An Innovative Finance ISA, also known as IFISA, is a new type of savings account that allows you to invest in peer-to-peer (P2P) lending and crowdfunding platforms. This type of account offers a number of benefits over traditional savings accounts, including tax breaks and higher returns.
In this article, we will discuss the different types of IFISAs available, the fees associated with them, and how they work. We will also provide a list of the best providers currently offering IFISAs.
Innovative Finance ISA: Benefits, Fees, Rates & Key Information Table of Contents
What is an Innovative Finance ISA?
An Innovative Finance ISA (Individual Savings Account) is a type of tax-free savings account that was introduced in the 2016/17 tax year. The account allows savers to invest in peer-to-peer (PTP) loans and receive interest payments tax-free.
How Does an Innovative Finance ISA Work?
The government introduced the IFISA to encourage more people to invest in PTP loans, which are seen as an alternative to traditional investments such as stocks and shares.
PTP loans are made between individuals, rather than between a borrower and a bank. The loans are often used for things like home improvements or debt consolidation.
Interest rates on PTP loans can be higher than on other types of investment, as the risks are also higher.
How to Get an Innovative Finance ISA
The first step is to find a financial advisor who can help you with the application process. You can use an online search engine like Google or Yahoo to find one in your area. Once you've found a few potential advisors, it's important to interview them to see if they're a good fit for you.
When you meet with an advisor, be sure to ask about their experience with Innovative Finance ISAs. It's also a good idea to ask about any fees they charge for their services.
Once you've found an advisor you're comfortable with, the next step is to complete the application process. This can be done online or in person at your local tax office.
The final step is to fund your Innovative Finance ISA. This can be done by making a deposit into your account or transferring funds from another account.
Once you've funded your account, you can start investing in a wide variety of investments. These can include stocks, bonds, and even real estate.
What Are The Different Types of Innovative Finance ISAs?
There are three types of Innovative Finance ISAs: the Property ISA, the Debt-Based Securities ISA, and the Peer-to-Peer Lending ISA.
The Property ISA allows you to invest in residential and commercial property through a special purpose vehicle.
Debt-Based Securities ISA
The Debt-Based Securities ISA allows you to invest in debt securities, such as corporate bonds and government bonds.
Peer-to-Peer Lending ISA
The Peer-to-Peer Lending ISA allows you to lend money to businesses and individuals through a peer-to-peer lending platform.
What Are The Benefits of an Innovative Finance ISA?
The main benefit of an Innovative Finance ISA is that it allows you to invest in a wider range of assets than a traditional Cash ISA or Stocks and Shares ISA. This includes things like peer-to-peer loans, mini-bonds, and crowdfunding.
Another benefit is that the tax rules are more favorable. With a traditional ISA, you only get tax relief on the interest you earn. With an Innovative Finance ISA, you get tax relief on the whole amount you invest.
Finally, an Innovative Finance ISA can offer better returns than a traditional ISA. This is because you are able to invest in higher-risk assets that have the potential to grow in returns.
What Are The Disadvantages of an Innovative Finance ISA?
If you're thinking about opening an Innovative Finance ISA, it's important to consider the potential disadvantages as well.
One of the biggest potential drawbacks is that your money is not protected by the Financial Services Compensation Scheme (FSCS). This means that if your provider goes bust, you could lose some or all of your investment.
Another potential downside is that you may have to pay taxes on your profits. This is because Innovative Finance ISAs are not exempt from capital gains tax.
Finally, it's worth noting that some Innovative Finance ISAs come with high fees and charges. This can eat into your returns, so it's important to compare different providers before making a decision.
Overall, an Innovative Finance ISA can be a great way to boost your savings, but it's important to weigh up the pros and cons before making a commitment.
Who Are The Best Innovative Finance ISA Providers?
There are a few key things to look for when choosing the best Innovative Finance ISA provider. You want to make sure that they have experience with the product and that they're regulated by the Financial Conduct Authority (FCA). Additionally, it's important to find a provider who offers competitive rates and fees.
Here are some of the best Innovative Finance ISA providers:
One of the largest and most well-established P peer-to-peer lenders in the UK. Zopa is regulated by the FCA and offers rates from around 0.65% to over 12%.
Another large and experienced P peer-to-peer lender. Funding Circle is also regulated by the FCA and offers rates starting at around 0.65%.
A smaller P peer-to-peer lender with a focus on customer service. Lending Works is regulated by the FCA and offers rates from around 0.70%.
What Commissions and Management Fees Come With Innovative Finance ISAs?
Just like any other form of financial product, there are always going to be fees and commissions involved. With Innovative Finance ISAs, these usually come in the form of management fees.
These can vary from provider to provider but typically range from 0.75% to around 0.95%. This may not sound like much, but it can soon add up over time – especially if you have a large sum of money invested.
So, what exactly are these management fees used for? Well, they cover the costs of running the ISA and also go towards paying any performance-related bonuses that may be due to the investment managers.
In terms of other fees, there are usually also charges for things like withdrawals and transfers. These can vary depending on the provider but are typically around £50 per withdrawal or transfer.
What Is The Minimum Amount Required to Open an Innovative Finance ISA?
The minimum amount required to open an Innovative Finance ISA is £100. This money can be invested in a single asset or spread across multiple assets.
What Are The Eligibility Requirements for an Innovative Finance ISA?
To qualify for an Innovative Finance ISA, you must:
- Be a UK resident
- Be 18 years or older
- Have a valid National Insurance number
In order to open an Innovative Finance ISA, you will need to provide your name, address, date of birth, and National Insurance number. You will also need to provide some basic information about your finances.
How Much Can You Contribute to an Innovative Finance ISA?
