Innovative Finance ISAs

With an Innovative Finance ISA, you can use your tax-free savings allowance to invest in peer-to-peer (P2P) lending and earn tax-free interest. Read our guide to find out if the risk is worth the reward for you.

With an Innovative Finance ISA, you can use your tax-free savings allowance to invest in peer-to-peer (P2P) lending and earn tax-free interest. Read our guide to find out if the risk is worth the reward for you.

Anelda Knoesen
From the Money team
4
minute read
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Posted 4 MAY 2021

What are Innovative Finance ISAs?

An Innovative Finance ISA – or IFISA - is a type of savings account that lets you use your tax-free ISA allowance to invest in peer-to-peer (P2P) lending.

Online peer-to-peer lending platforms connect investors with individuals, businesses or property developers that are looking for loans. When you put money in an IFISA you become a lender.

Over time, you should get back the money you loaned, plus interest. And because it’s part of your personal saving allowance, you don’t have to pay tax on the interest you earn

What are the pros and cons of Innovative Finance ISAs?

With an IFISA, the amount of interest you earn depends on how long you’re willing to invest your money. In general, you can expect a much higher interest rate from an IFISA than, say, a cash ISA because you’re effectively cutting the bank out of the equation. But that means you’re also assuming the risk of making the loan and you won’t be covered by the Financial Services Compensation Scheme (FSCS), which protects money you deposit in banks and building societies up to £85,000.

So, the reward of a greater return on your investment should be weighed up against the risk of potentially losing your savings. 

How do Innovative Finance ISAs work?

As an adult UK taxpayer, you get a tax-free savings allowance each year. This is designed to help you save and prepare for your future. In the 2020-21 tax year, this allowance is £20,000.

To diversify your savings, you can spread your tax-free allowance across different types of ISA  –  as long you don’t exceed your overall annual savings allowance – but you can only open one IFISA per tax year.

Read our guide to ISAs for more information.

Can you transfer existing ISAs into an Innovative Finance ISA?

You can transfer any money that's already within a cash ISA or a stocks and shares ISA into an IFISA.

If you’re transferring money from a current ISA (in the same tax year), you’ll need to transfer the full amount. However, you can transfer any amount from older ISAs because savings from previous years don’t count towards the current year’s allowance. Either way, you’ll need to complete a transfer form from your chosen IFISA provider – don’t try to withdraw the cash beforehand as it could affect your annual savings allowance.

What risks are involved with Innovative Finance ISAs?

In 2019, the Financial Conduct Authority (FCA) introduced tighter rules on peer-to-peer funding to protect potential investors, after several online platforms collapsed. However, there are still risks involved with IFISAs:

  • Risk of borrower defaulting Your IFISA is a loan, and with any loan there’s a risk that the borrower will default and you’ll lose your investment. Although many IFISA providers have back-up or reserve funds to protect you in this case, they may not be enough if several borrowers default at the same time - you could potentially lose your savings.
  • Lack of protection IFISAs aren’t protected by the Financial Services Compensation Scheme (FSCS), so you could lose your investment if your IFISA provider goes bust.
  • Slow withdrawal process Unlike more flexible cash ISAs, withdrawing money from an IFISA can be a slow process, so be careful not to invest any money you may need in the short term.

To limit your exposure to risk, consider the following when choosing an IFISA:

  • Is the IFISA provider trustworthy? Do your research and make sure to check the platform’s track record. Every IFISA provider must be authorised by the FCA. You can search the FCA register to make sure they’re legitimate.
  • What protection does the provider offer? Do they have a back-up fund in case a borrower defaults on their loan?
  • Will you be able to access your money? Will you face any charges if you need to withdraw early?
  • Are your investments diversified? Try not to keep all your savings in one place, especially where there is risk involved.

Where can I find Innovative Finance ISAs?

We don’t compare Innovative Finance ISAs at Compare the Market. Due to the high risk involved with this type of ISA, we highly recommend you speak to a financial advisor before opening an IFISA.

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