Today, we’ll talk about Innovative Finance ISA (IFISA). You will learn what is innovative finance ISA, get to know some of its characteristics and quirks, and get an idea about how it compares with cash ISA and investing ISA.
Are you getting a bit bored of hearing about stocks and shares ISA?
Great! You know I believe repetition only means something is very important. Hence, today I’ll be talking about ISA again – it is important that you top up your ISA as much as you can by mid-night on April 5th.
To deal with the boredom, I’ll be telling you about a type of ISA, I have not talked to you about before.
Before we go any further, let me remind you what is ISA. I’m not going to bore you with the official ISA definition; I’ll share the easiest way is to think about it so that all various kinds of ISAs start making sense.
Simply put, an ISA is a beautiful wrapping paper which can cover all kinds of (tax free) sweets.
You can have a cash ISA (when you un-wrap it you find a bland white chocolate sweet).
You can have an investment ISA which covers a rich dark chocolate sweet holding so much promise (but could be a bit bitter).
You could have Lifetime or Help to Buy ISA that hide milk chocolate with some attractive government inducements.
And you can have an Innovative Finance ISA which when un-wrapped is like a smooth chocolate with delicious hazelnuts.
Having said that ISA is the tax-free wrapping paper around a whole array of possibilities, each ISA type has some specificities that are worth keeping in mind.
What is Innovative Finance ISA?
Innovative Finance ISA allows you to use some, or all, of your ISA investment allowance to lend money through peer-to-peer landing platforms (companies) and receive tax free interest and capital gains.
This is a relatively recent provision introduced in April, 2016. One implication is that it is hard to report historical results of Innovative Finance ISAs offered by different providers.
There is considerable interest in this ISAs, both on the side of industry and on the side of individual investors. Innovative ISAs are currently being offered by established (and Financial Conduct Authority approved) peer to peer lenders. I’ve checked out several of those and the Innovative Finance ISA offered by Lending Works appears to be a good example of what is out there.
What is the ROI on Innovative Finance ISA?
There are comparative tables of Innovative ISA providers according to rate of return and other conditions. Typical rate of annual ROI is between 4% and 8%. These depend on the time you are prepared to ‘lock in’ your investment – the longer you don’t access your money, the higher the ROI rate.
(As a side note, you’ll notice that some providers boast much higher ROI rates than 8%. Don’t be tempted – there is a catch in that these are ‘self-directed’ IFISAs. In other words, return is up to your competence and the risks are increased.)
Most providers promise a fixed ROI; however, this is still an investment and this return is not guaranteed. ROI promise usually assumes that loan repayments are reinvested at the same rate and that any bad debt is covered by the platform’s provisions.
Still, annual returns are fixed and therefore predictable and consistent.
What are the fees for Innovative Finance ISA?
I had to look very hard to clarify the matter of fees when it comes to IFISA. Many providers don’t charge fees to open an account or to manage the account.
Fees may apply were you to withdraw your money before the ‘lock in’ term has expired. For instance, Landing Works charges 0.6% fee for early withdrawal.
Can I withdraw my money when I need it?
Ah now; here is the thing.
All Innovative Finance ISA providers require that you leave your money with them for a certain period. Usually this is three to five years.
(Please note that the returns increase the longer you leave your money with the ISA provider.)
Generally, I would expect that withdrawing your money before term would be problematic. Even providers that state it is possible to withdraw your money specify that this is ‘subject to the existence of other lenders’.
What this means for you, and your investment strategy, is that you should put in an Innovative Finance ISA only money that you are not likely to need for the next three to five years.
Can I invest in Innovative Finance ISA and other ISAs in the same year?
Yes, you can.
According to the latest rules on ISAs, you can split your annual allowance (currently £20,000) between the following:
- Cash Isa;
- Investment (stocks and shares) ISA; and
- Innovative Finance ISA.
You can’t invest in more than one Innovative Finance ISA during the same tax year, however.
How risky are Innovative Finance ISAs?
I’d be lying if I told you that these are risk free.
Still, Innovative Finance ISAs seem to me less risky than stocks and shares ISA; and because providers promise fixed return, they certainly appear more predictable and consistent.
Which makes me think that some Innovative Finance ISA provisions may be a way to grow passive income. But I’m digressing a bit here….
How much money I need to open Innovative Finance ISA?
Lile with other types of ISA this depends on the provider and their requirements.
Typically, to open an Innovative Finance ISA you’ll need between £1 (Assetz Capital) and £1,000 (Landing Crowd and The House Crowd). Opening an IFISA with Landing Works will set you back £10.
How does Innovative Finance ISA compare with other ISAs?
There are eight types of ISA now, including Innovative Finance ISA.
I believe that Lifetime, Help to Buy and Junior ISAs have very specific purpose and won’t include these in the comparison.
Here is how Cash ISA, Investment ISA and Innovative Finance ISA compare according to:
Returns. What are the returns on investment.
Risk level. What is the risk to your investment/savings.
Fees. How much are the fees of the ISA?
Predictability of returns. How predictable are the annual returns of your investment?
Diversity. How diversified is your investment?
Effort. How much effort from you does the investment require.
|Cash ISA||Investment ISA||Innovative Finance ISA|
0.5% to 2%
|Depends, could reach 10-15% on some funds||4% to 8%|
Charges for early withdrawal and for transfer
|Between 0.8% and 4.7% of amount invested*||Charges for early withdrawal|
|Predictability of return||High||Low||High|
|Low to High depending on account||Low|
Selecting an ISA account is a very personal thing. Still, to be able to select we need to know about the distinct types of ISA and their characteristics.
In this post, I told you what you need to know about the Innovative Finance ISA and compared this to Cash ISA and Investment ISA.
Finally, I’d like to remind you The Money Principle formula for ISA selection:
Ideal ISA = (Relatively) low risk + high (potential) returns + low fees + high diversity
Now it’s over to you: