Launched less than three years ago, the popularity of the Innovative Finance ISA (IFISA) is still growing – and growing fast.
This is because it can both outstrip the levels of return offered by cash ISAs (although it must be noted that IFISAs are much, much higher risk than cash ISAs) and potentially provide less volatile returns than stocks and shares ISAs.
With a Crowd2Fund IFISA, for example, investors were making an average of 10.25 per cent APR in January, before fees and bad debt.
Take advantage of tax breaks
Investing in an IFISA allows funds to grow tax-free as they are held within the ISA tax-free wrapper. This ensures that interest repayments are not subject to income tax, which is 20 per cent for basic rate tax payers (on non-ISA interest above £1,000), but can be as high as 45 per cent for additional rate taxpayers – who don’t get any tax free savings allowance at all. Additionally, no income tax is payable on IFISA funds when they are eventually withdrawn.
This is one of the reasons the IFISA is such an attractive investment vehicle for building up wealth in the long-term. It should also be noted that while IFISAs form part of an estate for inheritance tax purposes, they can also be passed on without incurring any associated tax if left to a spouse.
Use the full allowance Each year HMRC sets a tax free savings allowance that can be spread across the whole ISA range. The current allowance is £20,000. This allowance isn’t transferable between different years, however, meaning unused allowance is lost forever when the new tax year rolls in.
Therefore investors usually aim to use it all, or as much as possible, prior to the 5th April in any tax year in order to shield as much of their savings as possible from tax. If you have used up your full allowance and are married, be sure to take advantage of your spouse’s allocation to shelter up to £40,000 per year from income tax between you both.
Reinvest for compounding interest
If you have been a Crowd2Fund IFISA investor since its introduction in April 2016, some of the loans you are invested in may have completed by now. If this applies to you, you can redeploy your funds into new investment opportunities. By doing this you will continue to be paid interest on your earnings, which can multiply exponentially over time.
To increase returns even further, you can reinvest your repayments on a monthly basis into a specific new issue, providing you are lending £100 or more. If your repayments are lower than this each month, you can use the Smart-Invest feature, which automatically reinvests your repayments in all the live campaigns, spreading your risk.
Diversify your portfolio
Spreading your risk is an essential tool in managing the inevitable element of risk that comes with any investment. Diversifying your portfolio across a range of different companies and sectors will reduce your exposure to any single risk.
This means that should one loan go bad, you have plenty of others to fall back on. As the old mantra goes: “you shouldn’t put all your eggs in one basket.”
In addition to the primary investment opportunities listed on the platform, investors are also able to use the Crowd2Fund Exchange to buy existing loans – or parts of them – from other investors, increasing the range of investments available.
Some investors who sell their loan holdings may also be able to make a profit by setting a higher rate. Crowd2Fund is unique in that it is the only IFISA on the market which is self-selecting, allowing investors to directly assess and choose the companies and organisations that they want to lend money to.
By following the tips in this guide you will be in an excellent position to diversify your ISA savings and investments and potentially take advantage of strong returns using the IFISA, helping you to ride out short term market blips and secure your financial future over the long term.
This article is taken from the Good Guide to the Innovative Finance ISA. Download your FREE copy here.