The start of the new financial year is the ideal time to invest in an innovative finance ISA (IFISA).
By acting early and making full use of the £20,000 annual ISA allowance, retail investors can maximise their returns over the next 12 months.
But under current regulations, investors are only able to open one IFISA account per year. So how do you decide which IFISA provider to choose?
According to Peer2Peer Finance News research, just 36 IFISA providers were open at the end of the 2020/21 tax year, across 42 different IFISA accounts. Those same 36 providers were accepting new investment at the beginning of the 2021/22 tax year.
But when it comes to IFISAs, no two accounts are the same. And in order to choose the right IFISA, you have to know what exactly you want your money to do.
- If you want liquidity
Several peer-to-peer lending platforms offer flexible IFISAs, which means that you can remove and reinvest your money at any point within the tax year without eroding your annual allowance.
Non-flexible IFISAs can also offer some liquidity via secondary markets. These are platform-run marketplaces where investors can buy and sell loans or loan parts either for cost, at a premium, or at a discount. If you feel that you might need to access some of your IFISA savings in the short term, a robust secondary market will help a lot.
- If you want to invest in bonds
IFISAs allow UK taxpayers to invest in P2P loans as well as crowdfunded bonds. There are a few platforms which specialise in bond offerings, but they are subject to availability.
Research your options before choosing an IFISA-approved bond platform, and make sure you are ready to act quickly to invest your money as soon as a suitable bond is listed – the most attractive bonds can quickly become oversubscribed.
- If you want diversification
Even though you can only invest in one IFISA per year, diversification is possible. While some IFISA providers allow investors to manually select each individual loan in their portfolio, others offer an auto-investing option. This means that your money is automatically pooled with other investors and spread across a large loan portfolio consisting of dozens or even hundreds of different loans.
Auto-invest platforms will usually conduct rigorous credit checks on their borrowers, and this allows them to group bundles of loans into different categories of risk. An IFISA investor looking for a lower risk investment can still access the same diversification as a seasoned P2P lender with a higher risk threshold.
- If you want to support British businesses
Many P2P lending platforms have gone above and beyond to support British businesses and the economy during the Covid-19 pandemic, by offering payment breaks to borrowers and funding options to entrepreneurs.
When the pandemic is over, businesses will need even more help rebuilding their brands and recovering from their worst year ever, and P2P lenders are set to play a huge role in this funding effort. By opening an IFISA with a platform that specialises in business lending, you can help to support local businesses while you invest.
- If you want to invest £1,000 or less
A handful of IFISA providers require a minimum investment of between £2,500 and £20,000 to open a new IFISA account. However, the majority of IFISA providers will accept a minimum investment of £1,000 or less – with some even setting a £1 or £10 minimum.
If you don’t want to invest your entire ISA allowance into an IFISA, or if you are just starting out on your investment journey and want to test the waters a bit, then seek out a retail-focused P2P platform with a lower minimum threshold.