- On July 9, 2017
With interest rates still in the doldrums many savers have been left scratching their heads looking for a way to maximise their returns.
Conventional bank accounts offer next to nothing by the way of interest and you’ll struggle to get more than 1% or so with an easy access ISA, the traditional haven for savers.
However, there’s a new kid on the ISA block that’s tempting savers with headline grabbing rates of return – the Innovative Finance ISA or IFISA.
Although the name is a bit of a mouthful, the interest rates being touted around are very easy to swallow, with inflation-beating returns in the region of 6% often quoted.
In a nutshell an IFISA allows savers who have invested in a peer-to-peer (P2P) lending to place their money in a wrapper enabling them to take their profits completely free from tax, subject to the standard £20,000 ISA allowance.
P2P lending has exploded in popularity over the past 10 years and in effect cuts out the financial middleman, such as banks, by connecting the lender directly with the borrower.
Investors (you) give money to a P2P company who then lends it to a borrower. You receive the interest on the loan and retain your savings, with the company taking a small fee for its services.
So in the current climate of low interest rates a P2P ISA seems like a no-brainer, right?
Well, much of the answer depends on your personality. As with all investments, higher returns equate to greater risk and this certainly applies to an IFISA.
One of the most important factors that investors need to consider is that IFISAs are not protected by the Financial Services Compensation Scheme (FSCS). This means that if the firm you’re invested with goes bust you could potentially lose all your money.
That said, the loans made by P2P companies are spread over a broad customer base to lessen the impact of defaults on your money, and many firms have their own compensation schemes in place to give investors some peace of mind.
In addition to this, some firms say their lending criteria are so strict that only one in five applications for a loan are accepted.
On the positive side, all P2P firms have to be authorised by the Financial Conduct Authority in order to offer an IFISA, meaning they have to adhere to a strict set of operating rules.
IFISA also fall under the same rules as other ISA products in that they form part of your estate for inheritance tax purposes when you die. This also means that a spouse or civil partner can inherit your ISA allowance, while retaining their own annual allowance.
It’s clear then that an IFISA should be treated as an investment rather than a savings account. This means that you need to accept that you could lose some or all of your money with this type of product.
It’s worth thinking carefully about your own attitude to risk and whether you can afford to lose the money you invest in an IFISA before you add this product to your portfolio.
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