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The Innovative Finance ISA has recently been unveiled as the latest addition to the ISA family and, although it has had a slow start (name a financial product that hasn’t), it’s set to achieve lofty heights this year. It is forecast by market commentators that billions could be placed in this new type of ISA. The killer question though is why? Why would investors invest in the IFISA, which may return less than stock markets, but carry greater risk than cash?
Well, with inflation outstripping bank rates, and with markets highly priced and volatile, the IFISA, which enables investors to invest in loans originated by digital lending platforms, can offer investors returns greater than those available on cash, but with less volatility and correlation to stocks and bonds. The simple fact is that most investors won’t have previously invested in loans, so doing so adds a natural diversification to most portfolios.
But what can the IFISA really do for investors?
Well, the annual limits on ISAs (and before that PEPs) contributions has meant that becoming an ISA millionaire requires a combination of financial discipline, a strict savings regime…and steady returns. But, within as little as a decade we all could be all be living in households of ISA millionaires, thanks to an explosion in the amount we can save each year in a tax-free ISA. The new £20,000 annual ISA allowance means a couple can save £40,000 annually. Although this is still obviously a large amount of money, (especially once tax and non-discretionary expenses have been considered), it is enough to build a significant, £1m + nest egg for you and your partner over as little as 15 years. George Osbourne kick started the ISA bonanza in 2010 and given the reduction in other available tax breaks they have become extremely generous in recent years and now stand at £20,000 per year per taxpayer. So a couple can save £40,000 a year together.
How can you potentially become an ISA millionaire just using Direct Lending to generate a steady, tax free income in just 15 years?
Well, if each partner in a couple invests the maximum of £20,000 per tax year, equating to £40,000 in total, then total contributions would equate to £600,000 in 15 years. That may sound like a long time to invest, but with discipline the sum will grow quickly and the returns and gains will reward and encourage further investing and saving. If all the interest income earned from these investments was then reinvested each year, at an assumed rate of 6.14% (Goji’s annualised performance on its bonds – please remember that past performance is not guarantee of future returns), then the pot would grow further to almost £1.1m in just over 15 years. This is enough to generate a potential tax free income of almost £66,000 per year.
How you can use Direct Lending to help you reach your goal of becoming an ISA Millionaire:
Remember, Direct Lending should form part of a balanced portfolio that is matched to your particular investment profile and goals, and within that strategy you should consider matching different asset classes to different tax wrappers. For example when you are still accumulating wealth, pensions that are invested in for the longer term, are arguably more suited to higher risk equity investors, as in good years the returns are reinvested to grow and grow, whilst the long investment horizon gives plenty of time to recover from down years.
But this is also where the IFISA can come into its own for three primary reasons:
The information contained in this blog is of a general nature and intended as guidance only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs