About the IFISA
An Innovative Finance ISA (IFISA) lets you use your tax free ISA allowance while investing in peer to peer (P2P) lending.
It works by lending your money to borrowers in return for a set amount of interest based on the length of time you are prepared to leave your money untouched.
You can pay in up to your ISA allowance, which is £20,000 in the 2018/19 tax year.
As an IFISA works like a loan there is a chance the borrowers could default on their repayments.
Most of the companies that offer IFISAs have a backup or reserve fund set up to protect your money against any borrowers who default on their repayments.
Your investment will typically be split between a large number of loans to companies that match the risk/reward profile you select in order to spread your risk.
P2P lending and the IFISA
There are an increasing number of Innovative Finance ISAs available on the market, offering you the opportunity to lend your money to a mixture of individuals, businesses and infrastructure projects.
The IFISAs we list below vary greatly – some are based upon property loans, others loans to small businesses and SMEs; still more combine the two.
They also vary in terms of the minimum investment they will accept, and the period of your investment – typically the longer the term, the greater the reward.
As with any investment it is important that you fully understand what you are investing in, what your exposure to risk is, and what costs you will incur.
Whilst some marketplace lenders operate a lifeboat fund to cover the cost of default, not all do; your investment will be diversified over a wide range of loans, but P2P lending is a relatively new phenomenon and it is not covered by the Financial Services Compensation Scheme.
P2P is still growing at a rapid rate with 200,000 retail investors targeting stable, attractive returns with £10 billion in cumulative lending.
P2P loans are shielded from stock market volatility, offer downside protection through security provisions and can deliver a diverse portfolio with an alternative investment which was previously only available to institutional investors.
There are now a number of platforms that sit above a range of lenders and lending sub-sectors, removing the need for investors to select individual loans.
P2P is a direct loan contract, known as a P2P agreement, between the lender and borrower; the role of a P2P platform is to facilitate this agreement by originating loans and matching borrowers to lenders; the IFISA wrapper ensures that your gains stay well away from the Treasury.