Posted in:

What is an innovative finance ISA?

April was the dawn of the new tax year and brought with it some new methods of saving. One of these was the Innovate Finance Individual Savings Account, or IFISA. The IFISA allows savers to hold savings in peer-to-peer and crowdfunding companies within the ISA wrapper, that means tax-free growth.

In theory this would allow savers to access higher potential returns and may even boost the economy as small businesses who did not have access to loans previously could get them via crowdfunding.

It was anticipated that one in four ISA holders would consider the option, but there are very few IFISAs on the market.

However, with the possibility of higher returns also comes greater risk. Peer-to-peer lenders can offer as much as 7% interest, but if you want to access your money at short notice you could take a hit.

Lending to individuals or crowd funding an individual company can be compared to investing in an individual stock. You are placing your bet on that one company or person and relying on them for a return, taking on the gamble that large banks may not want to. A lack of credit after the financial crisis is why these companies exist.

Sign up to receive the Moneyfarm newsletter

Get the latest news and tips for managing your finances, straight to your inbox.

By making an investment, your capital is at risk.

But so far nobody in the UK has lost any money in the peer to peer sector. With interest rates at a record low and the possibility that they could go lower the IFISA could be a saving grace. With regular repayments on loans the returns could even be seen as more secure than the stock market.

But it is not the risk that is deterring savers from the IFISA. It is the fact that very few companies are offering them. Only three companies have had approval from HMRC so far, many of the big names are still waiting.

As the approval process takes longer and longer the IFISA becomes less appealing. What sounded like an exciting scheme is now surrounded by doubt. Savers are moving away from the Cash ISA in their droves, with the IFISA barely off the ground individuals are turning to the more tried and tested Stocks and Shares ISA.

If used as part of an investment portfolio the IFISA could be a fantastic tool to have in your arsenal. The risk comes into play if you rely too heavily on this, as with any investment you need to ensure it suits your needs. Most would not want the majority of their savings to be hard to reach and the IFISA is often more illiquid than many of the exchange-traded fund Stocks and Shares ISAs on the market.

It will be interesting to see how the IFISA market evolves. Their arrival certainly has not been quite what was anticipated but once the red tape lifts will savers move to the most adventurous member of the ISA family?

Try Moneyfarm for free

Simple, efficient and tailored to your profile. The Moneyfarm investment plan maximises your long-term returns whilst protecting your wealth.

Sign up to MoneyFarm now: get access to your investor profile and discover the portfolio that is right for you, free of charge.

Get started