The annual allowance for an Innovative Finance ISA is currently £20,000. This means you can contribute up to this amount each year and any interest earned will be tax-free. If you have already used up your annual ISA allowance with a different type of ISA, you can still open an Innovative Finance ISA but you won’t be able to contribute any more money to it that tax year.
What is The Innovative Finance ISA Contribution Deadline?
The Innovative Finance ISA contribution deadline is the same as the standard ISA contribution deadline of April each year. This means that you can invest up to £20,000 in an Innovative Finance ISA in the 2020/21 tax year.
What Are Some Alternatives to an Innovative Finance ISA?
If you're not interested in an Innovative Finance ISA, there are a few other options available to you. One option is traditional stocks and shares ISA. With this type of account, you can invest in a wide range of assets including stocks, bonds, and mutual funds. Another option is a cash ISA, which allows you to earn interest on your deposited funds.
If you're looking for a more aggressive investment strategy, you could opt for a peer-to-peer lending account. With this type of account, you can lend money to individuals or businesses and earn interest on your loan. However, it's important to note that there is a higher level of risk associated with peer-to-peer lending.
Finally, you could also choose to invest in a property through a Self-Invested Personal Pension (SIPP). With a SIPP, you can use your pension funds to purchase residential or commercial property. While there is a higher level of risk involved with this type of investment, it can offer the potential for high returns.
How Does an Innovative Finance ISA Compare to a Savings Account?
When it comes to interest rates, an Innovative Finance ISA typically offers a higher rate than a traditional savings account. This is because the money you invest in an IFISA is used to fund loans and other investments, which come with a higher degree of risk. However, this also means that your money is not 100% protected if the borrower defaults on their loan.
What Is The Difference Between a Cash ISA & an Innovative Finance ISA?
The main difference between a Cash ISA and an Innovative Finance ISA is the types of investments that you can hold within them. A Cash ISA is simply a savings account where you earn interest on your deposited funds, whereas with an Innovative Finance ISA you can invest in a peer-to-peer lending platform, meaning you could potentially earn higher returns. However, as with any investment, there is also more risk involved.
When Can You Withdraw Money From an Innovative Finance ISA?
Unlike a traditional Cash ISA, you can't just withdraw money from your Innovative Finance ISA whenever you want. With an Innovative Finance ISA, you need to give notice to your provider before making any withdrawals. This is because the money invested in an Innovative Finance ISA is typically locked up for a set period of time, usually between one and five years.
So, if you need to access your money before the end of the term, you will likely incur some penalties. It's important to check with your provider to see what their specific policies are before investing in an Innovative Finance ISA.
When Should You Open an Innovative Finance ISA?
If you're looking to invest in PPNs, the best time to open an Innovative Finance ISA is now. The sooner you open one, the longer your money can grow tax-free. And with rates on some PPN products reaching as high as 12%, there's potential for your money to grow quickly.
Is It Easy to Switch to an Innovative Finance ISA?
The great thing about an Innovative Finance ISA is that it’s easy to switch. If you’re currently invested in a Cash ISA, you can simply transfer your existing investment into an Innovative Finance ISA without having to pay any tax on it.
Can You Lose Money With an Innovative Finance ISA?
The simple answer is yes, you can lose money with an Innovative Finance ISA. However, there are a few things to keep in mind that will help mitigate the risks.
First and foremost, remember that your Innovative Finance ISA is invested in PPCs. PPCs are loans that are made to businesses or individuals and are not backed by any physical asset. This means that there is a higher risk associated with them than with other types of investments.
However, the returns on PPCs can be quite high, which is why they are often chosen for investment through an Innovative Finance ISA.
Another thing to keep in mind is that your Innovative Finance ISA is a long-term investment. This means that you should not expect to see immediate returns. Instead, your money will be invested over a period of time, and you will only see the returns once the investments have matured.
Lastly, remember that an Innovative Finance ISA is not a savings account. This means that you will not be able to access your money as easily as you would with a savings account.
If you are looking for a short-term investment, an Innovative Finance ISA is not the right choice for you. However, if you are willing to invest for the long term and are comfortable with the risks associated with PPCs, an Innovative Finance ISA could be a good option for you.
How Much Should You Contribute to an Innovative Finance ISA?
The answer to this question will depend on your personal circumstances and financial goals. However, as a general rule of thumb, you should aim to contribute as much as you can afford to your Innovative Finance ISA.
There are a few things to bear in mind when deciding how much to contribute. Firstly, the government’s annual ISA allowance is £20,000. This means that you can contribute up to this amount to your Innovative Finance ISA each year without paying any tax on the interest earned.
Secondly, it’s important to remember that you can only access the money in your Innovative Finance ISA after a minimum period of five years. This is something to bear in mind if you think you might need to access the money sooner.
Finally, it’s worth considering how much interest you could earn on your Innovative Finance ISA. The rates of return on offer are typically higher than those offered by traditional savings accounts. As such, you could potentially earn more interest by contributing a larger amount to your Innovative Finance ISA.
Does an Innovative Finance ISA Earn Interest?
An Innovative Finance ISA is a tax-free savings account that allows you to invest in peer-to-peer (PTP) loans and debt securities, including mini-bonds. The interest you earn on your investments is not subject to income tax or capital gains tax, so you can keep more of the money you make.
The account is opened and managed by a financial institution, such as a bank or building society. The money you invest is used to provide loans to individuals or businesses. These loans are then repaid with interest, which is paid into your Innovative Finance ISA.
Do You Pay Taxes On an Innovative Finance ISA?
The great thing about an Innovative Finance ISA is that you don't have to pay any taxes on the money you make. That's right, the government has given these types of investments a huge tax break. So, if you're looking to make some serious money, an Innovative Finance ISA is a great way to do it.