As a comparatively recent addition to the finance market, Innovative Finance ISAs can be much more complex for potential investors than other traditional ISA options. We’ve worked with our friends at Just ISA Investments to make the world of innovative finance clearer, including details such as IFISA limits, how your investment generates returns, and how some companies like Just work to make your investment safer.
An innovative finance isa (or IFISA) is the third, and newest, type of ISA available to UK investors and is specifically intended for you to use your tax free ISA allowance to invest in peer to peer lending – where your investment is lent to borrowers and businesses, who then pay back the amount with interest based on the length of your investment.
Litigation-based IFISAs, for example, use your investment to finance legal cases brought by third parties – often where the litigant cannot afford to pay the legal costs that would be a part of pursuing their case further. The return on the investment, if the case is successful, is then paid back to investors.
You can only pay into one IFISA in each tax year, but you can pay into a cash, stocks and shares and innovative finance ISA in the same tax year as long as you do not exceed your total yearly ISA allowance – allowing investors to vary their payments across several savings options.
What Makes ISA Products IFISAs?
IFISAs commonly differ from normal ISA offerings by increasing the options for investors to consider – Whilst a cash ISA is commonly held with a bank or building society and offers low interest and low risk, IFISAs can give you the opportunity to invest in a wide range of different sectors – including litigation finance, property, and even precious metals.
As innovative finance ISAs function as peer to peer lending, some companies also use IFISAs as a means of gaining direct investment (usually through bonds) into their own projects or partnerships, with the company acting directly as the borrower. The funds gathered through their investors are then further invested into areas like housing or litigation, and the investor gets a return based on the success of the IFISA company.
Risks can include the borrower defaulting on the loan created by your investment, or failure to raise enough investment to properly explore the chosen market. As with all investment options, your capital would be at risk.
How Can You Invest In An IFISA?
In the U.K., the number of investors interested in innovative finance options has only grown since the release of IFISAs into the public sphere. Peer-to-peer lending, group investment and specific products like the Just ISA and Just Bond are all accessible options for new investors – and as the number of willing investors continues to grow, the opportunities for investment should also continue to increase.
Invest in IFISAs are comparatively straightforward – each provider will have a minimum investment level required, and you can invest up to your yearly ISA maximum. You can even move your money from an existing ISA into an IFISA, so long as you do not exceed the yearly maximum.
During each tax year, you can only invest in one IFISA – so making sure you choose the right area of investment, terms, and company to invest with is very important. Interest on your investment also varies from product to product, and many will have a minimum term of investment – usually between 2 and 5 years.
For example, the Just ISA is an IFISA offering investment in a litigation funding bond and offers 8% interest per annum. Minimum investment is just £2,000, but the investment period is over 5 years.