5 Essential IF ISA Rules to Follow at the End of the Financial Tax Year
The end of the financial year is approaching, and despite every good intention, the majority of us will still wait until the last moment to invest our savings into an ISA account.
In the three years since the Innovative Finance ISA (IFISA) was launched, an increasing number of people have opted to shield their savings in peer-to-peer (P2P) loans and alternative lending. According to HMRC statistics, in 2016/17, £36m was put into IFISA accounts. In the following tax year, this figure had increased by a massive 700 per cent to be worth £290m.
Analysts and P2P platforms have predicted that IFISA inflows will top £1bn by the end of the 2018/19 tax year, with more people than ever before racing to take advantage of the inflation-busting returns offered by IFISAs.
But before you part with your hard-earned money, there are a few rules to consider.
1. Check the investment threshold
P2P platforms started life as a way to help the average retail investor to access decent returns by lending to another business or individual. But over the years, an influx of institutional money has led many platforms to start setting a minimum investment threshold.
On some platforms, the entry threshold can be as high as £10,000, while many set £1,000-£2,500 as their minimum. Having said that, there are also quite a few platforms which allow investors to access IFISA returns for as little as £10 – in fact, Assetz Capital allows investors to open a new account with just £1.
Before you do your due diligence on your preferred IFISAs, check the small print to make sure that you can afford to invest, and don’t feel pressured to invest more than you had planned. All of our comparison listings contain information on the minimum investment.
2. Understand the risk
IFISA investments are often described as sitting somewhere between cash ISAs and stocks and shares ISAs on the risk/reward scale. However, IFISA risk is a bit more complicated than that.
IFISAs are investment wrappers for P2P lending, where a group of investors lend money to a group of borrowers, and receive repayments along with interest over a set period of time. In the worst case scenario, one of your borrowers could go bust, in which case you could lose all of your money.
By diversifying your investment across a number of different borrowers, you can reduce the risk of this happening, or at least minimize your losses.
You can further reduce that risk by only investing in secured loans, i.e. loans which have collateral behind them in the form of property, or other valuable assets. This means that the platform should be able to recover most (if not all) of your capital investment by selling on these assets if the loan goes bad.
3. One platform per year
This is one of the most divisive rules in the IFISA market, as it states that only one IFISA account can be opened per platform, per year. This means that you have to be extra certain that you have chosen the right account, or you may have to wait a full year to open up a second one.
However, if you are truly waiting until the last moment to open your IFISA, you could be clever and open one on 5 April and a new one the following day, when the next tax year begins.
4. Transfer time lag
While most new IFISA accounts can be opened online within minutes, ISA transfers can take a little longer. To transfer from one ISA to another, you will have to fill out a transfer form, and wait for the transaction to take place.
If you are transferring money from a stocks and shares ISA, you should expect a lag of around 30 working days, while cash ISA transfer times are around 15 working days.
If you think that you can bypass this lag by withdrawing your money from one ISA and putting it into another – don’t. By taking money out of your ISA, you could reduce the value of your annual allowance, or cancel it out completely.
5. Flexibility and liquidity
All ISA accounts come with their own restrictions, and the IFISA is no different. In some cases, it can be very difficult to withdraw money ahead of the loan’s end date, while other accounts will make it easier for you to take money out, but the withdrawn money will still count towards your annual ISA allowance.
If you think you might need to take some money out of your IFISA at some point, consider choosing a flexible IFISA. And if you like to know that you can exit a loan at any time, search for IFISAs which have a secondary market, where loan parts can be bought and sold.
Updated: Friday, March 22nd, 2019