What do you need to consider when choosing an IFISA?

By Jo Bentham12th April 2021

Against a backdrop of low interest rates and a volatile stock market, the Innovative Finance ISA (IFISA) is an important – and increasingly popular – consideration for experienced investors.

Article main image

Whether you are looking to alter the weighting of your ISA portfolio by transferring into an IFISA from another ISA, or wanting to subscribe some – or all – of your 2021/22 ISA allowance, after seeking advice regarding whether an IFISA is an appropriate investment option for you, it’s time to start reviewing your IFISA options.

When doing so, there are multiple things to consider, from the product’s risk–return profile – which will differ depending on the asset held – through to the provider’s track record and experience.

 

Decide on an asset that aligns with your investment goals

As the IFISA allows investors to hold both peer-to-peer loans and debt-based securities, there are multiple potential assets you could access through the tax-efficient wrapper – and deciding the best option for you is one of the most important considerations when choosing an IFISA.

One major benefit of an IFISA is the control an investor has over where their funds are invested, resulting in the ability to choose an asset that aligns with your investment goals.

Assets available under the IFISA wrapper include:

  • property

  • green energy

  • consumer loans

  • SME loans

The most appropriate asset for your individual portfolio will be dependent upon personal circumstances, goals and interests and it’s important to appreciate that not only can your decision be based on one of these — your goals, for example — but all three could play a very active role.

With property continuing to cement itself as one of the most popular investment options for experienced investors – and its evidenced resilience throughout the Coronavirus pandemic, which will likely see its popularity increase further – the property-backed IFISA could be a consideration for those looking for access to the asset in a hands-off manner.

Read more:why is the UK residential property market still such a favoured asset for  investors?

 But for many investors, investing is more than simply have money in a place with a focus on a financial return. It’s about making a difference; being able to showcase you are making a genuine impact through, for instance, the creation of new homes. 

And investors looking to invest for impact have a multitude of options within the IFISA. 

For example, investing into a property-backed IFISA results in aiding small and medium-sized regional housebuilders in delivering much needed housing at a time when the UK is suffering from a chronic housing shortage and the housing market has been considered crucial in the UK’s economic recovery post-Coronavirus. 

Moreover, with the world focused on tackling climate change and finding more environmentally friendly solutions to everyday activities, supporting green energy projects is critical, and something that is readily achievable via the IFISA.

 

Ensure the IFISAs risk–return profile is suitable for you

The IFISA targets higher potential returns than some mainstream investment products, often between 4% and 8%. Alongside the account’s tax wrapper, this offers valuable opportunities for experienced investors to maximise potential returns whilst minimising their tax bill. 

But the IFISA is an investment product, and as with all investments, capital is at risk and returns are not guaranteed. 

Generally considered to be mid-to–high risk, the exact risk–return profile of an IFISA will differ from product to product, as it is largely dependent on both the asset held and the provider’s risk mitigation processes. 

For example, most IFISAs holding property bonds are asset-backed – where the investment is secured against an asset of the borrowers, offering an additional layer of protection. This itself can vary — does the security come in the form of a first or second charge, for example? — though it is important to note that being asset-backed in any capacity does not guarantee the return of capital. It simply helps to mitigate some of the risk.

Similarly for property bonds, the property development size itself can be a consideration. Whilst a wider spread of developments for some investors may be a positive, a more focused approach on one or two specific developments — where there is more control over the asset — can be considerably more beneficial for other investors.

As well as this, gaining an understanding of the provider’s due diligence processes and how they manage risk is crucial. When reviewing IFISA options, ask each provider questions about these processes, as well as their wider experience, and conduct your own due diligence into whether the provider has the relevant expertise to be offering the product confidently.

 

Get to know the provider and their track record

Before choosing to invest into a particular IFISA product, it’s important to learn more about the provider, ensuring they’re reputable and experienced. IFISAs are alternative investment products and require the skills and knowledge of a trusted team to deliver to their intended targets.

Market and external factors will always present themselves, but the right team should not only be able to tackle them when needed, but have strong processes in place to navigate around them confidently.

Taking the time to understand these —  and their wider risk mitigation processes, as well as their processes for originating and screening lending opportunities — is key. This information should be available on their website, or in their brochure or offer document, but the team should be able to communicate about them when asked. 

Learn more about the expertise of the Board, too — do they have relevant past experience? And don’t be hesitant to ask for a phone call – the internet is great for finding initial information, but for gauging trustworthiness and building rapport, speaking directly to a person is invaluable. 

Depending on the IFISA’s asset, consider asking to see things such as case studies, too. For IFISAs offering property bonds or green energy bonds in particular, this could be a key method of verifying the provider’s track record, and understanding exactly what your investment will be supporting. 

 

Choosing an IFISA

The core advantages of an IFISA make it a key investment consideration for experienced investors. 

This is especially true in the current climate, as it is uncorrelated to both the Bank of England base rate – which plummeted to 0.1% in March 2020, sending interest rates to rock-bottom – and the fluctuations of the stock market. 

And with various opportunities under the banner of the IFISA, it could very well prove to have a place in your investment portfolio today and well into the future.