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The Innovative Finance ISA (IFISA) was introduced in 2016 to encourage retail investors to invest in lending over peer to peer (P2P) lending and bond platforms. Investing in debt-based crowdfunding (investing via debt-based securities using platforms such as Goji) was introduced from 1 November 2016. The IFISA now sits alongside Cash,Stocks & Shares and Lifetime ISAs to give investors more diversity and choice over what to do with their ISA investments. Bearing in mind how low cash deposit rates are, and that inflation is starting to return, the IFISA is a much needed tool to help investors generate real returns from their savings.
Investors can have one of each type of ISA in any given tax year.
The ISA rules of “only one of each type” still apply, so investors can invest in a single ISA of each type in any given tax year (one cash, one Lifetime, one Stocks & Shares and one IFISA each year ending April 2016).
And invest up to £20,000 per year, across as many or as few types of ISA as they wish.
The IFISA has the same annual investment limit as the existing ISAs. During the current (2016/17) tax year, individual investors can invest up to £20,000 across all of their ISAs put together.
How to open an Innovative Finance ISA?
Investors can only open an IFISA through HMRC authorised lending platforms, and not all will offer the ISA. For platforms to be authorised by HMRC they have to be fully authorised by the Financial Conduct Authority. Equally not all investors are eligible. Investors have to be over 18 (P2P is not eligible for the Junior ISA) and UK resident (excluding the Channel Islands and the Isle of Man).
Once eligible investors have found an eligible platform, they will need to register and clear the platform’s Know-Your-Customer and Anti Money Laundering checks – both regulatory obligations. Once these checks are complete, investors will be able to open an IFISA directly on that platform. Until funds are invested within the ISA, the IFISA is only provisionally opened.
How does the IFISA compare to other ISAs?
Returns differ with the different assets that can be held in different ISAs. Returns are also likely to differ between different ISA providers. For example, the performance of a Stocks & Shares ISA will be highly contingent upon the performance of the stock market. Cash ISAs currently yield less than 1%, which is particularly challenging when inflation is greater than 3%, meaning investors are losing money in real terms in cash ISAs. Depending on the provider, the IFISA may yield between 4-12%. This is more lucrative than Cash ISAs, but more risky, whilst being less volatile than Stocks and Shares.
Please remember that your capital is at risk when investing in a stocks and shares or Innovative Finance ISAs and that the value of your investments can go down as well as up. Investing in lending, whether through an IFISA or in a general account, is not covered by the FSCS, the government backed deposit insurance scheme that protects bank deposits including Cash ISAs. Investing in lending also includes putting capital at risk; borrowers may not repay all of their debts or they may repay the funds late or early (so not as much income is received as much as expected). Before lending any funds on a platform, whether inside an IFISA or not, be aware and comfortable with the risks involved in P2P lending.