What is an innovative finance Isa, or Ifisa?
An innovative finance Isa (Ifisa) - is an Isa that contains peer-to-peer loans instead of cash (as in a cash Isa) or stocks and shares (as in an investment Isa).
Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers.
And because you're cutting out a bank by investing your money through an online portal - known as peer-to-peer lenders - you tend to earn higher rates of interest than a traditional savings account.
This guide explains how Ifisas work and whether you really need one.
Is peer-to-peer investing right for you?
Peer-to-peer lending involves considerable risks, and several platforms have collapsed in recent years.
The FCA imposed stricter rules in 2019 for peer-to-peer platforms to protect less experienced investors.
Under marketing restriction rules imposed by the regulator in 2019, peer-to-peer platforms may only communicate 'direct-offer financial promotions' to retail clients that are classified as either:
- certified high-net worth investors
- certified sophisticated investors
- self-certified sophisticated investors
- investors who are certified as 'restricted investors'.
However, they are still high-risk products, with limited protections should the borrower default. Some platforms offer contingency funds, but these don't guarantee to repay all investors.
Unlike savings accounts, returns are not guaranteed, and past performance does not serve as a reliable guide to future performance. You could face waits of several months to withdraw your money.
- Find out more: the best and worst investment platforms
How does my innovative finance Ifisa allowance work?
In the 2020-21 tax year, you can save up to £20,000 into an Isa. This can be a mixture of cash, stocks and shares or an innovative finance Isa.
So, to use up your allowance, you could put:
It's worth noting that you have a statutory right of cancellation for 14 days after opening the account.
How do transfers into innovative finance Ifisas work?
You can only open one new innovative finance Isa with one single provider each tax year.
However, you can transfer any money that's already within a cash Isa or stocks and shares Isa to an innovative finance Isa offered by a peer-to-peer provider.
Here's what you need to do:
- If you want to transfer your cash or stocks and shares Isa savings from the current tax year, you have to transfer the full amount;
- But you can transfer as much or as little as you like from older Isas you've held in previous years, without affecting this year's £20,000 Isa allowance;
- To transfer your your Isa, you should complete a transfer form with the innovative finance Isa provider you want to switch to;
- Don't withdraw your money out of your other Isas to transfer, as it could impact on your current Isa allowance;
- Transfers take place in cash - so if you hold stocks and shares Isas, all of your investments would be sold and the cash would be used to invest in peer-to-peer loans.
- Transfers to innovative finance Isas should take no more than 30 working days.
How to assess the risks of Ifisas
There's some important things to consider when choosing an Ifisa provider, including:
- The platform's track record - several have collapsed in recent years
- How spread out your investments are across borrowers to achieve a diversified portfolio
- What protections are offered by the platform should it be in trouble or go bust
- Whether or not you'll be able to transfer your Ifisa if needed
- How you can access your money, and any charges it could impose if you want to withdraw cash early.
If you can, seek independent financial advice to help you identify your risk profile and long term goals.
Do I need an Ifisa?
Basic-rate and higher-rate taxpayers can currently earn interest without paying any tax, under the Personal Savings Allowance.
The first £1,000 of interest earned by basic-rate taxpayers is paid tax free, while higher-rate taxpayers can earn £500 free of tax. The Personal Savings Allowance applies to interest earned on peer-to-peer lending.
Whether or not you need an innovative finance Isa will depend on the rate of tax you currently pay, how much you are prepared to invest and the rate of return you expect to receive.
But think carefully about the level of risk that you are taking with peer-to-peer lending - and don't simply choose the company because it offers an Isa.
- Find out more: work out your tax bill using our calculators
What other types of Isa are there?
Ifisas are just one of several types of Isas, some of which can hold investments: