An IFISA or Innovative Finance ISA is a financial service that allows you to make more money from your tax-free Individual Savings Allowance (ISA) by investing the interest you earn through peer to peer firms. This way, the funds that you invest in an Innovative Finance ISA can be lent out to the borrowers in return for a set interest rate. The interest rate is defined on the basis of the term that you want to lend your money for. Using an Innovative ISA to give peer to peer lending a chance is a comparatively low-risk investment.
You can invest either a part of or all of your ISA allowance, which is £20,000, into the IFISA.
Just like any other type of investment, there is risk involved in the Innovative Finance ISAs as well. It is risky because the borrowers may default on the loan repayments, and your funds won’t be protected by the Financial Services Compensation Scheme (FSCS). However, most peer to peer lending firms offer different ways to lessen the risk. For instance, they have provision funds, which protects your funds in case the borrower defaults on repayments or the firm goes out of business.
Also, there is something that you can do as an investor to reduce the risk. You can diversify your investment over multiple loans to spread out to funds. This way, you can reduce the risk significantly. However, as you may know by now that when Innovative Finance ISA is used to use p2p investment, there is a low risk of investment.
Let’s discuss some major benefits of investing in Innovative Finance ISA.
It is a great way to make your money work harder for you
If you have saved £100,000 so far with Cash ISA, then you can transfer some or all of these earnings into one or more of your Innovative Finance ISA accounts. You can also spread these funds over multiple IFISA providers if you want.
IFISA is a great way to earn maximum returns, since it allows you to invest more money in peer to peer investment than you would be able to otherwise, at least in one tax year. So, if you have funds save in ISAs which you are not planning on using for a while, then you are only earning minimal interest currently. This way, you can get more out of your money, so your savings grow faster.
The returns beat interest.
The interest rate for IFISA is known to be notoriously low. If you have been spending your money in cash ISAs or traditional savings account, then you must be getting minimal interest. You can expect a return rate of 4% to 7% of these investments.
Whilst the return rates for Innovative Finance ISAs can vary based on different factors like the p2p firm that you use and the term you can lend your funds out for, the majority of investors get a return of 4% to 7%.
If you think your funds are growing at the interest rate of 1.6% on a traditional savings account, then it is clear that your savings can grow quickly if you invest in Innovative Finance ISA and take a little risk.
It doesn’t take up your time
Usually, you will have the choice of auto-invest everything. Therefore, all you will have to do is deposit your funds into the IFISA account, and your peer to peer firm will handle the rest for you.
Also, you can choose whether you want to re-invest your returns or you want to get a regular income from your investment. All this can be automated as well. All this can happen without you having to do any work. If you want, you can oversee things and check how your investment is doing once in a while. Some firms may also allow you to withdraw your money early free of charge if necessary. However, this type of investment doesn’t consume a lot of your time. You simply have to leave your pot to grow.
You have the freedom to transfer your existing ISAs.
While your annual allowance is £20,000, if you invested your money into different ISA types over previous tax years, then you can transfer those funds into your new Innovative Finance ISA, and there is no upper limit.
It is needs low maintenance
If you are interested in multiplying your money, but you don’t want to micromanage everything since it requires a lot of time, then an Innovative Finance ISA might be the perfect option for you.
If you are considering investing in a service with low maintenance and less risk, then Innovative Finance ISA can be the ideal option for you. Also, it is a great idea if you have savings that you can use to get a better return while the interest rates remain low.