What exactly is an IFISA?
Well, it’s the acronym for an “Innovative Finance ISA” or “Innovative Finance Individual Savings Account” to spell it out fully. While a bit of a tongue twister, it is actually the best thing to happen to ISAs since they were first launched way back in the previous century – 6th April 1999 to be precise.
Why is it such great news for savers and investors?
The IFISA will finally introduce a sensible stepping stone between the two existing halves of ISAs: risk-free Cash ISAs (with their correspondingly low returns) and the thrills and spills of Stocks & Shares ISAs where you have to be prepared to see your investment go down as well as up.
The new middle ground will be introduced through the inclusion of innovative finance options such as peer-to-peer lending and debt-based crowdfunding. In return for taking some risk, but nowhere near as much as the full volatility of stocks & shares, investors will finally be able to enjoy steady returns at much higher levels than paid by Cash ISAs, but without feeling they’ve bet the farm.
ISAs right now are a game of two halves with a large gap between them. Although coincidentally Cash ISAs and Stocks & Shares ISAs have built up total investment of virtually the same amount – roughly £235 billion in each – around 10 million people put money in Cash ISAs each year, but only 3 million invest in Stocks & Shares ISAs.
When you consider that the average Cash ISA interest rate is less than 1%, this situation creates millions of frustrated savers who, even with the tax perk the Government has given ISAs, have to watch their savings going virtually nowhere.
The problem with ISAs up to now has been that for Cash ISA savers to step into risk-based products where the returns can be much higher whilst maintaining the tax break by staying in an ISA, they have had to take the major leap of faith into stock market investment with all its inherent volatility and insecurity.
Enter the IFISA…
By allowing peer-to-peer lending and debt-based crowdfunding into the ISA tax shelter, savers will have the long-missing middleground step where they can lend money to either other individuals, to small businesses, or in Landbay’s case, professional Buy-to-Let landlords. In return, these lenders will enjoy rates between 3% and 9%, with low risk at the lower end and higher risk at the higher end – although all with less risk than with stocks & shares.
And the crucial difference of course is that when these “innovative finance” options are allowed inside an ISA, the returns paid will be free of tax. So, if you were earning an annualised rate of 4.4% from Landbay as you would on the Fixed product currently, you would get to keep all 4.4% rather than only 3.6% if you were a basic rate taxpayer or just 2.7% if you were a higher rate taxpayer. Depending on how much you have invested, and what tax rate you are on, the IFISA can make a huge difference to your returns.
Are there any downsides?
Yes, there is risk. To get returns larger than the minimal rates paid out on cash accounts these days, you do have to take that step into investing. Your money will be at risk, but in return you gain the prospect of bigger returns. The key thing to remember here is the bigger the rate you are being offered from an investment, the higher the risk you will be taking.
So, as you take a look at the new stepping stone between Cash ISAs and Stocks and Shares ISAs with the new IFISA, you need to be sure you have chosen a risk level that you are comfortable with. The good thing about the Innovative Finance sector is that there are already a wide range of risk/return levels to choose from.
If you are new to investing and the risks involved or even if you are an experienced investor but don’t want to put your ISA money at too high a level of risk, then choosing a lower rate of return and enjoying a lower level of risk might be the right thing for you.
At this end of the scale, Landbay’s offer has been designed to be the lowest risk peer-to-peer lending available in the UK. Currently, returns are 3.5% p.a. from the Tracker product and 4.4% annualised from the Fixed Rate product. These returns are certainly better than most Cash ISAs pay, but are modest compared to some other forms of P2P lending.
However, to get those higher returns, you must be prepared to put your money at higher risk. These higher risks result from the fact you are lending on a different asset. For example, lending on personal loans to other individuals, to small businesses as a business loan, or a loan to property developers in the process of acquiring or building property. Each of these represent quite different types and levels of risk, and the higher returns that other platforms pay for their lending is in effect the compensation for taking that higher level of risk. There are other factors, such as lending diversification, stress testing and transparency of loan books and provisioning which should be taken into account.
The other downside you need to take into account is access. Here again there are a wide variety of levels offered across the new businesses included in the IFISA. Some will allow relatively easy and quick access (some with a fee for doing so), whereas others the option to cash in early is quite restrictive. The important thing to do is check before you invest to make sure the ability to get at your money early is as you require.
The information contained in this article should not be used by consumers to make financial decisions. Consumers have a range of different financial needs and requirements and as such should always seek independent professional financial advice before making an investment decision