Choosing an ISA: why the IFISA could be an important consideration for experienced investors

By Jo Bentham7th March 2022

Ahead of the ISA allowance resetting come the new tax year on 6th April, it’s time to start considering which ISA product(s) could make a valuable addition to your portfolio to help meet your saving and investment goals.

Article main image

Whilst it can certainly be beneficial to build a balanced and diversified ISA portfolio by spreading your ISA allowance across products, there is one ISA in particular that has fared well over the past several years – the Innovative Finance ISA (IFISA). 

It’s clear the economic fallout caused by the Coronavirus pandemic had an impact on the wider ISA market. Cash ISA rates have been hovering around historic lows after the Bank of England (BoE)  dropped their base rate to a record-low 0.1% in March 2020 – it has since been marginally raised several times, now sitting at 0.5% – in response to Covid-19. 

Though the Cash ISA is a savings-based ISA that is protected by the Financial Services Compensation Scheme (FSCS), making it an important consideration still for those all-important cash savings, it’s unsurprising that many experienced investors are searching for an investment-based ISA with greater growth potential.

Meanwhile, Stocks and Shares ISA investors will have undoubtedly witnessed the intense volatility of the equities market. As an example, the FTSE 100 saw £50 billion wiped off share values in August 2021 amidst concerns about Covid-19 variants. 

And now, whilst much of the uncertainty surrounding Coronavirus – and therefore the subsequent impact on the investment landscape – has slowly started to ease, soaring inflation has brought with it new challenges.

Cash ISA rates are failing to keep pace with the rate of inflation, which is at a three-decade high of 5.5% as of February. At present, the highest interest rate available on an instant-access Cash ISA is just 0.82%.

In addition, global equity markets are being impacted by fears of higher interest rates across many countries, as central banks endeavour to contend with rising global and domestic inflation.

But the IFISA and its alternative assets, uncorrelated with both the BoE base rate and the fluctuations of the equities market, have proven resilient, continuing to target attractive returns for experienced investors during a period of unprecedented economic instability.

 

Adding an IFISA to your ISA portfolio

For a number of reasons, utilising part of the generous ISA allowance to add an IFISA to your ISA portfolio is a key consideration for experienced investors with the appropriate appetite for risk.

As mentioned, because of its non-standard assets – from property bonds through to SME loans –  the IFISA can provide a particularly important level of diversification to a portfolio.

It can be beneficial in balancing the sometimes extreme volatility of the equities market and the rock-bottom interest rates offered by a Cash ISA, as the target returns from an IFISA (though not guaranteed like those from a Cash ISA) are often fixed and in excess of an inflation-beating 7%.

The value of this becomes all the more clear when understanding that outside of a tax-free wrapper, this equates to a Gross Equivalent Return of 12% for additional-rate taxpayers. 

Research from Peer2Peer Finance News has revealed that the IFISA even outperformed the stock market in the UK – namely the FTSE All Share Index – over the four years from 2018 to 2021, whilst also demonstrating more stable returns. 

Bruce Davis, Director of industry trade body the UK Crowdfunding Association, labelled the performance of the IFISA “perhaps the best kept secret in financial services”.

And the IFISA has seen strong growth in the years since it was first established. In the 2019/20 tax year, £438 million was invested into IFISAs alone, taking the product’s total value past £1 billion

When considering the aforementioned typical target returns offered by an IFISA paired with the variety of attractive eligible assets, this growth is somewhat unsurprising.

In particular, it’s often possible to invest into property bonds with IFISA – offering investors the opportunity to gain exposure to the ever-popular property market in a hands-off manner, whilst also investing for impact.

 

Subscribing your ISA allowance to an IFISA

It’s clear that for experienced investors, the IFISA has the potential to generate inflation-beating returns and provide important diversification for a balanced ISA portfolio. 

Therefore, when the new tax year begins and the ISA allowance resets, it’s crucial that experienced investors consider an IFISA when deciding where to subscribe their £20,000.