ISA deadline: How to choose an IFISA before 5 April
There are just six weeks left in the current tax year, which means that investors have six weeks to use up their remaining ISA allowance, and make some big decisions about next year’s ISA investments.
The ISA deadline is midnight of the 5 April 2021, and ISA providers typically see a huge rush of activity in the days and hours ahead of the cut-off. Some ISA managers have previously reported ISA transfers and investments being made mere minutes before the midnight deadline hits, as savers and investors rush to make the most of their £20,000 tax-free investment allowance before the clock runs out.
If you have yet to allocate your full ISA allowance for the 2020/21 tax year, you are certainly not alone. But in order to find the best deal for your needs, it is best to give yourself as much time as possible to research providers, do your due diligence and register with a new platform.
This is particularly true when it comes to the Innovative Finance ISA (IFISA). Introduced in 2016, the IFISA allows investors to make tax-free investments into peer-to-peer platforms and crowd bonds.
According to Peer2Peer Finance News research, IFISA returns have remained largely stable even during the pandemic, with annual returns averaging between eight and nine per cent per year between 2018 and 2022.
However, individual platform returns can vary considerably depending on the type of loans that you are investing in, and the amount of risk associated. Follow the three steps below to ensure that you choose the right IFISA before the ISA deadline hits.
- Understand how much you can afford to invest
The Financial Conduct Authority (FCA) has recommended that retail investors should only invest 10 per cent of their investible funds into P2P loans, however this investment cap does not apply to sophisticated and high-net worth individuals.
Once you know how much you can invest, you can start identifying suitable IFISAs for your money. All IFISA providers have a minimum investment threshold, which can range from £1 to £20,000, depending on the platform. If you can afford to invest no more than £1,000, for instance, that may automatically rule out several platforms which have a minimum investment threshold of £5,000 or more.
- Decide which types of loans you would like to back
P2P lending at its core involves retail investors lending money to a range of different types of borrowers. These borrowers may be individuals seeking money for a personal reason (consumer loans); businesses in need of financing for planned expansions or new product launches (business loans); and property developers seeking funds to complete a new site (property development loans), or to invest in refurbishing or updating an existing property for resale, or rental purposes (property loans).
Read more: How to enjoy tax-free earnings from buy-to-let investments
In most cases, these loans will be backed by an asset of some kind, which means that investors have a form of security in case the borrower defaults on a payment.
- Do your due diligence
Once you know how much you have to invest, and have chosen your preferred loan type, its time to pick your platform. There are 39 IFISAs open to retail investors this tax year, and each IFISA has its own pros and cons.
Start by visiting the platform’s website. Visit the ‘About Us’ page to learn more about the management team, and the platform’s credit checking process. This will give some insight into the expertise behind the loans, and the risk management measures set in place.
Most platforms will also include a ‘Statistics’ page on their website which will show the history of the lender’s loans, their default rates and average annual returns. While past performance is no indicator of future returns, it is always useful to understand a platform’s track record before investing.
Finally, use third party sites such as TrustPilot, 4th Way and the P2P Independent Forum, which collate borrower and investor reviews and may help you identify any potential issues with a particular platform.
Once you are confident that you have chosen the right IFISA for the current tax year, you can proceed to register with your IFISA provider. This will involve completing a short appropriateness test on the platform, and transferring funds to your new IFISA wallet.
Investments made, you can sit back and relax… at least until the beginning of the next financial year on 6 April.
Read more: The P2P lenders replacing Zopa and Funding Circle this ISA season