Look to the Innovative Finance Isa for market-beating returns on your tax- free savings, says Eleanor Ross
With ISA season on the horizon, enticing interest rates might be demand- ing your attention – f lashing on billboards, TV adverts, and popping up in your inbox.
Savers UK-wide have long waited for Isas with higher returns, but it seems unlikely that this will be the year for a life-changing interest rate boost.
As the current investment landscape looks predictably unappealing for investors, now is a good time to look at other Isa options, explains Andrew Lawson, chief product officer at Zopa.
“Cash Isas are paying less than inflation, and unsettled equity markets are causing uncertainty for stocks and shares Isas,” he told City A.M.
One alternative is the Innovative Finance Isa, or IFISA, which offers a middle ground for investors.
An IFISA can work as an attractive investment for savers who want to tar- get inflation-beating returns on their Isa money and are comfortable taking on some risk, but don’t want the ups and downs of the stock market.
So what is an IFISA?
An IFISA uses peer-to-peer lending, allowing you to lend up to £20,000 per tax year by simply removing the middle-man. This means you lend money directly to those who want to borrow (at no effort to you, of course). Most peer-to-peer lenders now offer the product.
Frazer Fearnhead, chief executive and founder of property crowdfunding and peer-to-peer lending platform The House Crowd, explains why the market’s right for IFISAs: “Cash Isas produce pitifully low returns. Stocks and shares Isas are volatile – you can have good, bad, or awful years.
“By contrast, IFISAs generally produce much higher returns than cash Isas, and more consistent returns than stocks and shares Isas.”
There are several reasons why investors should consider investing into an IFISA, explains Sam Handfield- Jones, director of Octopus Choice. The first is diversification.
“There will always be a vital role for
Unsettled markets cause uncertainty for stocks and shares Isas
cash and stocks and shares, but IFISAs provide an opportunity for investors to diversify their portfolio,” he said. Secondly, IFISA rates remains strong. As inflation is currently 2.7 per cent, IFISAs could help investors preserve the value of their Isa money by target- ing an attractive interest rate.
So how do they work?
An IFISA lets you earn tax-free interest on peer-to-peer investments, a sweet spot between the cash Isa and the stocks and shares Isa.
Reuben Skelton, from Oaksmore Isa says: “Having launched more than 200 funds, we have seen numerous categories of property fund.
“However, nobody looked at the UK’s existing property stock. There is a rush to tear down perfectly good buildings, that with a little effort can be reconfigured.”
This particular IFISA, specialising in historical building renovation, offers a tax-free return of up to 7.5 per cent each year.
Another lender trying to do some- thing different is Folk2Folk, a peer-to- peer platform for rural and local businesses. It is offering an IFISA which gives lenders the opportunity to earn 6.5 per cent interest a year, while supporting British businesses within their local area.
Compared to cash Isas, the IFISA offers much higher rates of return. Using a product like Zopa, investors can expect between four to 4.6 per cent interest, which will feel like a windfall in this climate.
The £20,000 Isa allowance is shared among all types of Isas, regardless of whether that’s a cash Isa, an IFISA, or a stocks and shares Isa.
As with other Isas, new contributions in a single tax year must all be in the same IFISA. Just as some Isa providers offer flexible cash Isas, some IFISA providers even let you withdraw money from your account.
IFISAs also give investors the opportunity to diversity their capital rather than just selecting individual loans.
At The House Crowd, returns are secured against UK properties, giving investors significant downside protection. “If things go wrong, at least a property-backed Isa means there is a tangible asset that can be sold to recover your money,” Fearnhead explains to City A.M.
“It’s not a guarantee, but it does mean that the secured property would have to suffer a significant fall in value before any of your capital was lost.”
Handfield-Jones points out that IFISAs offer relative security, if they’re secured against something unlikely to shift, such as property.
“In the case of asset-backed IFISAs like Octopus Choice, investors can take some com- fort from the fact that investments are secured against bricks and mortar.”
Do they carry risk?
Any investment carries a modicum of risk, so investors considering IFISAs should think about the level of return they want.
Lawson recommends looking at providers that have a strong track record of managing risk, and which are transparent about their performance and how they operate.
He adds: “Consumers should also have an understanding of the underly- ing asset class they’re investing in.
“In Zopa’s case, it’s unsecured personal loans to low risk UK consumers – the type of people banks would gladly lend to, but come to us because we offer better value and better experience.”
Fearnhead recommends mitigating risk by asking IFISA providers what their level of security is if things go wrong.
“Invest in an IFISA that lends money to a business and you could be left with nothing if things go pear- shaped.”
The rise of the funky IFISA
IFISAs are also a way for investors to do something interesting with their savings. For example, Oaksmore has recently launched an Isa which allows investors to capitalise on historic renovation.
Funds pledged to the Isa will be invested into heritage restoration projects around the UK, focusing on buildings that have fallen into disrepair and transforming them back to their best possible state for use and boosting the site’s profitability.
Reuben Skelton, from Oaksmore Isa says: “Having launched more than 200 funds, we have seen numerous cate- gories of property fund.
“However, nobody looked at the UK’s existing property stock. There is a rush to tear down perfectly good buildings, that with a little effort can be reconfigured.”
This particular IFISA, specialising in historical building renovation, offers a tax-free return of up to 7.5 per cent each year.
Another lender trying to do some- thing different is Folk2Folk, a peer-to- peer platform for rural and local businesses. It is offering an IFISA which gives lenders the opportunity to earn 6.5 per cent interest a year, while supporting British businesses within their local area.
If nothing else, the opportunity to invest in something a little different might be the push potential investors need to develop a more diverse portfolio in this low- interest rate and risk- averse climate.