The Innovative ISA increases the ways through which you can use your savings tax-free. Through IFISA, you get the opportunity to handle your savings in different ways, which stocks and shares ISA or cash ISA doesn't; however, the risk of losing your investment is higher. All the ISAs pay interest 100% tax-free. However, there is a limit for the amount of cash that you can put into your peer to peer lending to get the tax-free interest on it. The yearly limit for ISA is £20,000 from the 6th of April 2017 to 2019-20. Remember if you do not use your annual allowance before the 5th of April of every tax year, then you lose it.
What is IFISA?
Innovative Finance ISA allows individuals to use all or some of their annual ISA allowances to lend money to borrowers via peer to peer lending platforms and earn interest and capital gain tax-free. IFISA is a relatively new investment option that was introduced by the government of the UK in the year 2016.
There is considerable interest in IFISA both on the side of the individual investor and on the side of the industry. Currently, the IFISAs are being offered by the p2p lenders who are approved by the Financial Conduct Authority (FCA).
Innovative Finance ISA Fees
The majority of the providers do not charge a fee to open an account or to handle the account. However, fees might be applied if you take out your cash before the ‘lock-in' term is expired.
How Does ISA Compare to the IFISA?
Unlike the stocks and shares ISA and cash ISA the Innovative finance ISA allows you to lend your savings to a borrower using alternative finance platforms like Kuflink. Similar to other ISAs, IFISA still get capital gain and interest tax-free. Further, just like the other peer to peer ISA, if you do not use your annual allowance by the 5th of April, then you are going to lose it. It would help if you remembered that all crowdfunding investments, the returns, and the risks are not guaranteed.
However, there is no upper limit on the transfer of previously existing cash ISA from the previous year into the IFISAs.
The interest rates offered by Innovative Finance ISA providers can be around double the interest rate provided by a cash ISA provider because crowdfunding removes the middle man from the bank. This means that the borrowers usually pay less in the interest rate, and investors earn more.
What Is the ROI on IFISA?
There is a comparative range of Innovative ISA providers depending on the rate of return and other conditions. The usual rate of the annual ROI (Return on Investment) is between 4% and 8%. These also depend on the time in which you prepare to ‘lock-in' your savings' investment. The longer you do not access your invested money, the higher the ROI rate will be. Remember that you will notice that several providers boast a high ROI rate than 8%, but be sure not to be drawn. There is a catch in that since these are ‘self-directed' Innovative Finance ISA. In simple terms, the return depends on your competence, and there are increased risks.
The majority of the p2p providers promise a fixed ROI, but, still, this is an investment, and there is no guaranteed interest. The promised ROI generally assumes that repayment of loans is reinvested at the same rate and that the platform's provisions will cover any bad debt. Still, the annual returns are fixed and hence consistent and predictable.
Can You Withdraw Money Whenever You Need It?
Every peer to peer lending platform needs that you leave your money with them for a specific period. Generally, it is 3 to 5 years. However, let's not forget that the longer you leave your money, the higher will be the returns. Usually, it is expected that withdrawing money before the term ends can be problematic. Even if the providers state, it is possible for you to withdraw money need to specify that this is subject while clearly. Other vendors are not there yet. If you are wondering what it means for your investment strategy then, it means that you should put the money in IFISA only if you most probably won't need that money for the next 3 to 5 years.
Investing in Both IFISA and Other ISAs in the Same Tax Year
According to the rules on the ISAs, you are allowed to divide your annual allowance among the following:
- Cash ISA
- Stocks and shares ISA
- Innovative Finance ISA
However, remember that you cannot invest in more than one IFISA during the same tax year.
Comparison of IFISA to Other ISAs
| Investment ISA | Cash ISA | Innovative Finance ISA | |
| Risk level | High
|
Low | Medium- High |
| Returns | can reach 10-15% on some funds, depends | 0.5% to 2% | 4% to 8% |
| Predictability of return | Low | High | High |
| Diversity | Depends |
Low
|
High |
| Fees | Between 0.8% and 4.7% of amount invested* |
fee for early withdrawal and for transfer
|
Low |
| Effort | Variable with the type of account |
Low
|
Low |
Innovative Finance ISA in a Nutshell
- Innovative Finance ISA allows you to use all or some of your tax-free ISA allowance in order to invest in different types of lending platforms.
- You can invest in one Innovative Finance ISA; one cash ISA and one stocks and shares ISA altogether in the same tax year which ends on the 5th of April.
- Innovative Finance ISA's benefit is that it can properly diversify your ISA investment.
- And one negative side is that it carries double the risk for investment and the viability of a company offering ISA.
However, regardless of all the informed risks, the financial industry has spoken. Major investors are moving billions of pounds into the alternative finance model.
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