Folk2Folk has hailed the Innovative Finance ISA (IFISA) as a “complementary foil” to the volatility of stocks and shares ISAs and the low rates being offered by cash ISA providers.
As one of the largest IFISA providers in the UK, Folk2Folk has seen first-hand the growing demand for the tax wrapper.
Roy Warren (pictured), managing director of Folk2Folk, says that yield-seeking investors are increasingly seeking out a new home for their ISA funds. The platform has been receiving a lot of ISA transfers – not just from other IFISA providers, but from cash ISAs and stocks and shares ISAs as well.
“Cash ISAs offer a low return, nowhere near current levels of inflation, and so the reality is your money is losing value against inflation over the longer term,” explains Warren.
“Unlike stocks and shares, an IFISA investment is typically more stable because it is invested in a single asset type with a fixed rate of return. An IFISA focuses on producing income rather than capital growth and can be a complementary foil to a cash or stocks and shares ISA.”
Warren notes that the IFISA is the “sensible choice for now” as cash ISAs are unable to compete with the rising rate of inflation. By contrast, many IFISAs can offer inflation-beating interest rates, including Folk2Folk’s IFISA which has historically paid out 6.5 per cent per annum.
However, Warren adds that investors should always ensure that they take the time to perform thorough due diligence on their IFISA provider before transferring their funds.
“The health and governance of the business is an essential consideration,” he says. “Is the platform authorised and regulated by the Financial Conduct Authority? Is the platform profitable and stable? What plans are in place in case the platform fails? How safe is your cash when it’s not invested? Is the platform transparent? Do they provide unambiguous answers to your questions? What are the costs of investing via the platform?
“It’s also worth looking at the people who run the business,” Warren adds. “Do they appear focused on building a sustainable business or just quickly growing market share? Do they have the financial expertise to assess loan risk – is this done by people or algorithms?”
Read more: Innovative Finance ISAs: Six years on
Investors should also look at the track record of the business – how long has it been running, and what is its track record of losses, both as a percentage of the loanbook and amount of loss? Prospective investors should also look into the level of liquidity that comes with their chosen platform in order to work out how accessible their money might be if they needed to access it in an emergency.
“The IFISA is one of the newer and lesser-known types of ISA but is gaining greater prominence as a very attractive alternative or complement to cash ISAs and stocks and shares ISAs,” says Warren.
Read more: Five ethical and social IFISAs
“Like other ISAs, the main benefit of an IFISA is that there is no tax on the income you earn, and it doesn’t need to be declared on your tax return, so from an administrative point of view it’s a good place to hold your savings. Money can be withdrawn at any time without any tax penalties, and you can invest up to £20,000 per year.
“In addition, your IFISA investment, if invested via a platform like Folk2Folk, is invested into a loan which is secured against the tangible assets of land or property. While there is never any guarantee and capital is at risk, this secured element provides what is essentially a measured safety net for your investment.”