How do IFISAs stack up against stocks and shares ISAs?
IN THE two years since the launch of the Innovative Finance ISA (IFISA) an abundance of options have been made available to investors.
The majority the UK’s peer-to-peer platforms have already launched their own IFISA options and so far more than £300m has been invested in them, according to figures from the Peer-to-Peer Finance Association (P2PFA).
Returns vary depending on which platform is used and how much risk the investor is willing to take on board, but some IFISAs are offering lucrative double-digit returns within a tax-free wrapper. This places the IFISA on a par with some of the most popular stocks and shares ISA options. But how do IFISAs really stack up against stocks and shares portfolios?
Any UK taxpayer is entitled to open an IFISA and invest up to £20,000 per year. However, there are a few limitations imposed by various IFISA providers, with some welcoming new customers, and others limited to the platform’s existing customers. Many, such as ArchOver’s IFISA, accept transfers from other providers, which means that investors can move some or all of their funds from old cash or stocks and shares ISAs.
There is a huge variety of P2P investments which are eligible for IFISA inclusion, depending on the risk and returns which are being targeted. Here are just a few examples of the types of IFISA (and IFISA returns) available.
- Investing in asset-backed loans
Basset & Gold, which provides finance both to marketplace lending platforms and direct borrowers, offers two options on its IFISA product, which it then invests in asset-backed loans.
IFISA investors can choose from a three-year investment yielding 6.12 per cent interest monthly or a three-year compounding investment which would yield 20.1 per cent at the end of the term – equivalent to 6.7 per cent per year. With an illustrative investment of £10,000, this would equate to monthly returns of between £612 and £670.
- Investing in British businesses
A lot of platforms allow investors to support British businesses though SME lending. For instance, MoneyThing offers lenders up to 13 per cent returns on individually selected loans to British businesses with a minimum investment of just £1,000.
- Investing in bonds
Bond investments have become increasingly popular among P2P platforms, as they can offer double-digit returns over a fixed period of time. The UK Bond Network is currently advertising returns of up to 12 per cent on its corporate mini bonds, but requires a £5,000 minimum buy-in.
- Investing in consumer loans
P2P pawnbroking platform FundingSecure offers returns of up to 16 per cent for investors who are interested in funding consumer loans. Unlike most other consumer P2P lending sites, FundingSecure allows lenders to invest in luxury assets such as cars, jewellery or fine art into consumer and property development loans. This IFISA can be opened with as little as £25.
- Investing in property loans
Property funding allows P2P lenders to invest in real bricks and mortar, without having to scare up an enormous deposit. For instance, Assetz Capital allows lenders to invest in property from as little as £1, with target returns of between 4.1 and 6.25 per cent.
Read more: Investors dumping cash ISAs for IFISAs
Stocks and shares ISAs
Providers of stocks and shares ISA range from the traditional banks to investment managers and robo advisers.
The returns offered vary widely depending on portfolio choices and stock market performance, and that’s before manager fees are taken into account.
- Investing with an investment manager
One of the largest investment managers is Hargreaves Lansdown. Investors can open a stocks and shares ISA portfolio with as little as £100, but administrative and investment charges can add up to 1.2 per cent per year.
In the 12 months to July 2017 Hargreaves Lansdown’s Portfolio+ returns ranged from 8.4 per cent to 19.6 per cent. This means that a lump sum investment of £10,000 would have earned between £840 and £1,960 in one year minus fees of up to £120.
- Investing in funds
For a funds-only option, Fidelity’s Pathfinder service allows investors to diversify their portfolio according to their own individual risk profile. In general, Pathfinder follows the ‘high risk, high reward’ concept, with its risk-based portfolios averaging returns of between 9.2 per cent (for conservative funds) and 27.6 per cent (for high growth funds) in 2016. This means that a lump sum investment of £10,000 would have earned between £920 and £2,760 during that time period.
Pathfinder charges fees which are equal to 1.1 per cent or £45, a year – whichever is lower, making it a great option for investors who want instant diversity at affordable rates. Like Hargreaves Lansdown, a Fidelity ISA can be opened with £100.
- Investing with a stockbroker
Stockbroker Charles Stanley offers one of the cheapest ways of investing for those with less than £50,000 to invest, with charges of around one per cent for an ‘active’ portfolio. By choosing to open a stocks and shares ISA with a stockbroker, investors have a little more flexibility to choose individual company shares, and to switch up their portfolio daily. However, active trading can be a much riskier investment strategy for inexperienced investors, and the tax-free benefits of the ISA wrapper may not be sufficient to counter any losses.
- Investing with a robo-adviser
Robo-advice has become extremely popular in recent years, thanks to its low-fee ‘one-stop-shop’ structure. Nutmeg is the one of the largest robo advisers which offers ISAs in the UK, and its charges are relatively low at 0.64 per cent.
In 2016, Nutmeg’s portfolio returns ranged from 2.3 per cent to 15.4 per cent. This means that a £10,000 lump sum investment would have netted returns of between £230 and £1,540 during that time period, with fees of just £64.
However, although a Nutmeg account can be opened with an £500 initial payment, investors with less than £5,000 will also need to set up a regular investment of £100 per month.
Whether investors choose an IFISA or stocks and shares ISA they will not be short of options.
Their final decision will depend on their own investment goals and risk/reward appetite but either way they will not need to share their profits with the taxman until they pass the £20,000 threshold.
Read more: A guide to liquid IFISAs