There’s no one-size-fits-all approach when choosing the best IFISA - it depends on you and your personal circumstances. So, while choosing an IFISA with high target returns is likely to be at the top of most (if not all) investors’ lists, it’s certainly not the only thing you need to consider.
You should ask yourself questions such as;
- is the underlying asset of the IFISA something you're interested in?
- if the IFISA is fixed term (which most are), are you comfortable locking your money away for the length of the term?
- are you happy with the IFISAs minimum investment amount?
- are the fees charged by the IFISA provider acceptable?
Find an Innovative Finance ISA that offers high returns, and allows you to invest in something you care about
To jog your memory, the IFISA is an investment product introduced by the government in April 2016 that allows investors to loan funds through the peer-to-peer (P2P) lending market or purchase debt-based securities, both without paying any tax on interest or capital gains.
Read more: the Innovative Finance ISA guide
The best IFISA for you is likely to be one that lets you invest into something you’re interested in, while also potentially earning you a high return. There are multiple types of IFISA - property, SME, green energy, consumer lending - meaning you have plenty of choice when it comes to deciding where to invest.
Though IFISAs generally have a mid-high risk profile - where your capital is at risk and returns are not guaranteed - the risks will vary depending on what asset(s) you decide to hold in your IFISA, as will the rates of return.
Let’s start with property, which is typically one of the most popular asset classes with experienced investors because of its tried and tested ability to generate attractive returns. Investing into a fixed term property bond with your IFISA gives developers of residential or commercial property an alternative way of financing their development efforts. This is particularly necessary after the 2007/08 financial recession caused banks to scale back the funding they offer to regional builders in particular.
Property bonds can often be asset-backed, meaning your investment is secured against an asset - such as the property your funds are being used to develop - that is able to be sold if anything was to go wrong (for example, if the borrower was to default of their loan). While this doesn’t rid the investment of risk entirely, it does add an extra layer of protection, and can be a comforting factor for many investors.
Property bonds often offer target returns of between 4% and 8%, and while your eyes will likely automatically be drawn to those with the potential of a higher return, thorough research into the IFISA provider and the systems they have in place to mitigate risk is always advisable before investing your money.
SMEs in the UK have faced an uphill battle when it comes to securing finance for their business, and according to a survey released by the Bank of England in 2019, this could be getting worse - with the amount of banks willing to lend to SMEs heading towards its lowest rate since the 2008 crash. So SMEs are looking for an alternative means of finance, and this is where SME lending comes in. Through an IFISA, investors could earn target returns of between 4% and 6% on average when investing into SMEs, and the rate of return offered generally correlates with the level of risk.
There are secured and unsecured options available, with those that are unsecured often boasting higher potential returns because of their riskier nature - given that, in the risk of default, it may be harder to get your money back. For experienced investors though - those who are less risk averse - this might not be too off-putting, and the potential of higher returns may mean they’re open to taking more risk.
Climate change is the topic of conversation on everyone’s lips at the minute, and the renewable energy sector is growing - so it’s no surprise that more and more investors are considering green energy investment opportunities.
You can invest into green energy through an IFISA, funding projects such as solar and biomass power production and the development of wind farms (to name a few). The associated risks with investing in green energy are often higher than those of other assets, but these are often rewarded with high target returns - sometimes heading into double digits.
Last but not least, there’s consumer lending. Consumer loans were primarily introduced to help consumers who aren’t able to secure reasonably priced loans from banks, providing them with the funds they need to finance pretty much whatever they want.
Because consumer loans are often offered to borrowers at competitive rates, the target returns for investors can be relatively low in comparison to other assets - averaging between 4% and 6%.
Choose an Innovative Finance ISA with a term that you’re comfortable with
Though some IFISAs are flexible - meaning you can access your funds and then replace them whenever you need to - most require your money to be locked away for a fixed term.
The term is often between two and five years, and the target rates are generally higher the longer you put your money away for.
So, you need to find an IFISA with a term that you’re comfortable with - ensuring your money won't be out of reach for longer than you can withstand.
Check you’re happy with the Innovative Finance ISAs minimum investment amount
Many IFISA providers will require a minimum investment. This could be £1, £1,000 or even £5,000 - it depends entirely on the provider.
If you’re planning on investing a particularly large sum of money, you’re probably not worried about being below the minimum investment amount - but it’s important that you check it, because you could be surprised.
If you have around a couple of thousand - or less - that you’re looking to subscribe, the minimum investment is definitely an important consideration, because the best IFISA for you will be one thats minimum investment amount co-operates with your maximum investment amount.
Look for an Innovative Finance ISA with minimal fees
No investor wants to be paying high fees for the likes of IFISA management, deposits or withdrawals. Realistically, you’d probably like to be paying no fees for these things at all, and this would be the ideal scenario - finding a provider that charges no fees for investing, or any ongoing management fees.
At the very least, you want to be paying as little as possible. You should be able to find any information on fees and charges on a provider’s website, in their brochure or in the investment’s information memorandum.
You don’t want to get caught out by any fees you weren’t expecting, and if you’re not willing to pay the likes of ongoing management charges, the best IFISA for you is going to be one where you don’t have to.
Choosing the best Innovative Finance ISA for you
The best Innovative Finance ISA for you is likely going to be different to the best IFISA for someone else.
It’s important that you don’t get caught up in headline rates - opting for the highest target return without understanding how the return is generated, or knowing whether the IFISA is right for you in other key ways.
If you’re happy with the risks of an IFISA but are looking for an added layer of protection, an asset-backed IFISA could be what you’re looking for. If you only have £1,000 left of your annual ISA allowance to invest, you should be looking for an IFISA with a minimum investment of £1,000 or less.
Target rates are important, but you should also make sure you’re considering how much you want to invest, how long you’re comfortable with your money being tied up for and whether or not you’re open to paying management fees - then look for an IFISA that satisfies all of your needs.
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 11th February 2020, updated 24th April 2020.