Discovering IFISAs - Everything You Need to Know

Last post: Mar 29, 2018

An Innovative Finance Individual Savings Account, also known as an IFISA, is a tax-free savings vehicle in which individuals can invest in non-traditional or "innovative finance" options.

Peer to peer lending is not covered by the Financial Services Compensation Scheme and lenders' capital is therefore at risk.

What's the difference between an IFISA and a Cash/Stocks & Shares ISA?

An Innovative Finance Individual Savings Account is a tax-free alternative that allows you to invest in the peer-to-peer lending market.  There's plenty of different types of ISAs ranging from Stocks and Shares, Cash ISAs, Help to Buy ISAs (first time buyers), Lifetime ISAs (for under 40s aimed at a first home or retirement) and now IFISAs. With this alternative type of ISA growing increasingly in popularity.

The key points to remember about the difference between an IFISA and a Cash ISA / Stocks and Shares ISA is that..

  • It is an investment and not a deposit. This means that an IFISA typically has a higher rate of return due to the fact that they are considered riskier investments.
  • You're committing to interest and not equity. Unlike Stocks and Shares ISAs which purchase the equity of companies on your behalf, IFISAs are loans provided to companies that pay you part of the interest.
  • Your money is illiquid, not liquid. There's always a risk with a Stocks and Shares ISA that the performance of the companies your money has been invested in will fall, therefore creating a risk to your investment. This investment can be sold at any time, the reason for it being liquid. With an IFISA you are lending money with the consensus that there will be a certain interest level and, alongside with that, the investment is debt-based and so you have to remain invested for the term set.
  • You can be in control of where your investment goes. Investing in an IFISA means you're involved with the businesses/projects that you are lending to rather than taking a passive step-back. There's a few IFISA platforms allow you to browse these businesses or projects and select one that is right for you.

Why is the rate of return typically higher for an IFISA?

As talked about previously, an IFISA is considered a riskier investment due to the fact that you are relying on the performance of the company you are investing in. There is potential that you could lose your investment if said company is not able to pay back its loans.

Since Innovative Finance is a fairly new contender to the ball park, it means it has lower overheads.