Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
Are IFISAs Worth It? Here’s What You Need to Know!
Ruby Layram
11th Mar 2025
An Innovative Finance ISA (or IFISA) is a tax free savings-account that allows you to invest in peer-to-peer lending platforms and earn interest from borrowers. This type of ISA typically comes with high annual returns, but also high risk!
So, are IFISAs worth it and should you open one in 2025?
Understanding IFISAs
First things first, let’s break down what an IFISA is.
Launched in 2016, an Innovative Finance ISA allows you to lend your money through peer-to-peer (P2P) lending platforms or invest in crowdfunding projects, all within a tax-free wrapper.
This means any interest or returns you earn are free from income tax and capital gains tax, much like with Cash ISAs or Stocks and Shares ISAs.
Why Are IFISAs Appealing?
So, why might someone consider an IFISA?
One of the main attractions is the potential for higher returns compared to traditional savings accounts. With interest rates on standard savings accounts remaining relatively low, investors are on the lookout for alternatives that offer better growth prospects.
IFISAs, by facilitating investments in P2P loans or crowdfunding ventures, can provide more attractive interest rates – up to 18%!
Another reason why some people might choose to invest in an IFISA is to diversify away from the stock market.
Peer-to-peer lending operates in a different market to stocks and shares which means that the money locked up in an IFISA won’t be subject to the same challenges that may be faced by the stock market.
The Risks Involved
It’s essential to remember that with higher potential returns come higher risks.
Unlike Cash ISAs, the capital you invest in an IFISA isn’t protected by the Financial Services Compensation Scheme (FSCS).
This means that if a borrower defaults or a platform goes bust, you could lose some or all of your investment.
Additionally, the P2P lending market is relatively young, and while it has grown rapidly, it doesn’t have the long track record of more traditional investment avenues.
How to Evaluate an IFISA Provider
If you’re considering an IFISA, it’s crucial to thoroughly research the platforms offering these products.
Some platforms have stringent credit checks and robust risk assessment procedures, while others might be more lenient.
Understanding the platform’s approach to risk, default rates, and their contingency plans in case of borrower defaults can help you make an informed decision.
Use this checklist to understand whether an IFISA is worth considering:
- How does the platform assess and vet borrowers?
- What are the default rates on loans?
- Do they offer a provision fund or any form of investor protection in case borrowers fail to repay?
- Is the lending secured or unsecured?
- How volatile have past returns been?
- Are there any upfront fees for investing?
- Does the provider charge withdrawal fees or penalties for early access to funds?
- Are management fees deducted from returns?
- Does the platform automatically spread your investment across multiple loans to reduce risk?
- Can you choose which borrowers or projects to fund?
- How responsive is customer support?
- Are there positive reviews and testimonials from investors?
Diversification is Key
As with any investment, diversification can help mitigate risk.
Some IFISA platforms allow you to spread your investment across multiple loans or projects, reducing the impact if one doesn’t perform as expected. However, it’s also wise to consider how an IFISA fits within your broader investment portfolio.
Relying solely on IFISAs for your investment needs might expose you to unnecessary risk, so balancing them with other investment types can provide a more stable financial footing.
Regulatory Considerations
It’s worth noting that the regulatory landscape for IFISAs has evolved since their introduction.
The Financial Conduct Authority has implemented stricter rules to protect investors, including ensuring that platforms provide clear information about risks and have adequate capital reserves.
These measures aim to enhance the stability and reliability of the P2P lending market, but they don’t eliminate the inherent risks associated with these investments.
Recent IFISA Developments
In recent years, there have been discussions about expanding the scope of IFISAs. For instance, as of April 2024, investors will be able to hold Long-Term Asset Funds (LTAFs) and Property Authorised Investment Funds within IFISAs.
This expansion could provide more diversification opportunities for investors but also introduces new considerations and potential risks.
Is an IFISA Right for You?
Deciding whether an IFISA is worth it depends on your individual financial goals, risk tolerance, and investment strategy.
If you’re seeking higher returns and are comfortable with the associated risks, an IFISA could be a valuable addition to your portfolio.
However, if preserving your capital is a priority and you’re risk-averse, you might want to explore more traditional investment options.
Innovative Finance ISAs offer an intriguing opportunity to potentially earn higher, tax-free returns by participating in peer-to-peer lending and crowdfunding investments.
However, they come with risks that are not present in more traditional savings vehicles, such as the lack of FSCS protection and the possibility of borrower defaults.
As with any investment decision, it’s crucial to conduct thorough research, understand the risks involved, and consider how an IFISA aligns with your overall financial objectives.
Remember, while the prospect of higher returns is appealing, it’s essential to balance potential gains with the associated risks to ensure your investment choices support your long-term financial well-being.
Are you interested in learning more about investing? Why not sign up to the MoneyMagpie bi-weekly Investing Newsletter? It’s free and you can unsubscribe at any time if you find it isn’t for you.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
Leave a Reply