THIS WEEK is the busiest of the year for ISA providers and ISA savers alike. As the end of the tax year approaches, investors and savers are rushing to make the most of their annual ISA allowance, while ISA managers scramble to convince them that theirs is the right product.
But amid ongoing Brexit uncertainty and the accompanying market instability, the priority for many ISA investors is diversification. For cash ISA account holders, that means moving some of their money out of low-paying accounts in an effort to make inflation-beating returns.
For stocks and shares ISA investors, it may involve moving away from UK equities to minimize Brexit-related losses.
But for Innovative Finance ISA (IFISA) investors, gaining diversification is a bit more difficult, thanks to the Financial Conduct Authority’s rule that only one IFISA account can be opened per platform, per year. Difficult, but not impossible.
Here are five ways every IFISA investor can add diversity to their P2P portfolio.
1. Choose a provider that offers a choice of IFISA products
Although investors are currently only allowed to add new funds to an IFISA with one IFISA provider per year, that doesn’t necessarily mean that they are limited to one IFISA only. Several P2P platforms offer multiple IFISA products which are aimed at different types of investors with differing risk requirements.
For instance, Zopa offers two IFISA-ready products: Zopa Core and Zopa Plus. Zopa Core invests in lower-risk loans and targets returns of 4.5 per cent per annum, whereas Zopa Plus also includes some higher-risk loans in its portfolio, and targets returns of 5.2 per cent per year. A Zopa IFISA holder could add diversity by splitting their money between these two accounts, just as long as the cumulative total deposits don’t exceed £20,000 per tax year.
2. Switch sectors in the new year
As the P2P sector has grown, distinct sectors have begun to appear, offering different levels of risk and reward to investors. Property, SME, consumer lending and pawnbroking are just a few of the options available to new P2P investors, and new categories are emerging all the time.
IFISA investors can therefore build diversity into their P2P portfolios by choosing a new sector to invest in each year.
On 5 April, an IFISA investor could conceivably open a property-backed IFISA, then on 6 April they could open an IFISA account which invests only in consumer loans. If this action is repeated over the next few years, it could result in a highly diversified portfolio of different P2P loans, all sheltered within the tax-free IFISA.
3. Transfer your ISA money
There is no limit to the amount of money that you can transfer into a new IFISA from older ISA accounts. For instance, if you have £25,000 sitting in a 10-year-old cash ISA, you can move all of this money into an IFISA account without impacting on your existing annual allowance.
Over the past year, IFISA providers have benefited from this clause, as frustrated savers pulled their money from cash ISAs and into P2P. This is a great way for P2P newcomers to test the waters and put some money in an IFISA. But it is also an opportunity to diversify. ISA transfers do not impact on the one-IFISA platform-per year rule, so investors could open a new IFISA account with one provider, then transfer old ISA funds into a completely different IFISA.
4. Choose auto-lending options
Almost every P2P provider now offers a choice of auto-lending and self-selecting IFISA accounts. Self-selection requires investors to manually choose the loans that they want to invest in. However, this can be a time-consuming process, and it may result in a limited loan portfolio.
By contrast, auto-lending accounts automatically add diversity by investing IFISA money across a range of different loans, which have been grouped together in terms of their creditworthiness. This means that a one-time IFISA investment of £10,000 could offer one investor access to 100 or more different loans.
5. Invest via an aggregator
Aggregator IFISAs are still very new, and there are just a couple of these available in the current tax year. Orca’s IFISA targets 5.4 per cent per year by spreading investor money across five different platforms: Octopus Choice, Landbay, Assetz Capital, Lending Works and LendingCrowd. This allows investors to effectively invest their money in multiple platforms without contravening the FCA’s ‘one IFISA provider per year’ rule.