With ISA season underway, it can be tricky for people to know which product to choose, or how to diversify across the range of ISA options.
Clearly not every ISA will suit a person’s long-term goals or appetite for risk.
However, for people looking to earn a good return in exchange for some risk, the Innovative Finance ISA (IFISA) stands as a viable alternative to the Stocks and Shares ISA. Unlike the Stocks and Shares ISA, it isn’t linked to the stock market so doesn’t carry the risk of an investment going up or down in line with the equity market, nor does it carry the complicated charges and fees levied by the major investment platforms.
Natasha Wear, Zopa’s P2P CEO, comments on the IFISA: “Combining robust returns with well-managed risk, the Zopa IFISA is a reliable and stable alternative to investing in the stock market.
“It’s designed for investors who want to diversify their portfolio or for those people who are worried about the volatility and risks involved in investing in equities but are still happy to take some risk with their money for a good return.”
- What is it?
The IFISA is an ISA which enables customers to earn tax-free interest on their peer-to-peer investments. For example, through the Zopa platform, your investment will fund personal loans to low risk UK borrowers. An investment into a Zopa IFISA will function in the same way as any non-ISA Zopa investment does. The difference is simply ring-fencing the returns from the taxman. ISAs remain tax free for their lifetime so you don’t have to worry about exceeding your Personal Savings Allowance as your assets grow.
- What returns does it offer?
Unlike Stocks & Shares ISAs, the IFISA has target rates of return: up to 5% for Zopa’s Core IFISA, and up to 6% for Zopa’s Plus IFISA. The investment does carry risks, although Zopa is completely transparent with its loan book, and has a 15-year track record in successfully managing risk. Stocks & Shares ISAs can be especially volatile, as illustrated during the stock market crash of 2008 and the tumble in global markets in 2018 which saw the worst fall in value for 10 years.
Stocks & Shares ISAs can be especially volatile, as illustrated during the stock market crash of 2008 and the tumble in global markets in 2018 which saw the worst fall in value for 10 years.
- Is it right for me?
New FCA rules introduced in December 2019 mean that all P2P platforms now ask potential investors a series of appropriateness questions about their specific investments to determine if they are the right fit for the customer. Zopa’s IFISA products are designed for investors who want to make a reasonable return on their investments over the medium to long term, but who are worried about the volatility and risks involved in investing in the stock market. You can also hold one of each of the types of ISA in any given tax year so by having an IFISA alongside a Stocks and Shares ISA and a Cash ISA means you are diversified across asset classes.
- Can you transfer in and out?
Yes. Transferring across ISA asset classes is possible with some providers. However, many ISAs don’t allow this and even if they do, they’ll often charge you for it. The Zopa IFISA allows you to transfer your existing ISA or previous years’ ISAs into an IFISA for free. Transferring in an old ISA from another provider also won’t affect your current year’s tax-free allowance. Best of all, it means you’ll be able to start earning returns of up to 6%. Zopa offers the same rate for current and previous year ISAs so you’ll immediately start earning the market rate and there are no introductory rates that swiftly disappear. Of course, you can also transfer out by selling your loans to other investors for which a 1% sale fee applies.
- Can you have multiple IFISAs?
You can only contribute your annual allowance to one IFISA per tax year. However, you may transfer any historic ISA balances to multiple IFISAs. Your historic balances can only be moved via the ISA transfer process. If you simply withdraw funds or close an existing ISA, you may lose its ISA-wrapped status.