As a comparatively recent addition to the finance market, Innovative Finance ISAs can be much more complex for potential investors than other traditional ISA options. We’ve worked with our friends at Just ISA Investments to make the world of innovative finance clearer, including details such as IFISA limits, how your investment generates returns, and how some companies like Just work to make your investment safer.
An innovative finance isa (or IFISA) is the third, and newest, type of ISA available to UK investors and is specifically intended for you to use your tax free ISA allowance to invest in peer to peer lending – where your investment is lent to borrowers and businesses, who then pay back the amount with interest based on the length of your investment.
Litigation-based IFISAs, for example, use your investment to finance legal cases brought by third parties – often where the litigant cannot afford to pay the legal costs that would be a part of pursuing their case further. The return on the investment, if the case is successful, is then paid back to investors.
You can only pay into one IFISA in each tax year, but you can pay into a cash, stocks and shares and innovative finance ISA in the same tax year as long as you do not exceed your total yearly ISA allowance – allowing investors to vary their payments across several savings options.
What Makes ISA Products IFISAs?
IFISAs commonly differ from normal ISA offerings by increasing the options for investors to consider – Whilst a cash ISA is commonly held with a bank or building society and offers low interest and low risk, IFISAs can give you the opportunity to invest in a wide range of different sectors – including litigation finance, property, and even precious metals.
As innovative finance ISAs function as peer to peer lending, some companies also use IFISAs as a means of gaining direct investment (usually through bonds) into their own projects or partnerships, with the company acting directly as the borrower. The funds gathered through their investors are then further invested into areas like housing or litigation, and the investor gets a return based on the success of the IFISA company.
Risks can include the borrower defaulting on the loan created by your investment, or failure to raise enough investment to properly explore the chosen market. As with all investment options, your capital would be at risk.
How Can You Invest In An IFISA?
In the U.K., the number of investors interested in innovative finance options has only grown since the release of IFISAs into the public sphere. Peer-to-peer lending, group investment and specific products like bonds are all accessible options for new investors – and as the number of willing investors continues to grow, the opportunities for investment should also continue to increase.
What Risks Should I Be Aware Of?
Whilst there are a large number of risks associated with any investment, and every company offering IFISAs should have a complete breakdown of the risks associated with their sector, there are always several things that investors should be aware of (and are often caught out by).
Impact of Fees
IFISA investment opportunities often carry a series of fees payable by the investor to the management company – which will have some impact on the net return of the investment. These fees are usually set out in the terms and conditions of the investment, and those considering investing smaller amounts should be especially careful of the impact that fees could have on their eventual return.
Exposure to External Events
Whilst litigation funding is often sheltered from external financial events, the companies offering investment into litigation funding are not – the trading and assets of funders could be affected by unforeseen events, including economic, social and political events or trends. Whilst these events are unlikely, it is always worth taking the current financial and political climate into consideration when deciding on the best method for investing your funds and planning accordingly.
Diversification means spreading your investments across different asset classes and sectors. Diversification is a common means of reducing overall risk to your investment portfolio. When you invest in IFISAs focused on specific financial sectors – like litigation funding or property investment – you should be aware that all monies invested will be in the same sector and through the same asset class. To mitigate the inherent risk in this practice, investors should consider spreading or diversifying their other investment activities and seek independent advice if they have any doubts, particularly as some markets are more volatile than others.