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Innovative Finance ISAs (IFISAs) have grown in popularity since they were first introduced two years ago. Although the market has seemingly taken longer than expected to take off, with UK investors having waited for ISAs with higher returns, it appears the IFISA market is finally ready to deliver. Our previous post on IFISA projected returns of up to 8% interest per annum on your savings.
According to recent data from alternative finance industry news site AltFi, some IFISAs can offer tax-free returns on business, property or asset-backed investments of up to 16%. Given that easy access cash ISAs offer only up to 2.3% in projected returns, it is likely that some will consider the wait to have been well worth it.
The innovative finance ISA market has been slow to gain traction, partly because when it was launched in 2016, none of the major peer-to-peer lenders offered them. Also, providers were yet to be regulated by the Financial Conduct Authority (FCA) before they could offer an IFISA, a process which can take up to a year.
Today, there are over 30 FCA regulated IFISA providers lending through online peer-to-peer platforms. The platforms match investors with customers and businesses; and project returns of between 4% to 16%, depending on category, for example, business loans.
The most recent HMRC figures show that only 2,000 IFISA accounts were opened in 2016/2017, amounting to new money subscriptions of £17m. However, this figure is likely to rise significantly as more providers enter the IFISA market, with ISA comparison sites, like QuickISA making it easier for savers to ascertain how much they can earn at the click of a button.
Cash ISAs less popular
Cash ISAs on the other hand have been struggling to remain attractive for savers, with plummeting interest rates making them less popular. In 2016/17, cash ISA deposits fell by £19.5bn from 58.7bn in the 2015/16 tax year; that’s a 33% drop. Interest rates on cash ISAs continue to be disappointing, especially compared with what you can get for your investment with fixed-rate bonds or an IFISA.
Favourable Climate for IFISA Investment
In the 2018/2019 tax year, savers can save up to £20,000 in a tax ISA account. This can be made up investments of £20,000 in an IFISA, or it could be split into three investments of £10,000 into a cash ISA, £5,000 each in a stocks and shares and an IFISA, respectively.
AltFi predicts that 2018 is the “crunch year” for the innovative finance ISA market as the public awareness increases and more investors willing to take on the higher risk of return for higher projected earnings for their investments.
As with all investments, there are certain risks connected your IFISA. If the individual borrower defaults on their payments, your capital will be at risk. To mitigate this risk, as an investor can choose to spread out your loan across different borrowers. This way, if one borrower defaults on payment, only a fraction of your total investment will be at risk.
To learn more about IFISA or to speak to an expert financial advisor, check out www.quickisa.com.
This is a collaborated post.