- Innovative Finance ISA allows you to use some of, or all, your ISA tax-free allowance to invest with a variety of lending platforms.
- In the same tax year, ending on 5 April, you can invest in one Cash ISA, one Stocks, and Shares ISA and one IFISA.
- IFISA, on the positive, can appropriately diversify your ISA investment.
- IFISA, on the negative, carries the double risk of the investment and the viability of the company offering the ISA.
Are you getting a bit bored of hearing about stocks and shares ISA? (I understand and still believe that investing ISA is the best opportunity out there.)
Great! You know I believe repetition only means something is very important. Hence, today I’ll be talking about ISA again – it is important that you top up your ISA as much as you can by midnight on April 5th.
However, I’ll be telling you about a type of ISA, I have not talked to you about before Innovative Finance ISA or IFISA.
Before we go any further, let me remind you what is ISA. I’m not going to bore you with the official ISA definition; I’ll share the easiest way is to think about it so that all various kinds of ISAs start making sense.
Simply put, an ISA is a beautiful wrapping paper that can cover all kinds of (tax-free) sweets.
You can have a cash ISA (when you un-wrap it you find a bland white chocolate sweet).
You can have an investment ISA that covers a rich dark chocolate sweet holding so much promise (but could be a bit bitter).
You could have Lifetime or Help to Buy ISA that hides milk chocolate with some attractive government inducements.
And you can have an Innovative Finance ISA which when un-wrapped is like smooth chocolate with delicious hazelnuts.
Having said that ISA is the tax-free wrapping paper around a whole array of possibilities, each ISA type has some specificities that are worth keeping in mind.
What is Innovative Finance ISA?
Innovative Finance ISA allows you to use some, or all, of your ISA investment allowance to lend money through peer-to-peer lending platforms (companies) and receive tax-free interest and capital gains.
This is a relatively recent provision introduced in April 2016. One implication is that it is hard to report historical results of Innovative Finance ISAs offered by different providers.
There is considerable interest in these ISAs, both on the side of the industry and on the side of individual investors. Innovative ISAs are currently being offered by established (and Financial Conduct Authority approved) peer to peer lenders.
What is the ROI on Innovative Finance ISA?
There are comparative tables of Innovative ISA providers according to the rate of return and other conditions. The typical rate of annual ROI is between 4% and 8%. These depend on the time you are prepared to ‘lock-in’ your investment – the longer you don’t access your money, the higher the ROI rate.
(As a side note, you’ll notice that some providers boast much higher ROI rates than 8%. Don’t be tempted – there is a catch in that these are ‘self-directed’ IFISA. In other words, the return is up to your competence and the risks are increased.)
Most providers promise a fixed ROI; however, this is still an investment and this return is not guaranteed. ROI promise usually assumes that loan repayments are reinvested at the same rate and that any bad debt is covered by the platform’s provisions.
Still, annual returns are fixed and therefore predictable and consistent.
What are the fees for Innovative Finance ISA?
I had to look very hard to clarify the matter of fees when it comes to IFISA. Many providers don’t charge fees to open an account or to manage the account.
Fees may apply were you to withdraw your money before the ‘lock-in’ term has expired. For instance, Landing Works charges a 0.6% fee for early withdrawal.
Can I withdraw my money when I need it?
Ah now; here is the thing.
All Innovative Finance ISA providers require that you leave your money with them for a certain period. Usually, this is three to five years.
(Please note that the returns increase the longer you leave your money with the ISA provider.)
Generally, I would expect that withdrawing your money before the term would be problematic. Even providers that state it is possible to withdraw your money specify that this is ‘subject to the existence of other lenders’.
What this means for you, and your investment strategy is that you should put in an Innovative Finance ISA only money that you are not likely to need for the next three to five years.
Can I invest in IIFISA and other ISAs in the same year?
Yes, you can.
According to the latest rules on ISAs, you can split your annual allowance (currently £20,000) between the following:
- Cash Isa;
- Investment (stocks and shares) ISA; and
- Innovative Finance ISA.
You can’t invest in more than one Innovative Finance ISA during the same tax year, however.
How risky are Innovative Finance ISAs?
I’d be lying if I told you that these are risk-free.
Still, while IFISA seems to me equally, or even more risky, than stocks and shares ISA it is probably not as volatile. This is because providers promise fixed returns and they certainly appear more predictable and consistent. At the same time, IFISA carries the double risk of the investment itself and the viability of the company that provides it.
Some Innovative Finance ISA provisions may be a way to grow passive income. These are certainly a way to diversify your investments into a variety of investment classes. But I’m digressing a bit here….
How much money do I need to open IFISA?
Like with other types of ISA this depends on the provider and their requirements.
Typically, to open an Innovative Finance ISA you’ll need between £1 (Assetz Capital) and £1,000 (Landing Crowd and The House Crowd). Opening an IFISA with Landing Works will set you back £10.
How does IFISA compare with other ISA provisions?
There are eight types of ISA now, including Innovative Finance ISA.
I believe that Lifetime, Help to Buy and Junior ISAs have very specific purposes and won’t include these in the comparison.
Here is how Cash ISA, Investment ISA, and Innovative Finance ISA compare according to:
Returns. What are the returns on investment?
Risk level. What is the risk to your investment/savings?
Fees. How much are the fees of the ISA?
Predictability of returns. How predictable are the annual returns of your investment?
Diversity. How diversified is your investment?
Effort. How much effort from you does the investment requirements.
|Cash ISA||Investment ISA||Innovative Finance ISA|
0.5% to 2%
|Depends, could reach 10-15% on some funds||4% to 8%|
Charges for early withdrawal and for transfer
|Between 0.8% and 4.7% of the amount invested*||Low|
|Predictability of return||High||Low||High|
|Low to High depending on the account||Low|
*Source: The Telegraph: The Cheapest and Most Expensive Places to Buy an ISA
Selecting an ISA account is a very personal thing. Still, to be able to select we need to know about the distinct types of ISA and their characteristics.
In this post, I told you what you need to know about the Innovative Finance ISA and compared this to Cash ISA and Investment ISA.
Finally, I’d like to remind you of The Money Principle rule for ISA selection:
Ideal ISA = (Relatively) low risk + high (potential) returns + low fees + high diversity
Now it’s over to you:
Do you already have an IFISA account? What is your assessment of it?
photo credit: investmentzen Peer-to-peer Lending Keyboard Button via photopin (license)