IFISA gathers momentum in the face of Brexit uncertainty
The received wisdom is that ‘ISA Season’ is not quite the event it once was as savvy investors increasingly seek to maximise the tax advantages of their ISA investments by spreading them throughout the year rather than availing themselves of brokers that man the phones up until midnight on 5th April or services that allow late-comers to ‘park’ their cash until they decide what to do with it.
Another reported trend this year has been the ‘coming of age’ of the IFISA as investors seek to diversify their investment portfolios in the face of Brexit uncertainty.
As previously explored by Muckle (Income is hard to find – don’t lose interest in ISA Season) virtually every Cash ISA account is losing its real value because they offer returns that lag inflation; increasingly investors are turning to the IFISA as they can offer a higher risk-return profile than a Cash ISA and less volatility than a Stocks and Shares ISA. See The Innovative Finance ISA (IFISA) – a little oasis between a rock and a hard place?
Stocks and shares ISA investors may consider moving away from UK equities to minimize the potential for Brexit-related losses, or perhaps consider an IFISA investment that is not directly correlated to the stock market.
perhaps consider an IFISA investment that is not directly correlated to the stock market
However financial regulator, the Financial Conduct Authority (FCA), has ruled that an investor can only open one IFISA account per platform, per year; whilst this does make diversification a challenge, at least in the short term, there are ways for investors to get the investment portfolio they want, with the comfort of diversification.
Here are some suggestions as to how an IFISA investor can diversify their P2P portfolio:
Move ‘old’ ISA money
ISA rules allow money to be moved between different account types, and there is no limit to the amount you can transfer into a new IFISA from older Cash or Stocks and Shares ISAs without impacting your existing annual allowance.
IFISA providers have seen an increasing inflow of cash as disgruntled Cash ISA savers try P2P for size and this ‘loophole’ has the additional benefit of the potential to diversify as ISA transfers do not impact on the one-IFISA platform-per year rule. Investors can open a new IFISA account with one provider and then transfer their Cash ISA funds into an account with another provider.
Find a provider with a range of IFISA options
Despite the fact that investors can currently only fund one IFISA provider per year, that doesn’t mean that they are limited to just one IFISA product as several P2P platforms offer multiple products
Zopa is one example of a company that offers products aimed at different types of investors with a varying risk appetite; ‘Zopa Core’ invests in lower-risk loans and targets returns of 4.5% p.a., whilst ‘Zopa Plus’ includes some gamier loans in its portfolio, and targets returns of 5.2%
It would therefore be possible for an investment of up to the £20,000 annual threshold to be made with Zopa, and then be diversified by being split between the two products.
As the peer to peer sector has grown the underlying loans have grouped around particular sectors, and that allows an investor – lender – to select where their money goes.
Property has been conspicuous in its success in attracting direct loans, but SME and consumer lending are just two of the other emerging sectors.
Therefore IFISA investors can diversify their P2P portfolios over time by choosing a new sector to invest in each tax year – maybe a property-backed IFISA one year, and an account which invests only in consumer loans the next.
Most P2P providers offer a choice of auto-lending and self-selecting IFISA accounts; think of it as the difference between building a portfolio of individual equities, or buying a readymade portfolio via an investment fund.
Self-selection allows you to manually choose the loans you want to invest in, but this can be time-consuming and may result in a limited loan portfolio.
Alternatively, auto-lending accounts automatically add diversity by investing IFISA money across a wide range of different loans, grouped together in terms of their creditworthiness – and thereby risk; an auto-lending IFISA investment could be spread across 100 or more different loans.
Use an aggregator
A relatively new concept, in a relatively new sector, aggregator IFISAs allow investors to invest their money in multiple platforms without contravening the FCA’s ‘one provider per year’ rule.
The most recent cab off this particular rank has been Orca which targets returns of 5.4% p.a. with its IFISA by spreading loans across five different platforms – Octopus Choice, Landbay, Assetz Capital, Lending Works and LendingCrowd.
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