5 things you need to know about the Innovative Finance ISA
With ISA season upon us, it can be tough for savers and investors to know which product to choose. Not every ISA will suit a person’s long-term goals or appetite for risk.
Stocks & Shares ISAs typically offer higher returns but carry the risk of an investment going up or down in line with the stock market, whilst Cash ISAs offer security but low returns in the current savings environment.
However, there is a relatively new entrant to the market which offers an excellent middle ground, in the form of the Innovative Finance ISA (IFISA). In fact, the IFISA is becoming increasingly popular with investors. £290m was invested into the product in the last tax year, 8 times more than in the 2016/17 tax year.
1. What is it?
The IFISA is an ISA which enables customers to earn tax-free interest on their peer-to-peer investments. For example, through the Zopa platform, your investment will fund personal loans to low risk UK borrowers. 66,000 UK customers currently use these types of investments to diversify their portfolio. An investment into a Zopa IFISA will function in the same way as any non-ISA Zopa investment does. The difference is simply ring-fencing the returns from the taxman. ISAs remain tax free for their lifetime so you don’t have to worry about exceeding your Personal Savings Allowance as your assets grow.
2. What returns does it offer?
Unlike Stocks & Shares ISAs, the IFISA has target rates of return: 4.5-5.2% in the case of Zopa’s IFISAs. The investment does carry risks, although Zopa is completely transparent with its loan book, and has a 14-year track record in successfully managing risk. Stocks & Shares ISAs can be especially volatile, as illustrated during the stock market crash of 2008 and the recent tumble in global markets which saw the worst fall in value for 10 years. The IFISA also offers much higher rates of return in comparison to the Cash ISA, with the average return across Cash ISAs in 2018 just 0.8%.
3. So, you can transfer in and out?
Yes. Transferring across ISA asset classes is possible with some providers. However, many ISAs don’t allow this and even if they do, they’ll often charge you for it. The Zopa IFISA allows you to transfer your existing ISA or previous years’ ISAs into an IFISA for free. Transferring in an old ISA from another provider also won’t affect your current year’s tax-free allowance. Best of all, it means you’ll be able to start earning returns upwards of 4.5% on Cash ISAs that typically would have been earning less than 1%, although it does carry more risk than Cash ISAs. Of course, you can also transfer out by selling your loans to other investors, but there are associated fees.
4. Is it flexible?
Yes. Flexible IFISAs are available from some providers – such as Zopa - which means you can withdraw money from your account, and then refund up to the amount withdrawn without using up more of your annual allowance for that tax year. If you want to withdraw a lump sum from the platform, we’ll sell your loans to other investors and there are associated fees.
5. Can you have multiple IFISAs?
You can only contribute your annual allowance to one IFISA per tax year. However, you may transfer any historic ISA balances to multiple IFISAs. Your historic balances can only be moved via the ISA transfer process. If you simply withdraw funds or close an existing ISA, you may lose its ISA-wrapped status.
Andrew Lawson, Chief Product Officer at Zopa comments on the IFISA: “The IFISA represents an excellent middle ground for investors put off by the increasingly turbulent equity markets or disappointed by the pitiful returns offered by Cash ISAs.
“Our IFISA offers retail investors a well-diversified portfolio of low risk loans, and a reasonably predictable, stable, and attractive return on their investment.
“As the IFISA and peer-to-peer lending enter the mainstream, investors are quite rightly demanding fairer, simpler, and more intuitive products which do away with hidden fees or introductory rates that swiftly disappear.”
When you invest your money with Zopa, your capital is at risk. Tax treatment depends on the individual circumstances and may be subject to change in the future.