Looking at investing in tax-free savings? An ISA (Individual Savings Account) offers exactly that – and during the 2018/2019 tax year, you’re able to put away up to £20,000 without paying tax on the interest.
There are several different types of ISA to choose from, so finding the right one will depend on your individual needs. For instance, people looking to buy their first home can use a dedicated Help to Buy Isa and receive a boost from the government when putting down a deposit. Or, if you’re looking to save for your retirement the dedicated Lifetime ISA will help you do just that.
This means that it’s important to do your research before going ahead – and it’s also important to consider all the options, including what’s known as alternative saving and investment. In this article, we’ll explore how an Innovative Finance ISA, or IFISA, can be used to invest in a different way.
What is an Innovative Finance ISA?
An Innovative Finance ISA is designed to let savers invest their money using alternative investment options such as peer-to-peer lending or crowdfunding. It practice, that means you’re lending your money directly to a business (for instance, a small company crowdfunding their product) or individual (for instance, a landlord looking to borrow money for a buy-to-let mortgage). This is in contrast to the traditional model of investing through a bank which will act as a middle-man and absorb some of the risk.
These investments can be riskier, but they can also yield greater profits. And, just as excitingly, they can give you a way to invest in something you care about – whether that means a product that you’d like to help bring to market or, as is the case with companies like JustISA, a social cause that you are interested in supporting.
What are the benefits and risks?
One major benefit of an IFISA is that a successful investment is likely to invest you a higher return. According to the Innovative Finance ISA website, ‘peer-to-peer lending platforms offer higher potential interest returns than savings accounts from banks and building societies – with many P2P platforms citing target returns in excess of 8% per annum.’ These platforms are also regulated by the FCA, offering the lender some protection.
However, it’s worth noting that the risks can be higher than with other types of ISA. If the companies you invest with don’t turn a profit then you could end up losing your money. Crucially IFISAs aren’t backed by the Financial Services Compensation Scheme – this scheme allows people using more traditional accounts to protect the first £75,000 of their savings.
This means that you may want to consider splitting your savings across more than one type of ISA to ensure that you can benefit from the increased returns whilst also reducing the risk.
Can anyone sign up for an IFISA?
ISAs aren’t open to everyone. To start an IFISA, you’ll need to be a UK resident over the age of 18 years old.
What are my next steps?
So long as you meet the requirements, and you’re aware of the risks, the next step is to find a peer-to-peer lending platform that offers IFISAs. Not all P2P lenders offer IFISAs. If you use such a platform, be aware that you’ll be liable to pay income tax and capital gains tax on any interest earned.