The Pros and Cons of Innovative Finance ISAs

IF-ISAs help investors maximise investments by conveniently allowing them to earn tax-free returns on whatever they put in, up to the yearly government threshold.

Opposites one thumb up, one thumb down

IF-ISAs also come with a fair share of other benefits – and, naturally, some risks – which are important to take note of before adding them to your investment portfolio.

Understanding How IF-ISAs Work

By utilising an IF-ISA, you effectively invest your money in the form of a loan to a specific type of borrower, which will vary based on the provider that you go with. You could be investing in anything ranging from a property project to small British businesses.

The minimum investment required for an IF-ISA varies by provider, but usually ranges anywhere between £100 and £10,000. Investments can be made and managed online on a Peer to Peer platform, which doesn’t involve a bank or traditional financial institutions.

Innovative Finance ISA: Pros and Cons

First introduced in April of 2016, IF-ISAs are relatively new compared to the other Individual Savings Account (ISA) types. Since they hit the market, investors have gotten to know their pros and cons well, which can help newcomers to make an informed decision before committing.

A graph indicating success

The pros

  • IF-ISAs are easy to open and access via online Peer to Peer platforms
  • There is a multitude of IF-ISA providers from which to choose, so you can choose the right Peer to Peer platform for you
  • You’re able to invest up to £20,000 per tax year across your IF-ISAs and your other ISAs, earning tax-free returns on the amount invested
  • A reputable provider like Kuflink offers returns of up to 7% per annum across a five-year term, for example
  • Lending to private borrowers or taking a stake in ‘crowdfunded’ investments via IF-ISAs could yield returns as high as 9% per annum

The cons

  • IF-ISAs are not protected by the FSCS
  • As with all investments, your capital is at risk
  • IF-ISAs are considered to be higher risk than other ISA types
  • The converse of relatively low barriers of entry and having many providers from which to choose means that there is room for a few bad apples to show up. Always choose a reputable provider

A light bulb on a wooden table

Choosing your Investment Term

Typically investors earn a higher return rate on IF-ISAs with a longer investment term, though this can vary from provider to provider. If you’re starting to explore making IF-ISAs a part of your investment strategy, you should consider how long you will be able to invest for.

Taking the Plunge with an IF-ISA

Thanks to online Peer to Peer platforms, it’s never been easier to open an investment account. Now that you know some of the pros and cons of Innovative Finance ISAs, you might be better equipped to make an informed decision about whether to integrate them in your investment strategy.

Regardless of where you decide to invest next, always ensure that you read the terms and understand the risks before making a formal commitment.

Add Comment