Should you invest with an IFISA?

Richard Litchfield is Head of Operations of the peer-to-peer lending platform Lending Works. Here, he shares his insight into whether investing with an IFISA is worthwhile.

Recent figures released by the Peer-to-Peer Finance Association have highlighted just how popular Innovative Finance Individual Savings Accounts (IFISAs) have become since they were first introduced in 2016.

‘By the end of the second quarter of this year, £588 million had been invested in more than 40,000 accounts’

By the end of 2019, £1 billion had been invested in more than 40,000 accounts, and it’s expected that this rate of growth is only going to continue, as more and more people learn about IFISAs.

Of course, as these accounts are still relatively new to the market, there’s some confusion about how they work, who they’re designed for, and whether they’re actually worth investing in. So, here, I’m going to explain more about IFISAs and take you through some of the benefits of taking one out.

What is an IFISA?

An Innovative Finance ISA allows you to make the most of your tax-free ISA allowance by investing your savings through peer-to-peer (P2P) lending.

This means any money you put in an IFISA will be lent out to borrowers in return for a set amount of interest, which is based on how long you’re willing to leave your money in the account untouched.

‘using an IFISA to give P2P lending a go is a relatively low risk way to invest’

You can pay in up to your annual ISA allowance, which is currently £20,000.

Like any form of investment, IFISAs do carry an element of risk, as borrowers might default on their repayments, and contributions aren’t covered by the Financial Services Compensation Scheme (FSCS).

But most P2P platforms will offer ways to reduce the risks ⁠— for example, we have the Lending Works Shield, which means we’re able to provide protection to investors against loans defaulting.

We also ensure our investors diversify by lending their money out to a spread of borrowers, which helps to reduce the risk even further.

As you can see, using an IFISA to give P2P lending a go is a relatively low risk way to invest, and I’m now going to explain some of the other benefits of going down this route.

The returns beat interest

Interest rates are notoriously low at the moment. This means, if you’ve been squirrelling money away in cash ISAs and everyday savings accounts, the interest accumulating in these will usually be minimal.

‘most investors can expect a return of around 4–7%’

While the rates of return on IFISAs can vary significantly depending on factors such as what platform you use and how long you’re willing to lend your money out for, most investors can expect a return of around 4–7%.

When you consider that you’ll currently get a maximum interest rate of 1.16% on an easy-access savings account, and up to 1.6% on a fixed-rate savings account (Money Saving Expert), it’s clear your pot will typically grow much more quickly if you’re willing to take the relatively small risk of putting it in an IFISA instead.

It’s a low maintenance form of investing

If you’re interested in making your money work harder for you, but don’t have the time to micromanage your investments, an IFISA could be the perfect option for you.

‘this form of investing shouldn’t take up too much of your time’

You will typically have the option of automating everything so, essentially, all you need to do is deposit your money into the account and your chosen P2P platform will do everything else for you.

You can also choose whether you would like to re-invest your returns or draw a regular income from your investment. Again, this can all be automated so it all happens without you having to lift a finger.

You can still check in every once in a while to see how things are going, and some providers will allow you to withdraw your money early fee-free if necessary. But this form of investing shouldn’t take up too much of your time. You can simply leave your pot to grow in the background.

You can transfer your existing ISAs over

While your annual ISA allowance is £20,000, if you’ve accumulated funds in different ISAs over previous financial years, you can transfer these into your new IFISA, and there’s no upper limit.

‘this is a great way to make that money work harder’

This means, if you’ve saved £100,000 into a Cash ISA over time, you can transfer some or all of this into one or more IFISAs. These can even be spread over multiple platforms if you prefer.

This is a great way to maximise your returns, as it allows you to invest a lot more in P2P lending than you would otherwise be able to — at least in one financial year.

So, if you have money put away in ISAs that you aren’t planning to touch for a while, and you’re currently only earning minimal levels of interest, this is a great way to make that money work harder, so your pot will grow more quickly.

If you’re looking for an investment solution that’s low-maintenance and relatively low-risk, an IFISA could be the perfect option for you. It’s also a great idea if you have savings that you could be getting a much better return on, with interest rates being so low.

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