Budget & Saving

The deal with ISAs and IFISAs

Saving money isn't all about budgeting and cost-cutting. A smart saver will invest their savings in the way that generates the most interest or bonus pay-outs, and in many cases, the best way to do so is to put your money into an ISA.

What is an ISA?

An ISA (Individual Savings Account) is a type of tax-free account for savings and investments, meaning that the Government will not charge tax on the interest up to a certain limit, called a tax free allowance. For the current tax year ending 5 April 2019, the ISA allowance is £20,000.

There are four main types – Cash, Stocks & Shares, Lifetime and Innovative Finance. Savers can hold more than one ISA but can only contribute money to one of each kind during the same tax year.

So, for example, it’s fine to use your full allowance on a cash ISA, or to split amounts across Cash, Stocks & Shares, Lifetime or Innovative Finance ISA depending on how much you’d like to deposit and how you’d like it to be invested.

How do I know which type is best for me?

Cash ISA - this effectively works like a normal savings account, but your interest isn’t taxed. That means the interest you make doesn’t count towards your personal savings allowance (currently £1,000 a year, £500 for higher-rate taxpayers).

Stocks & Shares ISA - As the name suggests, Stocks & Shares ISAs allow you to invest in companies, and as with cash ISAs, your returns aren’t taxed.

Lifetime ISA - Also referred to as LISAs, these allow those 18 or over to save up to £4,000 a year until the age of 50 towards later life or buying property. The big bonus here is that the Government will add 25% on top of your contributions each year.

Innovative Finance ISA - Otherwise known as an IFISA, these are a new type of ISA introduced in 2016 and let you invest in peer-to-peer lending, businesses and properties. That means your funds will be used to provide loans to individuals or businesses who borrow from the IFISA provider, and therefore carry an element of risk to your capital.

What happens to my investment when I deposit into an IFISA?

Different IFISA providers structure their products differently. For example, Ratesetter offers personal loans to borrowers as well as property, dealer and family financing. British Pearl specialises in property investments, while LendingCrowd lends your funds to credit-assessed UK businesses.

When you invest, IFISA providers effectively facilitate a credit agreement between you as the lender and any combination of individuals and businesses to try to find you the best rate of return.

In all cases, diversification is the best way to spread the risk you take on when you open an IFISA. If you open an account, make sure to do your due diligence on the types of individuals or businesses the provider is investing your funds into. In some cases, you’ll even be able to hand pick where your money is invested, depending on your appetite for risk or your interests.

Understanding the risks

It’s no secret that finding a decent return on a standard savings account is a difficult task these days, even with interest rates finally starting to rise. In part, that’s why so many of us are now turning to alternative investment options where the rate of return can be significantly higher.

However, with greater reward comes a degree of risk. If you choose to deposit your investments into P2P lending with an IFISA, there is a risk that the business or person your money is lent to can default on their loan. As such, it's important to understand that your money won't be protected by the Financial Service Compensation Scheme like they would with a bank or building society account.

Similarly, there is a risk that the P2P provider you lend your money with goes out of business. However, all UK P2P lenders in the UK must be regulated by the Financial Conduct Authority which means they have to keep lenders' funds separate from their own.

When choosing an investment platform, always be sure to do your due diligence on the provider and weigh up all the benefits and risks. For many people, ISAs are an excellent way of maximising returns and using the tax free allowance available to us. Remember, if you don’t use your £20,000 ISA allowance by 5 April, you can’t carry any of it over into the new tax year. Use it or lose it, the choice is yours!

Sean MacNicol

Engagement Manager