If you’re looking to make your money really work for you, investing in an ISA may be just what you’re looking for. The ISA – which stands for ‘individual savings account’ – is a way of allowing people to save money tax-free.
The two ISAs you’ve probably heard about are…
- Cash ISA
- Stocks and shares ISA
However, in April 2016, the Government unveiled a new ISA available to savers: The Innovative Finance ISA (IFISA).
What is the Innovative Finance ISA?
The Innovative Finance ISA was designed by the Government ‘to provide lender with tax-free returns on peer-to-peer loans.’
All right, so let’s first look at peer-to-peer loans, then.
Exactly as described, peer-to-peer, or P2P, means that individuals can lend their money to small and medium-sized businesses without the need for a bank as an intermediary. Think of it, essentially, as a sort of ‘crowdfunding for borrowers and lenders’ type platform.
Christine Famish, of the P2P Finance Association said:
‘They’re a half-way house between a cash ISA, which is safe, but very low return, and a stocks and shares ISA, which is a bit more racy, and where you carry more risk.’
The biggest risk is, as with any debt, that the borrower may default on the loan. To circumnavigate this particular problem, many P2P lenders spread their investments across hundreds (and sometimes even thousands) of different accounts – just as a bank would. This essentially limits the risk of losing your money. In fact, in their report, the BBC says that, in effect you become ‘your own bank manager.’
And how do banks make their money? Interest, of course.
It’s that interest which, prior to the introduction of the IFISA, would be tax-deductible – making P2P lending a far less attractive alternative for individuals. Way back in 2014, the Treasury announced their intention to regard P2P loans as an investment that qualifies for an ISA. The Innovative Finance ISA is the mechanism that allows this.
How do I start an IFISA?
The first port of call – as it always is when dealing with finances – is research. Your options. Is it right for you? And if it is, which IFISA will you invest in? How much can you afford to save?
There are many IFISAs offered by peer-to-peer lending platforms, where lenders and borrowers meet. Each of these companies connect lenders with borrowers in different sectors. For instance, one might solely invest in businesses; others might lend your money to gren iniaitives. The choice is yours.
For each of the IFISAs offered by these websites, you’ll find varying average return rates – and, generally speaking, the higher return, the more you’ll need to save.
Now for your investment. Depending on the IFISA you select, you can start lending from as little as £10, right up to a minimum of a £20,000.
With all ISAS, whether it’s cash, stocks or innovative finance, you can save a maximum of £20,000 for the current fiscal year. That’s across all ISAS, s, depending on your finances, you may choose to place up to £15,000 in cash ISAs, and the splitting the remaining £5,000 into a stocks ISA and an IFISA. However you work it, ensure you don’t stash more than £20,000, as you’ll then become liable to pay tax.
And remember: For each tax year, you can only open a single IFISA, from one provider. You won’t be able to have multiple Innovative Finance ISAs on the go.