Whilst experienced investors were once limited to the Stocks and Shares ISA when looking to invest using the popular tax wrapper, the introduction of the Innovative Finance ISA (IFISA) brought with it the ability to hold peer-to-peer loans and debt-based securities under the ISA banner.
This allowed for increased portfolio diversification – with the low interest Cash ISA and volatile Stocks and Shares ISA no longer the only options – and the potential to invest into alternative investments whilst benefiting from the tax-free status of the ISA for the first time.
One of the least well-known of the ISA market when compared to its Cash ISA and Stocks and Shares ISA siblings, which have both been around since 1999, the growth of the IFISA has been rapid since launch – with subscriptions growing 18% in 2018/19.
And though returns are not guaranteed and capital is at risk, the IFISA often offers target returns of between 4% and 8% – making it a valuable, tax-efficient consideration for experienced investors looking to maximise returns.
To understand the potential value of an IFISA and whether it’s the right choice for some – or all – of your 2021/22 ISA allowance, this is what you need to consider.
There are several assets that can be held in an IFISA
On a high level, the IFISA can hold peer-to-peer loans and debt-based securities, but the specific IFISA-eligible assets available under these two areas include SME loans, consumer loans, property and green energy projects.
Each of these have their own benefits – the best asset choice for your portfolio will depend on personal circumstances and investment goals.
For example, if you are interested in investing into the popular asset of property, using the ISA allowance to invest into a property-backed IFISA could mean an experienced investor is investing for impact through supporting small and medium-sized housebuilders in delivering much-needed housing.
As well as this, the investor could receive all of the potential benefits of holding property, whilst also earning returns free of income and capital gains tax – an important point to consider amidst changes to taxation for other methods of investment into property that have had a negative impact on profitability.
In addition, investing into green energy projects with the IFISA is another example of using the 2021/22 ISA allowance to invest for impact, with experienced investors able to provide alternative finance to fund the likes of hydropower stations and wind farms.
Whilst with SME loans, it’s possible to support the next wave of British businesses, offering the appropriate funding to accelerate business growth and provide the UK with an economic boost.
You can split the ISA allowance to build a diversified portfolio
Being able to split the annual ISA allowance results in excellent opportunities to build a diversified ISA portfolio, and contributing some of 2021/22’s £20,000 allowance to an IFISA could be an important consideration for experienced investors looking to alter the weighting of their portfolio.
Whilst Cash ISA interest rates were low pre-pandemic, the Coronavirus crisis brought them to rock-bottom after the Bank of England (BoE) cut their base rate to its lowest on record, with the best easy-access Cash ISA on the market at-present sitting at just 0.45%.
On the other hand, where experienced investors willing to take higher risks may have a portfolio weighted more towards equities with a Stocks and Shares ISA, the severe stock market fluctuations seen since the beginning of the pandemic in 2020 could have some considering methods of rebalancing their portfolio.
Both the Cash ISA and Stocks and Shares ISA still have their place in the market. The Cash ISA is an appropriate option for cautious savers and investors looking to have savings that are accessible as and when needed, whilst the Stocks and Shares ISA is an important long-term investment consideration. But adding an IFISA to your ISA portfolio should be considered when looking for a tax-free investment option that is uncorrelated to the BoE base rate and volatile nature of the stock market.
The IFISA has a medium–high risk profile
When we move to look at the risks associated with an IFISA, we need to remember it is an investment product. This means that returns are not guaranteed and capital is at risk – so seeking independent financial advice before choosing to subscribe your ISA allowance to the account is crucial.
Though the exact risk profile of an IFISA will depend on the asset held – for example, an IFISA holding a property bond will often be asset-backed, offering additional protection – the IFISA is considered to have a medium–high risk profile and is most suitable for experienced investors.
However, with higher risks come higher returns. For experienced investors willing and able to take on the medium–high risk profile of an IFISA and invest into a property bond, there is the potential for returns of between 4% and 8% – higher than most mainstream investment products.
Subscribing your ISA allowance to an IFISA
It is no surprise that many experienced investors are disillusioned with the record-low Cash ISA interest rates and extreme volatile nature of the Stocks and Shares ISA.
Through seeking the appropriate advice and contributing a portion of the 2021/22 ISA allowance to an IFISA, there is potential for all-important diversification as well as high, tax-free target returns.
And having knowledge and understanding of the IFISA and its core features is imperative when deciding where to subscribe your ISA allowance, as the alternative investment product has the potential to be a valuable addition to an experienced investor’s ISA portfolio.