Investing your hard-earned money is not an easy decision. There are several questions that come to mind. There are many things involved that you must understand completely before you invest your money. One of the essential questions that you must know the answer to is how risky the investment is?
This is specifically true for Innovative Finance ISA (IFISA) investment, mainly because it offers high rewards. Most investors want to know the risk level of IFISA investments. Hence we have compiled this guide together to help you understand all the risks involved in Innovative Finance ISAs. This can give you a clear understanding you need for IFISA accounts.
What is an Innovative Finance ISA?
Innovative Finance ISAs allow you to use parts of or all of your annual individual savings accounts allowance to invest in loans through peer to peer lending market while earning tax-free interest and capital gains.
Peer to peer lending offers higher return rates compared to other forms of ISAs because it eliminates the middleman that would be the bank. But, contrary to the other types of ISAs, the Innovative ISAs are not covered by the Financial Services Compensation Scheme (FSCS).this means that if the IFISA provider goes out of business, you may lose your money.
Since the returns are higher, there are more risks that you need to take. However, what kinds of risks are there, and is it all worth it?
Innovative Finance ISAs- what risks can you expect?
The biggest risk that you must know about is of ‘default.’ Either a borrower may default on their loan or the peer to peer firm could go out of business. As mentioned above, there is no cover from the FSCS, so neither your returns nor your capital is guaranteed if either of these happen.
But you don’t need to worry; there are some measures you can take to significantly reduce the risks. First, you can spread your funds over several loans and safeguard your funds. Second, you can also talk to an Innovative Finance ISA expert if you need to learn more about this type of investment.
Is IFISA worth the risk?
To put it into context, the Innovative ISAs are considered a midpoint in terms of rewards and risks between cash ISA and stocks & share ISA. The IFISA was first introduced in 2016. Since then, investors have enjoyed steady interests from the IFISA till the present day. Combine this with the fact that the majority cash ISA pays interest rate below the inflation rate. The answer for most IFISA investors would be yes, IFISA are work the risk. However, it is always a good idea to invest wisely. To make sure that you understand everything clearly, you need to learn about all types of ISAs and investing options.
To help you understand everything correctly, let’s go over some of the most frequently asked questions.
Innovative Finance ISA FAQ’s
Below are the most common questions that people often ask about IFISAs.
What are the limits of an IFISA?
Every adult in the UK can invest up to £20,000 in an Innovative Finance ISA per tax year. However, this ISA allowance will be shared among all your different ISAs. Hence, if you contribute to a cash or stocks & shares ISA as well, then you will have to share your current year’s ISA allowance limit. But, the total amount you will earn will be uncapped.
How are IFISAs regulated?
Every peer to peer lending firm must have complete authorization from the Financial Conduct Authority (FCA) in order to offer IFISAs to their customers. This is to make sure that there is protection in place for all customers, particularly for investors/ lenders, along with borrowers. The authorization from the FCA ensures that the peer to peer lending platform adheres to the common rules and regulations. And that they provide every product in a fair and clear way. Also, some regulations are in place for handling client’s funds and complaint procedures.
Is it possible to transfer other types of ISAs into an Innovative Finance ISA?
Yes, it is possible. However, you have to ensure that you won’t get penalized for doing so by checking if there are any restrictions with your existing ISA provider.
If you have savings set aside for a rainy day, then it is good to invest that money, especially if you don’t need the money immediately. If you are not afraid to take a little risk and tie your money for some time, then Innovative Finance ISA may be the right option for you. There are a lot of IFISA providers in the market. Just choose the one that offers services that match your financial goals. Don’t just let your money sit in one place. Use it to earn more!