Launched to strengthen and accelerate the UK’s booming alternative finance market, the IFISA enables investors with the appropriate appetite for risk to hold peer-to-peer loans and debt-based securities.
Benefited by the ISA tax wrapper (although an investment product rather than a savings one, so returns are not guaranteed and capital is at risk), the IFISA can often target tax-free returns of between 4% and 8% and allows investors to hold assets such as property, SME loans and consumer loans.
Though it’s one of the latest additions to the ISA family – which also includes the Cash ISA, Stocks and Shares ISA, Lifetime ISA and Junior ISA – the IFISA has grown at a rapid pace since launch.
The most recent data from HMRC showcases that in 2019, it surpassed the milestone of £1 billion in inflows, while the number of subscriptions to an IFISA increased by 18% in the 2018/19 tax year when compared to the year previous.
This is a stark contrast to the Stocks and Shares ISA, which saw subscriptions take a dip in the 2018/19 tax year – falling by £5.2 billion from the year previous.
Yet the IFISA arguably remains the least well-known of all ISA products. The Cash ISA is the product most think of when talking about an ISA, whilst the Stocks and Shares ISA is the natural progression for many looking to increase the risk and return profile of their ISA investments.
With Lifetime and Junior ISAs well known amongst their respective target audiences, it leaves the IFISA in somewhat of a middle-ground.
It’s not competing against the Cash ISA or Lifetime ISA, and isn’t accessible to the younger Junior ISA audience. It sits in a similar ballpark to the Stocks and Shares ISA, but with the exception of sharing the same suffix, it has very little by the way of similarities.
And when considered, it could play a crucial role in maximising potential returns for experienced investors - particularly in the current climate.
The IFISA’s place in the ISA market
The effects of COVID-19 have undoubtedly confused the investment landscape and had an impact on the whole ISA market.
Even before the Coronavirus crisis, Cash ISA interest rates were at low levels and the Stocks and Shares ISA was – expectedly – volatile.
But interest rates offered by the Cash ISA hit an all time low in March 2020 when the Bank of England cut their base rate to 0.1%, the lowest on record. When accounting for the rate of inflation, too, this has resulted in the value of capital held in a Cash ISA actually decreasing.
As well as this, in response to the ongoing pandemic, the stock market experienced intense fluctuations and volatility. At the beginning of the pandemic in February 2020, both the US and UK stock markets suffered losses surpassing £3.8 trillion in a single week.
Though the stock market has been improving in the months since, continuing lockdowns and general uncertainty make its performance somewhat unpredictable.
Therefore, it’s clear to see why investors are likely disillusioned with the dwindling Cash ISA interest rates, and fluctuating nature of the stock market. Even the most seasoned investor has their line in the sand; the point where the level of volatility outweighs the potential returns.
As a result of this, experienced investors can look for an ISA product whereby they receive the same tax reliefs afforded by the Cash ISA and Stocks and Shares ISA, but with the potential for higher returns and less volatility. For this, the IFISA – and in particular, the property-backed IFISA – is an important consideration.
The advantages of an IFISA
Not only does the IFISA have the advantage of tax-free target returns, these returns – though not guaranteed – are often higher than many mainstream investment products, frequently between 4% and 8%.
The exact potential return will depend on the underlying asset of the IFISA - whether your money is being put to work by regional housebuilders or loaned to individuals, for instance.
With an IFISA, control and choice over investments – without being too hands-on – is another core benefit. Investors can choose to invest in an asset within which they have a vested interest.
For example, a business owner looking to support the growth of small and medium-sized businesses may choose to utilise their IFISA to invest in SME lending.
Or, an investor wanting to invest for impact could choose a property-backed IFISA, supporting regional housebuilders in delivering much-needed affordable housing amidst the UK’s ongoing housing shortage.
And this is where the IFISA could truly be considered a hidden gem.
Whilst other investment routes into property clearly exist, investing through an IFISA means returns are tax-free and it doesn’t require hands-on involvement or direct property management from the investor – two advantages that aren’t available through the likes of buy-to-let.
What’s more, the UK will always need new high quality, affordable homes, resulting in consistent demand for the properties delivered by the regional housebuilder’s who receive the alternative finance that a property-backed IFISA provides. Right now, estimates suggest we need 345,000 new homes built each year - in 2019/20, we only achieved 244,000. That’s a 100,000 new home deficit.
The demand is there, but the supply still needs improving; investment made to move the country to a point where it’s providing the number of new homes that’s needed.
In addition, though the IFISA is considered a medium to long-term investment – again dependent upon the underlying asset – particularly with property, some providers offer the opportunity to realise interest payments on a quarterly basis. A useful consideration, as it can allow the IFISA to be seen as an opportunity for income rather than just a capital gain.
Investing via an IFISA
With its tax-free wrapper, it’s understandable that the ISA is a popular product with investors.
Whilst the Cash ISA remains one of the most popular savings products in the UK, its investment-based siblings can prove to be a more appropriate option for experienced investors wanting a greater level of risk for potentially greater returns.
For experienced investors, the IFISA in particular could be key to maximising potential returns amidst a period of all-time low Cash ISA rates and exceptional stock market volatility.
Moreover, with advantages including increased control and visibility over investments, the potential of quarterly interest payments, and opportunities to invest for impact, it’s clear why more investors are getting involved in an IFISA.
So whether it’s a hidden gem or not is certainly up for debate (and we’ll find out in the coming months when the most recent inflow figures are released), but the IFISA could be a more important investment consideration than ever before for many experienced investors.
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).