ISA season is here, and that means that the national papers are publishing their annual think pieces on the Innovative Finance ISA (IFISA). Every year, these articles ask the same questions – what is an IFISA and is it worth investing in? And every year the answer is inconclusive.
The IFISA is actually very easy to understand. It is a tax-free wrapper that retail investors can use to protect the first £20,000 of their peer-to-peer lending investments from taxation.
According to the latest 4thWay P2P and Direct Lending (PADL) Index, investors in the PADL sector have earned 7.31 per cent per annum annualised, net of investing costs and bad debts over the past 10 years. Folk2Folk’s returns are slightly higher than average, with current target returns starting from 8.75 per cent. These returns are typically higher than cash ISA returns and less volatile than stocks and shares ISAs, making the IFISA a great tool for portfolio diversification. Yet a lack of awareness around the risks and rewards of the asset class and the IFISA could prevent some investors from making full use of their IFISA allowance this ISA season.
Read more: IFISAs offer steady returns amid stock market turmoil
“The biggest misconceptions about IFISAs stem from a lack of mainstream awareness and a misunderstanding of risk,” says Roy Warren (pictured), managing director of Folk2Folk.
“Many investors assume IFISAs are unregulated or excessively risky simply because they don’t operate in the same way as cash ISAs or stocks and shares ISAs.
“It’s important to remember that IFISAs are an investment, not a savings product. They carry a higher risk profile than cash ISAs but offer an alternative to stocks and shares ISAs for investors seeking a property-backed investment with a fixed monthly income.
“Unlike stocks and shares ISAs, where returns fluctuate with the market, IFISA investments generate returns based on agreed fixed interest rates, providing greater predictability. Rather than being in competition with cash ISAs or stocks and shares ISAs, IFISAs can complement them.”
Read more: Chancellor urged not to overlook IFISA in tax wrapper reforms
Warren adds that investors also need to be fully aware of the risks before committing to an IFISA. While Folk2Folk has offered its IFISA since 2017 with zero capital loss to investors to date, past performance is no guarantee of future success. The key risks in P2P lending are the risk of borrower default and the lack of financial services compensation scheme (FSCS) protection in the event that the platform fails.
“Like all investments, IFISAs carry risk,” says Warren. “However, they are not speculative; they are structured investment products where investors lend money through a regulated lending platform to UK businesses.
“At Folk2Folk we work to mitigate these risks by applying over 300 years of combined lending experience to assess every loan.
“Every application is manually reviewed by our experienced team with human – not automated – credit decisions. Additionally, unlike unsecured investments, our loans are secured against UK property, meaning there is a tangible asset behind every investment. We typically only lend a conservative loan-to-value ratio of around 60 per cent, based on independent valuations. And in the event a borrower defaults, their interest payments increase to compensate investors.”
While P2P investors do not qualify for FSCS protection, Folk2Folk has a detailed wind-down plan in place which ensures that if Folk2Folk were to cease operations, an independent provider would continue managing the loans and interest payments. This has been set up to ensure that – in theory – investors should get all their capital and interest back assuming the investment runs to plan.
“While they aren’t suitable for every investor, for those seeking tax-free, fixed monthly income, IFISAs can be an excellent option,” adds Warren.
“Raising awareness around how they work, who they’re for, and how they compare to other ISA options will help investors make informed decisions, rather than dismissing IFISAs due to misconceptions.”
Read more: How to invest in an IFISA in 2025
