It is the third type of ISA that exists alongside the cash ISA and the stocks and shares ISA. Here is how the innovative finance ISA works.
An innovative finance ISA (IFISA) lets you use your tax free ISA allowance while investing in peer to peer (P2P) lending.
Peer to Peer (P2P) lending is a form if investing where you directly lend money to borrowers and businesses through a P2P lending platform. The borrowers then pay back the borrowed amount with interest.
The interest they pay is the return you get on your investment.
An IFISA works by lending your money to borrowers in return for a set amount of interest based on the length of time you are prepared to leave your money untouched.
You can pay in up to your ISA allowance, which is £20,000 in the 2020/21 tax year. Which runs from 6th April to the 5th April.
As an IFISA works like a loan there is a chance the borrowers could default on their repayments.
Most of the companies that offer IFISAs have a backup or reserve fund set up to protect your money against any borrowers who default on their repayments.
However, this fund may not cover you should a large number of borrowers default at the same time.
IFISAs are not protected under the Financial Services Compensation Scheme (FSCS). This means your money could be at risk if you save with an IFISA company that goes bust.
Yes, but make sure you are not penalised for doing so by checking for any restrictions with your existing ISA provider.
You can transfer all of your cash and stocks and shares ISA money into an IFISA.
You can only pay into one IFISA in each tax year, but you can also pay into a cash ISA and stocks and shares ISA as long as you do not exceed your ISA allowance:
For example, you could pay £5,000 into a cash ISA, £3,000 into a stocks and shares ISA and still pay in up to £7,240 into an IFISA until the end of tax year.
It is also possible to transfer your ISAs from previous tax years into separate IFISAs, but you can only add further funds into one of them during the same tax year.
Most P2P lenders are still waiting for full FCA authorisation before they can offer IFISAs.
However, many companies have already announced their headline rates ready for when they get FCA authorisation.
You can find each available IFISA by using our comparison table.