The IFISA is the ultimate investment that no-one’s heard of – and few are investing in.
According to data published last week, just 2,000 of the new Innovative Finance ISAs have been opened since launch, with the lion’s share of the market – 72 per cent – so far going to Abundance Investment, which specialises in lending to renewable energy projects, according to Peer 2 Peer Finance News.
The market is expected to grow significantly this year, as some of the biggest peer-to-peer platforms receive authorisation from the regulator to offer the new ISA type. Zopa, the UK’s biggest peer-to-peer lender, became authorised earlier this year and now offers two IFISAs: a core rate of 3.7 per cent, or a “plus” rate, currently 4.5 per cent.
The low uptake so far is despite the IFISA ticking the top three investment priorities for investors of tax efficiency, fixed income and self-selection, according to Crowdstacker, another IFISA platform.
The IFISA is available on Abundance Investment, Crowd2Fund*, Crowdstacker, Downing Crowd, the Lending Works and Zopa, among others, to investors wanting to make use of their £20,000 ISA allowance this tax year. Although many investors, it seems, are in danger of missing out.
Only one in 20 (5 per cent) of investors questioned by Crowdstacker said they know enough about what an IFISA is to be able to explain it clearly to other people.
The IFISA offers investors the chance to put peer to peer (P2P) lending in a tax efficient wrapper, paying around 6 per cent. About 4 per cent of all potential ISA money is earmarked for investment in IFISAs over the 2017-18 tax year, the research found.
“It’s the potential returns that can really set the IFISA apart”, according to Downing Crowd. To date, its “Crowd Bonds” have achieved an average weighted interest rate of 5.79 per cent.
The catch is that there is no Financial Services Compensation Scheme (FSCS) protection on investments, as there is with cash savings. So those not prepared to make the leap from cash savings to investing may still be put-off.
However, if investors are happy to take on the higher risk, this could prove an attractive option compared to the current low interest rates offered by many cash ISAs.
Julia Groves, partner and head of crowdfunding at Downing LLP said: “Despite any good intentions to invest early, the end of every tax year inevitably sees investors flock to ISAs at the last minute – it’s simply human nature. But investors should still take time amidst the rush to shop around, particularly in today’s low interest rate world.”
“Different types of crowdfunding often get lumped together as being too risky but Crowd Bonds are actually a very simple form of lending that can, in many ways, be less complex and risky than traditional equity investing.”
Karteek Patel, CEO of Crowdstacker, said: “We believe our own success in year one of offering the Innovative Finance ISA – we take an average £1m per month in ISA investment – is clearly just the tip of the iceberg. We can see from this new data there is an appetite for it, and that investors want all the things it can offer such as better returns, tax efficiency, transparency, and fixed income”.
However, those that do know about IFISAs and have invested in them, have invested more on average, than in traditional cash ISAs. The average amount of £7,013 per person has been invested in Crowdstacker’s IFISA to date. This is compared to £5,810 in cash ISAs between 2015 and 2016.
Want to know more? The Good Guide to Innovative Finance ISAs has a flow chart to help you decide, as well as a table showing the latest changes to the ISA regime, including information on Lifetime and Help to Buy ISA options.
*Just so you know, Crowd2Fund and The Lending Works pay Good With Money for new investor sign-ups via the links in this article.