Sammie Ellard-King
I’m Sammie, a money expert and business owner passionate about helping you take control of your wallet. My mission with Up the Gains is to create a safe space to help improve your finances, cut your costs and make you feel good while doing it.
There are lots of different types of ISA. You might have one or two of them already. Something that people tend to know less about is innovative finance ISAs or IFISAs for short.Â
But what is an Innovative Finance ISA? And how do they differ from normal ISAs?Â
Let’s dive in to see exactly that so you have all the facts before deciding if they’re right for you to open one.
Table of Contents
What is an innovative finance ISA
Innovative finance ISAs allow users to access peer-to-peer networks, lending funds whilst earning tax-free interest.Â
Peer-to-peer lending allows an individual to loan directly to another individual or corporation cutting out the larger financial institutions and therefore fees associated with the loan.
The borrower would then pay back the loan with added interest on top and you as the loanee would profit from that investment.
This might sound ideal; however, you must also be aware of the potential risks involved.
What might be seen as a good investment, Innovative Finance ISAs will depend upon your situation and the risk you are willing to take with your finances.Â
Providers offering this type of ISA product will differ depending on the lending opportunities they offer, as well as the interest rates they could pay out.
What is the difference between IFISAs and other ISA products?
There are some vast differences between IFISAs and other ISA products, but also some things in common.
The main difference is the physical aspects that they hold. IFISAs hold loans, Cash ISAs hold savings and Stocks and Shares ISAs hold assets.Â
The risks with IFISAs also differ and are higher than some other ISA products, so much so that a return on your investment isn’t guaranteed. More on their risks shortly.
Cash ISAs, for example, can guarantee that your deposits are safe and, in some cases, give you a fixed return on your money. Whilst you will be looking at lower interest rates, there is less risk involved.
Stocks and shares ISAs, historically perform better over the long term compared to a Cash ISA. However, there are also higher risks involved because no one can guarantee how your investments will perform.
Where you invest your money and in what ISA product is up to you but really, what makes IFISAs and ISAs similar is the amounts you can put in each year.
You can also have more than one of each type of product and as many of them as you wish. However, you can only invest in one of each type every year.Â
What you put into your combined ISA products can be up to £20k each year, and investments into your IFISA are included in this £20,000 ISA allowance.
What are the risks associated with having an IFISA?
Sure, IFISAs are risky but just like every investment you make there is always risk attached.Â
If you research and do your due diligence then your risk should be a lot lower. Those that jump into investments without all of the facts are more likely to lose money.Â
The risks associated with Innovative Finance ISAs are:
- Defaults – The main risk with IFISAs is defaulting. You’ve lent someone money so if they don’t pay it back for whatever reason and default on the loan you as the loanee pay the price.
- No FCSC Protection – If your online portal goes bust then you are not protected. Usually, with most other ISA products, you have up to £85,000 in protection which is something to look into.
- Withdrawals – IFISAs are known to have a slow process, so if you need the money quickly, this can be a huge stumbling block for some.
IFISA pros
- tax-free investmentÂ
- flexible termsÂ
- potential high-interest ratesÂ
- many providers available, research will help you find the reputable one for youÂ
- can invest up to £20K a yearÂ
IFISA cons
- interest rates can be affected by numerous factorsÂ
- capital at riskÂ
- no FSCS protectionÂ
- considered higher risk than other ISA products
Is peer-to-peer lending right for you?
If this is your first ISA product, then I would not be looking to open an IFISA. In fact, the FCA has even imposed rules that shelter less experienced or lower-income investors from IFISAs.
Generally, these types of accounts form part of a balanced investment portfolio from higher net work individuals or more sophisticated investors.
There is even advice from the Financial Conduct Authority to have no more than 10% of your entire investment portfolio in Innovative Finance ISAs.Â
What are the rules to open a IFISA?
In order to open an innovative finance ISA you have to be a UK resident and at least 18 years of age.
The minimum investment to start your IFISA varies depending on your provider but can be anywhere from £1 to £10k.
You can only pay into one IFISA each year. You can have more than one in your name though, you’ll just have to choose which one you pay into each year.
The maximum investment is £20k per person, per tax year. This would max out your ISA allowance means you couldn’t put money into another ISA product. You must not exceed your annual ISA allowance or you will be liable with HMRC.
Can I transfer an IFISA?
You can transfer IFISAs between providers. Remember to transfer them rather than making a withdrawal and re-depositing. That way, you won’t eat into your annual £20k allowance.Â
An official ISA transfer avoids that issue and keeps your allowance available to use.Â
You can also transfer funds to an IFISA from an existing ISA product like a Cash ISA but you cannot transfer directly from a Stocks & Shares ISA without selling your shares first.
If you have existing peer-to-peer loans you would need to sell them first (incurring any early exit charges) before re-opening the loans inside your IFISA.
FAQs
Are innovative finance ISAs worth it?
Investing in an IFISA can be great for some people, however, you need to weigh up the risks. Innovative Finance ISAs are much riskier than other ISA products, such as Cash ISAs. However, as part of a balanced investment portfolio they can offer attractive returns.
What is the interest rate on an innovative finance ISA?
The interest rates you can expect from IFISAs vary from provider to provider, however, on average you’ll be looking at somewhere between 4.5% – 6% each year. Some providers will also give new users bonuses when they sign up which can be useful.
Are innovative finance ISAs risky?
Generally, IFISAs are considered to be in the high-risk investment category. This is due to the funds working like loans and being invested in products such as peer-to-peer investments and mini-bonds.Â
Remember, IFISAs are not covered by the Financial Services Compensation Scheme (FSCS).
Final Thoughts
So, what is an innovative finance ISA? Well, we now know it’s about p2p lending and that there are certainly risks attatched to them.Â
When investing your money, you need to determine the level of risk you are willing to take. If taking risks is acceptable to you, IFISAs could be an option for your portfolios.
They certainly won’t be for everyone however, if you feel that they are, you should do your research and definitely look into the best innovative finance ISAs for your personal circumstance.Â
It’s absolutely worth spreading that risk, though, and the no-more-than-10% advice is wise to follow.
That £20,000 annual ISA allowance gives you plenty of opportunity to pay into different types of ISA products throughout each financial year.Â
That way, you will make your money work for you and work towards a thriving financial future.
DISCLAIMER: With the risks associated with Innovative Finance ISAs and other ISA products mentioned in this article we strongly recommend seeking proper financial advice from a qualified professional before making an investment.
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Disclaimer: Content on this page is for informational purposes and does not constitute financial advice. Always do your own research before making a financially related decision.
