IFISA - Tax Free Returns

Could the IFISA take over from the Cash ISA?

Cash ISA accounts are falling out of favour with the Great British public, while Innovative Finance ISA (IFISA) accounts have seen enormous growth over the past year. There can be little doubt that a significant shift is taking place in the savings and investment market.

Low interest rates have left Cash ISA savers struggling to find a good deal over the past few years. In fact, for a prolonged period of time, there wasn’t a single instant-access Cash ISA able to match the rate of inflation. When this happens, it means that any money deposited in this account will effectively be losing value, unless either inflation rates fall or interest rates rise.

With this in mind, it is hardly surprising that many ISA holders have been deserting their cash accounts and looking elsewhere in the search for returns. And the IFISA has proved to be a popular alternative.

What is an IFISA?

Unlike a Cash ISA, IFISAs are investment products as opposed to savings products. Often pitched as the happy medium between a cash savings account and a stocks and shares portfolio, IFISAs allow investors to fund small businesses, property developments and consumer loans via a peer-to-peer (P2P) platform or crowdfunding site.

By cutting out the middleman and lending to borrowers directly, investors can make inflation-busting returns of up to 15 per cent. However, if a borrower defaults on their payments, the investor risks losing their capital investment, as well as any interest accrued.

In many cases, these loans are backed by hard assets, which offer a form of assurance behind the loan as the assets can be used as collateral if the borrower defaults on a payment. This has had the effect of reassuring would-be investors that their money is safer than it might be if it was being held in a stocks and shares portfolio.

However, as the P2P sector grows, there have been more and more reports of rising defaults. In the worst-case scenario, defaults can mean that an IFISA investor will lose all their money – capital and interest. However, since most P2P platforms distribute investments across a series of loans, rising defaults are more likely to translate into slightly lower returns. Returns that still vastly overshadow the interest payment currently being offered by the majority of Cash ISAs.

Is the IFISA the new Cash ISA?

It’s too early to say if the IFISA will to overtake the Cash ISA as the most popular tax-free wrapper in the UK. But the rise of the IFISA has been rapid, to say the least.

The IFISA was officially launched in April 2016, but due to a backlog at the regulator, few financial providers were able to offer IFISA products until later in the year.

The dearth of choice, plus a general lack of awareness around the IFISA market, meant that just 7,200 IFISA accounts were opened in the 2016/17 tax year, with a combined value of just £36m. By comparison, around 8.5m Cash ISA accounts were active during that same year.

However, things have changed quickly. According to the most recent HMRC data, more than £290m was invested in 31,000 IFISA accounts during the 2017/18 tax year – a year-on-year increase of more than 700 per cent.

During the same 12-month period, Cash ISA subscriptions fell by almost ten per cent, with just 7.7m new accounts opened. In fact, over the past three years the amount of money invested into Cash ISAs has fallen by more than 30 per cent.

The future of the IFISA

At the time of writing, there were 86 authorised IFISA managers, offering services such as consumer lending, bridging loans, property financing, and good old-fashioned P2P lending. And the industry is growing. This year alone has seen more than a dozen high-profile new IFISA launches, including ISA-compliant offerings from big P2P brands such as RateSetter, Zopa and Funding Circle.

As savers and investors become more engaged with the ISA market’s offerings, it is likely that we will see a further increase in IFISA accounts in 2018/19. But this doesn’t mean that the Cash ISA is dead. Conservative savers will always prefer the stability and FSCS protection that only a Cash ISA can offer, even if it means lower returns. And for the more ambitious saver, there is a whole world of IFISA products out there just waiting to be explored.

Originally Published: Tuesday, December 18th, 2018
Updated: Friday, December 14th, 2018

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