Both the start of a new tax year and the financial fall-out from the current pandemic - which includes the Bank of England sharply cutting their base rate and severe stock market fluctuations - may have you considering an ISA transfer to rebalance your portfolio.
Where you transfer your current ISA(s) and how you choose to rebalance will be dependent upon your personal circumstances and, of course, risk appetite.
Over the years, the Innovative Finance ISA (IFISA) has become a popular product amongst experienced investors looking to maximise their returns by lending capital through the peer-to-peer lending market.
Uncorrelated to the fluctuations of the stock market and the Bank of England’s base rate, IFISAs can provide investors with a clear choice over where their capital is invested - from consumer lending and property, to green energy.
In recent weeks, it was announced that peer-to-peer lenders are eligible to apply for accreditation from the British Business Bank (BBB) to participate in the Coronavirus Business Interruption Loan Scheme (CBILS), showing the prominence of alternative finance’s role in the bounce-back of the UKs economy.
Why might you need to rebalance your ISA portfolio?
When you originally mapped out your ideal portfolio balance, you likely - and hopefully - placed your risk appetite and investment goals at the forefront of your decisions.
When investing, you never want to have all of your eggs in one basket, and you only want to be taking on a level of investment risk that you’re comfortable with.
Over time though, your circumstances and goals can change (especially when faced with the turbulence of a global pandemic) and so can the value of your investments.
In an emergency move in March 2020, the Bank of England cut rates from 0.25% to 0.1% in an effort to support the economy in the face of the COVID-19 pandemic. They are now at the lowest level in the bank's 325-year history.
If your ISA portfolio included a higher weighting towards Stocks and Shares ISAs, the value of your investments may have taken a significant hit as the stock markets also reacted to COVID-19.
A cautious investor may well have most of their ISA portfolio weighted towards Cash ISAs, but with the best easy-access Cash ISA on the market offering rock bottom returns of 1.01%, the value of their savings is being eroded - as inflation is currently running at 1.5% per annum.
More adventurous investors may see Cash ISAs as a safe haven, but at the same time may be concerned with the consistent low interest rates. The option to rebalance an existing ISA portfolio by spreading risk to maximise returns is an interesting one.
For example, an experienced investor with £20,000 sitting in a Cash ISA from a previous tax year may decide they want to transfer £5,000 into an IFISA.
In an IFISA with a target interest rate of 7.75% per annum, the transferred £5,000 could be worth a potential £6,550 at the end of a four year fixed term (£1,550 interest, assuming interest is rolled up and paid at maturity). On the other hand, left in a Cash ISA with an annual interest rate of 1.01%, your £5,000 would be worth an estimated £5,205.28 at the end of a four year fixed term (estimated £205.28 interest, assuming interest is paid annually and compounded annually).
Please note that the above is an example, not a recommendation. The Cash ISA is a savings product which benefits from FSCS protection. An IFISA is an investment product. As with all investment products, your capital is at risk and returns not guaranteed.
Investors considering transferring into a Stocks and Shares ISA prior to the COVID-19 pandemic may now be reconsidering, having seen the drop in value of the stock market over recent weeks. However, for investors who are attracted to the current potential of buying stock cheaply, this could be seen as an opportunity to take advantage of the downturn.
With this in mind, it is important to understand that investors increasing their allocation in Stocks and Shares ISAs should be prepared for fluctuations as the markets recover.
The IFISA can offer similar target returns to the 4%+ often targeted by a Stocks and Shares ISA, but with significantly reduced volatility as they’re uncorrelated to the markets.
You might also want to rebalance your portfolio if your investment goals change.
Perhaps you’re a higher earner affected by the pension taper and are now wanting to turn your attention to boosting your pension pot. This is something the IFISA could help with, especially when considering the account often offers the opportunity to pay interest quarterly, which can potentially provide an attractive stream of income as part of a balanced portfolio.
Using an IFISA for rebalancing and impact-investing
Uncertain times may present an opportunity to consider a different approach which could include investment into alternative assets that sit outside of the traditional asset classes.
Peer-to-peer lending and debt-based securities - which can both be held in an IFISA - are becoming increasingly important as investors and the UK economy navigate the COVID-19 crisis.
The IFISA is subject to the same annual allowance as the Cash ISA and Stocks and Shares ISA, which is £20,000 in 2020/21. However, if you’re looking to transfer funds accumulated under the ISA regime in previous tax years into an IFISA, your annual ISA allowance will not be affected.
In terms of risk profile, the IFISA is generally most suited to more experienced investors and higher earners who are willing to take on investment products with a medium to high risk profile in the search of higher returns. The exact risk profile however will depend on the underlying asset of your IFISA.
The assets that can be held in an IFISA are the important aspect, because not only can they target returns of between 4% and 8% generally, but some also have characteristics of impact driven investments.
Impact-investing is the term used to describe investments that deliver a positive social, economic or environmental impact.
The IFISA has four key underlying assets:
Each one of these have the potential to offer an element of impact-investing, and each one is more crucial than ever in the current social and economic climate.
Firstly, the UK has a chronic housing shortage, and addressing this is going to remain a priority throughout the current pandemic and beyond.
Property developers and regional house-builders found it difficult to secure finance from traditional lenders as a result of the 2008/09 recession, and it’s expected that they’ll tighten their purse string even further in the wake of COVID-19.
But property development and house building will continue to be vital in driving economic growth as the UK begins to recover, placing greater importance on alternative finance methods - such as property-backed lending through an IFISA - that will facilitate the delivery of much needed mixed tenure housing developments.
Investing in property through an IFISA means you are providing this alternative finance to property developers for the development of commercial and residential projects while earning attractive potential returns - tackling the housing crisis head-on.
Take CARLTON Bonds as an example. When you invest through a CARLTON Bonds IFISA, you’re supporting the delivery of well researched property projects that help to drive innovation and regenerate communities. Throughout this, you could be earning projected returns of up to 7.75% per annum tax free.
The major banks have also been slow to support SMEs through the CBILS. It’s encouraging to see peer-to-peer lenders approved to deliver these loans alongside IFISA peer-to-peer loans.
Consumer loans and green energy finance are also likely to retain their importance. Individuals, now more than ever, will need access to affordable loans, and green energy projects will continue to be prioritised by a society that is dedicated to confronting the devastating effects of climate change.
How do I transfer an ISA into an IFISA?
If you decide that rebalancing your portfolio by transferring into an IFISA is the right move for you, the process is straightforward. And remember: if you’re transferring funds saved in an ISA in a previous tax year, your annual ISA allowance will not be affected.
You should start by making sure that your preferred IFISA provider accepts transfers in, and always check your current ISA providers exit fees and rules on transferring out, as these will vary on a provider-to-provider basis.
If you’re happy with these, you can authorise your new ISA provider by completing an ISA transfer authority form. Once this is done, your transfer will usually take between 15 and 30 days to process - again, this is subject to change on a provider-to-provider basis.
Each provider will have their own specific procedures when it comes to ISA transfers. Here’s a brief overview of the CARLTON Bonds ISA transfer process to give you an idea of what to expect.
In order to process your transfer to a CARLTON Bonds IFISA, you would need to complete five steps through our online platform.
1. Download a copy of the CARLTON Bonds Information Memorandum, ensuring you understand how CARLTON Bonds work, who makes up the experienced team and how returns are generated.
2. Schedule a call with the CARLTON Bonds investment team if you have any questions.
3. Create an account at https://www.carltonbonds.co.uk/register.
4. Complete your profile on the CARLTON Bonds platform including security checks.
5. Complete your ISA transfer request form.
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).