Innovative Finance ISAs, or IFISAs for short, were introduced in 2016 to allow people to invest their Individual Savings Account money with FCA-regulated and approved peer-to-peer lending companies.
It simply means that in addition to sheltering your savings from taxes by keeping them in cash or investing in stocks and shares, you can now also grow your peer-to-peer earnings tax free. This is great news because interest rates are pretty low on cash ISAs, and the more returns you earn, the more sense it makes to avoid taxation (legally, of course).
For the 2018/2019 tax year, the ISA allowance is £20,000, and you can decide how you want to use it, if part cash, part stocks, part IFISA, all cash, etc. Any combination is possible as long as the sum of all your ISAs contributions for the year does not exceed your allowance. You cannot rollover your allowance from one year to the other, so if you don’t use it, you lose it.
Because Cash ISAs often have an attractive first year offer, then revert to a low interest rate, it also makes sense to review the ISAs you have from previous years, and transfer them to another provider to get a better rate. Be careful, you cannot withdraw the money yourself, you need to talk to your new provider and have them execute the transfer, or you would lose your tax free benefit.
Just ISA is one of the companies offering Innovative Finance ISAs and their focus is on litigation funding, to help people with their litigation fees. They offer an interest rate of 8% p.a., and you need to invest a minimum of £2,000, with no upper limit, if you wish to transfer old ISA funds.
Compared to the best cash ISA offers hovering around 2% interest, that can make quite the difference over the long term, especially since all returns are tax free.
If you invest £10,000 at 2% for 10 years, you will have £12,189 at the end of term.
If you invest £10,000 at 8% for 10 years, you will have more than doubled your money, with £21,589 in the bank, assuming you reinvested the proceeds year after year.
The slightest difference in interest rate, compounded over a long period of time, can have a great impact on your finances. Plus, £11,589 tax free is £4,635 you wouldn’t have to hand over to the taxman if you are in the 40% tax band.
Now with greater returns obviously comes greater risks, so if you plan on investing in Stock and Shares ISAs or IFISAs, make sure you can afford said risks. Do not invest money you may need to access shortly. Educate yourself and understand all the implications before you start investing. Balance your portfolio with some low risk investments, and a cash cushion in case of a money emergency.
Since you can’t access your ISA money unless you lose the allowance, earmark these savings for retirement or another long term goal. It makes more sense to invest your ISA money into higher return vehicles, but if you have not used your allowance by the end of the tax year, you can still put some of your cash into an easy access ISA to save a little extra thanks to tax-free interest.
Money and personal finance are very personal, so get informed and do what is best for your particular situation and where you are in life.