Should you ditch your S&S ISA for an IFISA?

In the current economic climate, fixed asset investments are hard to come by – harder still if you want to beat the rate of inflation. Most cash ISAs are offering less than one per cent in interest, even while the rate of inflation hovers around the two per cent mark. And last year, the FTSE 100 recorded its worst performance in a decade, ending the year at a 12.5 per cent loss.

This has left many ISA holders wondering if there may be a better way to save or invest, without incurring enormous losses.

The Innovative Finance ISA (IFISA) may offer a solution to the problem of low-yielding and negative-yielding investments. First introduced in 2016, the IFISA offers a tax-free way to invest in secured and unsecured loans. These may include loans to property developers, small businesses, or consumer credit loans. As with other ISAs, up to £20,000 can be invested in each tax year, with typical IFISA yields coming in at between four and six per cent.

In terms of risk, the IFISA sits somewhere between the cash ISA and the stocks and shares ISA. Like the cash ISA, IFISAs offer fixed amounts of interest which are paid out at regular intervals (monthly, quarterly, annually). But like stocks and shares ISAs, your capital is at risk.

IFISA returns are dependent on the loans being repaid in a timely fashion. If a borrower defaults on their loan, the lender’s capital could be lost.

In reality, all IFISA providers are required to conduct stringent credit checks on all potential borrowers, and if a default seems likely they will employ the help of a recoveries agent. As a general rule, the average default rate across all IFISA providers is around two per cent.

IFISA investors can further reduce the risk of capital loss by using an IFISA provider which allows them to spread their money across a variety of different loans.

Regardless of the risks, it seems that more and more investors are turning towards the IFISA. In the 2016/17 tax year, just £31m was invested in IFISA accounts, but this figure had ballooned to £290m by the end of the following tax year. According to numerous industry analysts, IFISA inflows are set to grow again this year, as investors seek out an alternative to low returns and stock market volatility.