Is Innovative Finance ISA right for you?

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Innovative Finance ISA

Innovative Finance ISA (IFISA) is a relatively newer initiative taken by the UK government in 2016. Innovative Finance Individual Savings Accounts allow individuals to make peer to peer lending investments and enjoy interest that has a tax free wrapper. This means that the interest will not be taxed.

As a new method of investing, the Innovative ISA offers individuals the opportunity to invest by lending money to individuals, infrastructure developments, businesses and other projects, while earning tax-free return on the repayments. Generally, the lending available to people is a peer to peer lending, which is an online platform that allows investors to lend money directly to borrowers. There is no mediator involved that traditionally would be a bank.

It is essential to think about whether an Innovative Finance ISA is right for you to accomplish your financial goals. If you want to save money and don’t want to take on any risk, then you should invest in a Cash ISA that is protected by the Financial Services Compensation Scheme (FSCS). On the contrary, if you are open to taking a risk and want to fight the inflation, then you should opt for IFISA account as it may be right up your alley.

In this article, we are to enlist some pros and cons of an Innovative Finance ISA account. Of course, as for any other investment, you should seek a professional’s advice before proceeding. Keep in mind that if you invest in peer to peer lending your capital will be at risk.

How IFISA works?

You can save up to £20,000 into an ISA in the tax year 2020/21. You can put your money in one or a mixture of ISAs including cash ISA, stocks & shares ISA and IFISA. So in order to use all your annual ISA allowance, you could do the following:

  • Invest £10,000 into a cash Isa
  • Put £5,000 into a stocks and shares Isa
  • Invest £5,000 into an innovative finance Isa

Benefits and Drawbacks of IFISA

Benefits

  • The interest that you earn with IFISA is tax-free and will remain so, no matter how much funds grow with time.
  • You don’t need to report your p2p earnings to the taxman or anywhere.
  • You can avoid being taxed on all your p2p capital gains that you earn.
  • Also, you can transfer money from your cash ISA from the previous year into any number of new Innovative Finance ISA that you like.
  • By investing in peer to peer lending platforms, you can support entrepreneurs and small businesses through your investment.

Drawbacks

  • The interest rate of the investment can be affected by different factors like liquidity and bad debts.
  • There is a risk that you could lose some or all of your money. Keep in mind that the capital will not be protected by the FSCS.
  • Losses within an Innovative Finance ISA can’t be offset against capital gains, because the capital is already within a tax-free wrapper.
  • The default rate can be affected in case of an economic downturn that may affect yields.
  • The interest returns which are advertised are not guaranteed, hence while your IFISA provide may say that you will earn 6&, they will say ‘up to 6%.

Some Key Statistics about IFISA

  • Around £69 billion was invested in ISAs in the year 2017/18, which was an increase of £8.8 billion from 2016/17, which brings that total ISA fund to £608bn.
  • Compared to the year 2016/17 the number of stocks & shares ISA rose by 246,000, while the Cash ISA investment fell by 697,000 and the IFISA rose by 26,000.
  • Around 31,000 investors subscribed £300m to IFISA. This may seem like a small amount compared to the total amount of ISAs. However, it is worth remembering that this represents a growth IFISA value of 805% from the 2016/17 tax year.
  • The average subscriptions in different types of ISAs in 2017/18 were £6,409, up 15% from 2016/17 tax year. The value of an Innovative Finance ISA was £9,355, which is nearly 50% bigger than the average ISA.
  • Similarly, the IFISA is still small compared to cash and stocks & shares ISAs, and the 26,000 new accounts represent 620% growth from the previous year.

How can you open an IFISA?

Investors can only open one IFISA per tax year through a platform that is authorised by HMRC (Her Majesty’s Revenue and Customs). Other than HMRC, the peer to peer platforms also have to be authorised by the Financial Conduct Authority (FCA). To be eligible, an investor has to be of 18 years of age or over and a UK resident.

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