The IFISA - introduced by the government in April 2016 - generally offers investors tax free returns of between 4% and 8% when investing into the peer-to-peer (P2P) lending or debt-based securities market. But how do you determine whether an IFISA is right for you?
There are a few important things you should consider, including;
what are your investment goals?
do you understand the relationship between higher returns and higher risks?
do you have knowledge of your IFISA options and an understanding of the market your capital is being invested into?
The IFISA is just one of many ISA products - including Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs and Junior ISAs - that experienced investors are able to take advantage of, but it offers its own benefits and features. You need to determine whether these benefits and features make an IFISA an appropriate investment choice for you, so we’ve compiled some key considerations to help you get on the right track.
Recognise where the Innovative Finance ISA sits within the ISA family
The government introduced the Innovative Finance ISA to the ever-popular ISA family back in 2016 as a means of continuing and strengthening the growth of the UK’s alternative finance market.
Like the Stocks and Shares ISA, and in contrast to the Cash ISA, Lifetime ISA and Junior ISA - which are all savings products - the IFISA is an investment product, and before its introduction, investors weren’t able to invest into P2P lending or debt-based securities with the help of an ISA and its tax free benefits.
The IFISA shares with its ISA brothers and sisters the tax wrapper that makes them so tax-efficient, and with its forementioned high projected returns of between 4% and 8%, it’s not hard to see why it’s been so explosively popular with investors looking for a better return on their investments.
Read more: download the Innovative Finance ISA guide
Cash ISAs are currently offering near-record low returns, with the best instant-access Cash ISA rate on the market at the moment sitting at 1.05% according to Money Saving Expert. And though a Stocks and Shares ISA has the ability to perform well and offer high returns over an extended period of time, stock market volatility can be a worrying factor for many investors.
Identify your short and long term goals
Having a clear idea of your goals - and the timescales you have in mind to reach them - is an undoubtedly important factor to consider when deciding whether an Innovative Finance ISA is right for you.
Over time, your goals are likely to change inline with your personal circumstances. Therefore, it’s a good idea to assess your saving and investment plans each year - to make sure you’re still using the best methods to help you reach your goals.
It’s a general rule of thumb that if you have a short term goal that you’d like to achieve within the next five years - such as buying that new car you’ve had your eye on or going on your annual family holiday - keeping your money in a savings product such as a Cash ISA is a good option. This is, quite simply, because a savings product is safer than an investment product, and you can usually access your funds whenever you need them (as long as you opted for an instant-access Cash ISA). It’s always advisable that you have an emergency fund in the form of cash savings before you begin investing, so if the unexpected was to happen - such as the loss of your job - you have easy-to-access money to act as a buffer.
When you invest in an investment product such as a Stocks and Shares ISA or an IFISA, it’s important that you give your investments time to ride out the highs and lows, giving any falls in value the chance to recover before you need access to your money.
IFISAs are also usually fixed term, meaning your funds are locked away for a set period of time - usually between two and five years.
So, if your goals are primarily short term, an IFISA probably isn’t your best option. But if your plans are longer term - such as saving for retirement - and you’re happy to take a little more risk in the search of higher returns, an IFISA can offer a boost to your funds that’s hard to overlook.
Read more: Innovative Finance ISA review: can an IFISA form part of your retirement plan?
Find out whether an Innovative Finance ISA could allow you to invest in something you're passionate about
One of the benefits of an IFISA - other than its tax-efficiency and offer of high projected returns - is the control, choice and flexibility it allows investors. Not only do their (usually) user-friendly online platforms give increased transparency over how your investment is performing, the sheer variety of assets available to invest in through an IFISA means you may even be able to invest in a way that supports an industry - or cause - that you’re passionate about.
At a time when the UK is estimated to need around 340,000 new homes built each year to keep up with demand, and banks are still reluctant to loosen their purse strings - after the financial recession of 2007/08 - and provide regional house-builders with the funding they need, many are relying on the likes of property loans to help them tackle the housing shortage head-on. With a property IFISA, you can invest into property bonds, which developers use to fund the development of residential or commercial property. So, investing through an IFISA could mean you’re supporting local house-builders, creating jobs and providing homes in your area, all while simultaneously boosting the UK property sector.
Another sector that’s still suffering from the after-effects of the financial recession are SMEs, who are still finding it difficult to secure loans from banks. A survey released in 2019 by the Bank of England even suggested that the number of banks willing to lend to SMEs could soon be at its lowest since the 2008 crash. When you consider that SMEs account for three fifths of employment and around half of turnover in the UK private sector, you can probably see why it’s vital that they get the support they need. By loaning funds to small and medium sized businesses through an IFISA, you could be the one to provide this support.
If you’re interested in a bit of socially responsible investing, opting for a green energy IFISA allows you to fund renewable energy projects, such as hydropower stations and wind farms. So you could be doing your bit to help combat climate change, while earning generous returns of between 4% and 15% (but beware, those offering returns of above 10% are likely sitting at the higher end of the risk spectrum, and should always be approached with caution).
Understand the risks as well as the returns of an Innovative Finance ISA
One of the most important considerations when deciding whether any investment product is right for you are the risks, and the IFISA is no exception.
As with any investment product, when you invest in an IFISA, your capital is at risk and returns are not guaranteed. Unlike the Cash ISA, which is protected by the Financial Services Compensation Scheme for up to £85,000 if your ISA provider fails, the IFISA doesn’t provide a backup if, say, the borrower defaults on their loans. Unless, that is, the investment is asset-backed - which is often the case with property bonds.
However, even if your investment is asset-backed, this doesn’t mean it holds no risk. While loans secured against the likes of property have an added layer of protection, you’re still at risk of losing some or all of your capital.
So, IFISAs have a mid-high risk profile, but this is why they’re able to offer higher returns. For some investors - those who understand the risks of an IFISA and are comfortable with them - the prospect of inflation-beating returns and an investment product that is not subject to the fluctuations of the stock market is too attractive to pass up.
Read more: understanding the risks and returns of an IFISA and Stocks and Shares ISA
The key factors when deciding whether an Innovative Finance ISA is right for you
You’re looking to invest your money, most likely, because you want a generous return that helps you reach your goals. If your goals are longer term - for example, supplementing your retirement pot - an IFISA could offer the high returns (alongside mid-high risks, remember) that you need to get you on track. And if you’re particularly interested in property development, SMEs, green energy or even consumer lending, IFISAs could give you the opportunity to invest in, and support, sectors you care about.
Before you commit to an IFISA, and particularly if you’re unsure of your risk profile and whether an IFISA is an appropriate investment choice for you and your portfolio, you should consider speaking to an independent financial advisor, but the information above should certainly give you a head start when deciding whether an IFISA is right for you.
The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).
Originally published 10th February 2020, updated 4th May 2020.