Being a UK saver hasn’t produced much in the way of benefits over the past couple of years. ‘Miserable’ savings rates have made traditional cash ISAs and regular savings accounts almost not worth the effort. The volume of cash that we’re putting aside is down, and most people feel fairly disillusioned about the opportunities for earning income with saved money. So, a fairly gloomy picture – or is it? The Innovative Financial ISA (IFISA) went live in April 2016 but it’s only this year that we’re beginning to see the potential of this new savings vehicle. Could it be the change British savers need?
What is the Innovative Financial ISA (IFISA)?
All ISAs are “tax wrappers” that surround a form of saving or investment which mean any growth/profits are protected from being taxed. The new IFISA is simply the same tax wrapper around the relatively new saving/borrowing product of peer-to-peer loans (with the IFISA extended to include debt crowdfunding from late 2016). Returns substantially greater than from standard cash ISAs are forecast – perhaps upward of 10%. But as noted below your capital is at risk, unlike with traditional cash ISAs.
How much can you invest?
The annual ISA limit for 2017/18 is £20,000. This can be split between the various different types of ISA – Stocks & Shares ISA, a Cash ISA, a Lifetime ISA or an Innovative Finance ISA – or you can put all the money into one type of ISA, as long as you stay within the limit. For example, you could save £11,500 in a cash ISA, £3,000 in a stocks and shares ISA and £5,500 in an innovative finance ISA. This tax-free income can only be earned on new investments.
Why has the IFISA been introduced?
It’s designed to be a clever solution to the lack of income savers can generate with their cash. Plus, it offers a new route to becoming an investor. Previously, if you wanted to save or invest tax-free then you would either have to accept the lower interest rates of the traditional cash ISA (but enjoy FSCS protection) or take the risk of putting your cash into potentially risky stocks and shares with the Stocks & Shares ISA. The new IFISA makes use of peer-to-peer lending, which is generally considered to be less risky than traditional stock market investments, although these savings are not protected by FSCS. Plus, the rates of interest that are available are higher than a classic cash ISA.
Who is offering the Innovative Financial ISA?
This new and innovative type of funding isn’t yet something that major lenders have jumped on to. However, you’ll find plenty of options out there as the market continues to expand. Some of the best-known companies currently looking at offering (or already offering) the IFISA are Zopa (which is offering rates between 2.9% and 6.1%), RateSetter (up to 5.3%) and Funding Circle (6.9%). To achieve greater returns means you will have to accept higher risk.
Is the IFISA a safe bet?
No. Any investment is a risk and you shouldn’t be investing money that you can’t afford to lose if the worst happens. As this savings mechanism is based on peer-to-peer lending any money you put in is not protected by FSCS. For those looking to put money safely aside, a traditional cash ISA may well be the better choice. However, while the IFISA isn’t ‘as safe as houses’ it is a much more appealing option if you have money to spare and you’d like to use it to generate some return for the future.
The pros and cons of an IFISA
Like any kind of saving or investment vehicle there are both advantages and disadvantages to the IFISA.
You’ll get much better rates of interest on the money you put into the IFISA (though you may need to accept higher risks)
It’s very simple to set up an IFISA
You can support entrepreneurs and growing businesses via your investment
Interest is paid tax-free
You may lose your money (capital is not protected by FSCS)
Interest rates can be affected by many factors, such as bad debts and liquidity
Default rates could be problematic in an economic downturn
Thanks to the Personal Savings Allowance, the first £1,000 of interest you earn on savings is tax-free – if you’re only investing modest amounts the tax-free element of the IFISA may make no difference
The IFISA market remains relatively new and untested and it will take some time to really establish the benefits and the opportunities. In the meantime, for those looking to invest existing savings, it’s certainly an option to consider.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley