For over six years – since its introduction in April 2016 – the Innovative Finance ISA (IFISA) has been playing a key role in diversifying an experienced investors ISA portfolio, opening them up to alternative investments for the first time since the ISA itself was established in 1999.
Within this time, the IFISA has surpassed the significant milestone of over £1 billion in inflows, with £438 million invested in the 2019/20 tax year alone according to the latest HMRC data, a 33.5% increase on the previous year.
At present, circa 126,000 IFISA accounts are open, and the average amount held has increased from £8,632 in 2018/19 to £12,882 in 2019/20.
What’s more, Peer2Peer Finance News have reported that many platforms saw a record number of IFISA inflows in the 2021/22 tax year, facilitated in part by a large number of ISA transfers from other ISA products.
The solid performance of the product is somewhat unsurprising. Even before world events such as the Coronavirus pandemic, cost of living crisis and the war in Ukraine caused mainstream assets such as cash and stocks to falter, experienced investors were increasingly recognising the potential benefits of adding alternative assets to their portfolios.
Then in 2021, research conducted by NextGen Cloud found that 43% of UK investors surveyed with a portfolio value in excess of £10,000 were more likely to consider alternative investments compared to pre-Covid-19.
Meanwhile, whilst still the most popular and widely-known ISA on the market, there has been a substantial decrease in the total accumulated holdings of Cash ISAs for the first time since their inception, down from £295 billion in January 2021 to £289 billion in January 2022 according to the Bank of England (BoE).
This is not entirely unexpected, it’s understandable that many Cash ISA holders might opt for other products at a time when interest rates are hovering around all-time lows. Even now the BoE have increased their base rate to a still incredibly low 1%, the best rate currently available on an instant-access Cash ISA is just keeping pace, also at 1%.
What that rate is certainly not keeping pace with however is inflation, which as of March 2022 is at a three-decade high of 7%, and is expected to continue to rise.
At the same time, the equities market is showcasing its volatile nature – with research from Peer2Peer Finance News finding the IFISA actually outperformed the stock market, namely the FTSE All Share Index, over the four years from 2018 to 2021, whilst also demonstrating more stable returns.
With all of this in mind, it’s clear to see why the IFISA is becoming more and more attractive to experienced investors. With target rates often in excess of 7%, the product is an important consideration at a time when the preservation of capital should be a core priority.
And it’s worth noting that to target 7% outside of the ISA wrapper, this equates to a Gross Equivalent Return of over 12% for additional-rate taxpayers – highlighting the power of the IFISAs tax-free status.
Aside from the clear potential monetary and tax-efficient benefits of the IFISA, they also offer opportunities to invest for impact, a key investment trend in 2022 and a feature that an increasing number of investors are prioritising.
Investing for impact with the IFISA and property bonds
In their annual Market Sizing Report, Big Society Capital found that social impact investing had reached a value of £6.4 billion in 2020, an eightfold increase from £833 million in 2011.
This was spurred by consistent year-on-year growth, but with particular acceleration between 2019 and 2020, when there was a 26% increase in the value of social impact investments in the UK.
From this data, it’s clear to see that investing for impact is on the rise, and whilst Butterfield Mortgages found that 30% of investors surveyed were willing to accept lower investment returns if the said investment has a positive social, environmental or economic impact, it may not be necessary to choose between the two.
There are a number of impact-driven, IFISA-eligible assets – from SME loans whereby experienced investors can support the next wave of businesses and in turn the wider economy, through to green energy projects.
But one that could prove particularly impactful at present are property bonds. For decades, the UK has been suffering a housing shortage, with the gap between supply and demand widening further in response to the Coronavirus-induced housing boom and “race for space”.
To aid in closing this gap and delivering much-needed housing, small and medium-sized housebuilders and the alternative finance made available to them through property bonds are crucial.
As a result, not only are experienced investors able to target tax-free returns often in excess of 7% whilst gaining exposure to the ever-popular property market via property bonds and the IFISA, they’re also able to make a significant, tangible impact with their capital.
Adding an IFISA to your ISA portfolio
The advantages of the ISA wrapper are widely known and acknowledged, and over 20 years after its launch, it remains one of the most generous tax incentives available to investors in the UK.
And with the opportunity to now utilise the tax-free ISA allowance to further diversify your ISA portfolio with alternative assets via the IFISA, it comes as no surprise that many experienced investors are using it to its full potential.