Back in 1999, the government introduced a new way for people to build up their wealth – the Individual Savings Allowance, or ISA. 17 years later, the Innovative Finance ISA (IFISA) came in to existence: which added another asset class to the ISA family. Here’s how this new addition fits in with its tax-efficient siblings.
ISAs – the basics
All UK adults have an ISA allowance (currently £20,000), which renews each year. It’s a tax wrapper – so you don’t pay tax on any interest or capital gains (which is tax payable on the profits from any sale of assets) from the money you’ve stowed away in ISAs. The accounts don’t close at the end of the year so your tax-free pot can continue to grow.
In fact, there are even a few UK ISA millionaires: people who reached this milestone by not only making the most of their current year ISAs, but maximising the earning potential of previous years’ ones as well.
But aside from the tax treatment (and the name), ISA types can be very different, depending on the provider and what assets you choose to go in your tax-free wrapper. In addition, the types of ISA available have increased and changed with the times. What started as two ISA categories – Stocks & Shares and Cash – has expanded to five, giving different options to people with different financial requirements.
Here at Zopa, we campaigned for the introduction of an ISA that would let you earn tax efficient returns on your peer-to-peer investments. This work finally came to fruition in a product known as the Innovative Finance ISA (IFISA), and in June 2017 the Zopa ISA had its first customer.
So where does the IFISA fit in?
Here’s our quick guide to the different ISAs on offer today:
Cash ISAs – Cash ISAs can include savings in bank and building societies, and some National Savings and Investments products. It’s is the safe and steady option (and the most popular). You’ll get low returns (historic lows on older ISAs), but they aren’t as risky as some of the other ISA types, and the assets in them are covered by the government’s Financial Services Compensation Scheme (FSCS): which guarantees your first £85,000 with each provider.
Stocks & Shares ISA – These ISAs can include shares in companies, unit trusts and investment funds, corporate or government bonds. As it’s stocks and shares, they’re more volatile than cash – so you have to accept that your ISA pot could go up or down depending on what the market’s doing.
Lifetime ISA – This is the newest option, which evolved out of the Help-To-Buy ISA. You can put in £4,000 each year (cash or stocks and shares) up until you’re 50, and the government will add a 25% bonus up to a maximum of £1,000 each year. You can take it out for free if you use the money to buy your first house or take it out after you’re 60.
Junior ISA – Parents or guardians can open a Junior ISA and manage the account on behalf of a child. The annual allowance is lower – currently £4,128 – and the assets can be either cash or stocks and shares. The money belongs to the child, but they can’t withdraw it until they’re 18.
The Innovative Finance ISA – This is where Zopa comes in! IFISAs can cover peer-to-peer loans or crowdfunding investments. This means that risk and return-wise, you have to look carefully at the underlying asset you’re investing in is as they all behave quite differently.
So, taking Zopa as an example, our assets (UK consumer loans) sit somewhere between cash and stocks and shares on both the risk and return scale. With peer-to-peer investing you have to expect some defaults and understand your capital is at risk, but over the past 14 years we’ve delivered consistent returns (after defaults) to investors. However, if your IFISA contains investments from crowdfunding, or even business loans, you’d take on quite different risks and see different returns.
Want to find out more?
It’s a good time to be thinking about ISAs. The new tax year is just around the corner, so you still have time to make the most of this year’s allowance and plan what you’re going to do with 2018/19’s.
We’re going to be thinking and writing about this a lot in the next few weeks, particularly about the Innovative Finance ISA and what you can do with it here at Zopa. So if there’s anything you’d particularly like us to cover, drop us a line on firstname.lastname@example.org.
Or if you’re ready to find out how a Zopa IFISA could work for you, go to our ISA pages for more information.