider will ask your National Insurance number to verify your residency.
2. Choose a provider
If you are eligible, then choose an IFISA service provider from the market and submit your application. Remember that you can only subscribe to one IFISA every tax year and they are available only through specific FCA regulated peer to peer platforms.
3. Start investing
Once you have applied to an Innovative Finance ISA provider, you can start to pay into your new account to the limit of £20,000 per tax year. This limit is for all your ISA accounts, including cash ISAs, lifetime ISAs, and stocks & shares ISA.
Is Innovative Finance ISA worth the risk?
It is worth noting that IFISAs risk profiles are different for every platform. However, Innovative Finance ISA is accepted as a midpoint for reward and risk between cash ISA and stocks & shares ISA. Unlike stock market investment, lenders/investors enjoy steady and high returns from the IFISAs.
Although your funds aren’t guaranteed like it is if you deposit it in a bank, Cash ISA pays less return than the inflation rate. Because of the low-level risk, your funds in an IFSA will not lose its worth as it could in cash ISA.
Of course, investors have their preferences of risk, and it is essential to do your homework. The blend of inflation-beating, predictable returns, and easy sign-up procedure means the Innovative Finance ISA is creating an inspiring track record.