Experienced investors looking for an investment ISA will most often be drawn to the Stocks and Shares ISA – but since its introduction in April 2016, the Innovative Finance ISA (IFISA) provides a valuable option for investors aiming to maximise potential returns.
Both the Stocks and Shares ISA and IFISA offer the same tax-efficient benefits – returns free from income tax and capital gains tax. And both ISAs are investment products, meaning capital is at risk and returns are not guaranteed.
Their main difference is in the investments they can hold, with a Stocks and Shares ISA providing access to the stock market, and the IFISA allowing investors to hold alternative investments such as peer-to-peer loans and debt-based securities.
But for experienced investors accustomed to the Stocks and Shares ISA, why should an IFISA also be a consideration?
The IFISA is growing
In its first two years, the IFISA saw staggering growth – with the number of subscriptions rising from 5,000 in 2016/17 to 49,000 in 2017/18.
And the latest data from HMRC shows this is not slowing down. In 2019, the IFISA surpassed a milestone £1 billion in inflows, while subscriptions increased 18% in 2018/19 when compared to the previous year.
This is a stark contrast to the Stocks and Shares ISA, which saw the number of subscriptions fall by 450,000 in 2018/19, with inflows plummeting £5.2 billion from the year before.
Whilst the Stocks and Shares ISA is still a way ahead of the IFISA when examining the number of accounts opened each year, the amounts subscribed to each are close – with a difference in the average of just £600.
This shows that, although the IFISA is one of the newest members of the ISA family – and one of the least well-known, being considered somewhat of a hidden gem for experienced investors in the UK – investors into the product have a high degree of confidence.
IFISA-eligible assets are in high demand
The stock market will always appeal to investors, and so the Stocks and Shares ISA will continue to be a popular choice.
But more and more, IFISA-eligible assets are becoming key considerations because of their often high target returns – when compared to mainstream investments – and their increasing importance on a societal, economic and environmental level.
As an example, whilst most sectors – and the stock market – suffered significant falls due to the Coronavirus pandemic, the housing market proved itself to be resilient, and will even be crucial in the UK’s economic recovery, as housebuilding alone supports almost 750,000 jobs.
Through a property-backed IFISA, experienced investors are able to benefit from this – with target returns often between 4% and 8%, as well as the ability to invest for impact.
Even before the COVID-19 pandemic hit, the UK’s chronic housing shortage presented opportunities for investors into a property-backed IFISA.
To tackle the unmet demand, small and medium-sized regional housebuilders are critical, as emphasised in a Government white paper released in August 2020. Yet limited access to funding is often the main hurdle these housebuilders face.
But small and medium-sized housebuilders are the ones who benefit from the alternative finance provided by the property-backed IFISA.
This finance enables them to not only deliver high quality, affordable housing, but also to create jobs, utilise innovative methods of building and work towards the regeneration of communities.
Building a diversified portfolio with both a Stocks and Shares ISA and an IFISA
There is no one-size-fits-all approach to investing, and the most appropriate ISA will depend on personal circumstances, investment goals and timeframes.
But for an experienced investor comfortable with the medium–high risk profile of both the Stocks and Shares ISA and IFISA, there could be no reason to choose between the two at all.
The stock market has long provided investors with a multitude of investment options that over the long-term have the potential to deliver attractive returns.
On the other hand, the rise of peer-to-peer lending and the likes of property bonds is somewhat newer, but there’s a reason they are so appealing to experienced investors.
Whilst it’s important to seek independent financial advice before making investment decisions, adding both a Stocks and Shares ISA and an IFISA to your portfolio could be the best way to reap the benefits of each.