Should I get an Innovative Finance ISA?
Innovative Finance ISAs offer retail investors an alternative to more conventional savings accounts, although some financial advisers are cautious about the risk that comes with these products.
IFISAs are designed to include more long-term, less-liquid investments. These can include peer-to-peer loans, crowdfunded debt issued by companies, and bonds issued by charities.
As with all ISAs, their returns are free of capital gains tax and income tax. They fit within the current annual tax-free allowance of £20,000 for ISAs.
IFISAs typically offer high savings rates, reflecting their heightened perceived level of risk compared with other savings products. For example, Kuflink’s website says that its IFISA customers can earn up to 9.13 per cent gross per annum.
By contrast, the average Stocks and Shares ISA experienced a growth of 2.8 per cent in the year to February 2024, according to Moneyfacts. However, the average return for a Stocks and Shares ISA over the past 10 years sits at 9.64 per cent, according to Moneyfacts data cited by AJ Bell.
“The Innovative Finance ISA is a good way for investors to diversify their risk exposure to another asset class/sector,” says Stuart Gibbs, financial planner at Prydis Wealth.
Whether or not an Innovative Finance ISA is appropriate for a saver depends on their attitude to risk, he continues.
“These are considered to be risky, so you should satisfy yourself with the risks involved and get a good understanding of the underlying assets which you will be exposed to.”
Borrowers may default on loans
Falling UK interest rates are likely to precede a drop in the rates offered by banks and savings accounts, which could tempt savers to look to the lofty rates advertised by IFISA providers.
Some financial advisers are cautious about IFISAs and the risks that come with peer to peer lending. “We would not tend to recommend it to our clients”, says John Phillips, independent financial adviser at AAF Financial.
“Borrowers may default on loans, and you might lose some or all of your investment,” he continues, adding that “peer to peer lending and crowdfunding sectors can be less regulated than traditional banking or stock markets”.
“With a wide range of investment risk profiles, low charging, diversification provided by Stocks and Shares ISAs, our view is that there is likely to be a provider and wide choice of investment funds that better suit our clients than innovative ISAs.”
Michaela Pashley, chartered financial planner at Roseum Financial Planning, is similarly unenthusiastic about IFISAs.
“No one has yet managed to convince me that this is superior to equity-based investment over the long-term,” she says. “I’m unconvinced that most people wouldn’t be better served sticking to Stocks and Shares ISAs”.