The Innovative Finance ISA, or IFISA, is the least well-known and arguably least successful Isa product on the market.
Latest government statistics show that there were only 34,000 such products opened in the 2019-20 financial year, a drop on both of the previous two years since their launch.
Customer caution is perhaps unsurprising, given that even the government’s own financial regulator says that IFISAs are ‘high-risk’, and has put measures in place to stop many ordinary investors putting too much of their Isa allowances into them.
However, with inflation at 6.2%, and many of us searching for ways to get a higher return on our money, it can’t be denied that those Ifisas still available offer a higher rate than ordinary savings accounts, which can be attractive to some.
Here’s how they work…
What is an IFISA?
An Innovative Finance Isa allows you to put money into what are called peer-to-peer loans. These are loans made directly – frequently to small businesses, other individuals, charities or property developers, who might struggle to get cheap lending from banks.
Typically the rates are much higher than on cash savings, but because you are lending to individuals or businesses, there is no guarantee they won’t default because of business troubles. The Isa wrapper allows any returns to grow free of tax, just as with any other type of Isa.
What is peer-to-peer lending?
Peer-to-peer lending, sometimes called crowdfunding, became popular several years ago, with companies such as Zopa, RateSetter and Funding Circle all offering individuals the chance to lend directly to investors.
Many offered ‘guarantees’ to ensure that investors were still repaid to some extent in the event of default, and in some cases borrowers were vetted to attempt to ensure they were safe bets.
Many of these lenders have now exited the peer-to-peer market. Funding Circle, which lent individual money to small businesses exited this month, while Zopa shut down its peer-to-peer arm to become a digital bank, and RateSetter was bought by Metro Bank and stopped focussing on lending.
What’s available now?
There are still some IFISAs available, and you can choose to open a new one or transfer money from an existing stocks and shares or cash Isa.
These include an IFIS from ethical bank Triodos, which offers investments in charity or community projects.
It is just about to open a new inflation-linked bond for investment in its IFISA, paying 4.25% rising with inflation, investing in solar panels in Salisbury
Case Study: ‘My IFISAs allow me to invest in causes and issues’
‘I made my first investment with our Innovative Finance Isa in 2018,’ says Stephen Coles, a housing charity expert from East London, who holds an IFISA with Triodos Bank.
‘I was very keen to feel a bit more actively involved in choosing where my money went, and I can invest in very specific causes and issues.’
Stephen’s investment portfolio includes a rewilding project called Trees For Life, as well as one investing in broadband for the rural north and several wind turbines and solar projects.
‘They’ve started paying back interest and capital exactly as planned,’ says Stephen.
The Triodos investments have a variety of interest rates and Stephen, 44, says that although he could have got higher rates with other IFISAs, he wanted to invest in projects that he knew were a force for good.
‘These are reasonable interest rates one could probably find higher elsewhere, but with much lower social environmental impact,’ he says.
‘And they are far, far better, of course, than the rates and savings accounts at the moment.
‘They’ve all bumbled along making their four or five or six percent interest very competently, without that much risk or turbulence.
‘My stocks and shares ISAs have been more volatile.’
Kuflink, which focuses on property bridging loans, offers rates of up to seven per cent on funds secured on UK property in its IFISA.
Lendwise offers up to 9% on its IFISA, where you would be lending to individuals who are studying for MBAs or Masters programmes.
What are the risks?
These rates are very attractive compared with bank rates, but there’s a reason why the Financial Conduct Authority says Ifisas are risky.
The investments in them are very illiquid – you can’t usually sell them when you want to – and you may need to hold them for a very long time. The new Triodos solar offer mentioned previously, for example, is a 16-year bond.
Meanwhile, if a borrower defaults on the loan, you won’t get the money back, and if you are lending to a number of different businesses or individuals and some default, you will not get the advertised rate, which is not guaranteed.
How can I mitigate the risks?
If you still want to open an IFISA, diversifying your investments is one way to minimise the risk of default. Ensure you use a firm regulated by the FCA as a bare minimum – the list is available via the FCA website website. You should also make sure that you do not put the bulk of your savings in an IFISA.
New FCA rules mean that ordinary retail investors can only put ten per cent of their investable assets into crowdfunding schemes like IFISAs, so that is likely to be just £2,000 a year for most with a £20,000 Isa allowance.
To put in more you will have to be judged a sophisticated investor, which may mean that you need to pass a test.
Make sure you understand the risks and rewards of the investments you make inside an IFISA, just as you would with a stocks and shares Isa.
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