Jasmine Birtles
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Here’s How to Target £500 Per Month Passive Income With an ISA
Ruby Layram
19th Mar 2025
If you’re looking for a way to generate passive income every month, an Innovative Finance ISA might just be the secret weapon you need. With interest rates as high as 18%, this type of ISA could help you target a handy £500 per month in passive income—without eating into your capital.
In this guide, we will explore how to use an IFISA to build passive income over time.
What Is an IFISA, and How Does It Work?
An Innovative Finance ISA is a tax-efficient investment vehicle that allows you to invest in peer-to-peer lending platforms or other alternative finance products. Unlike traditional Cash ISAs, which offer low interest rates, or Stocks and Shares ISAs, which come with market volatility, an IFISA allows you to earn much higher returns—sometimes up to 18% per year.
Here’s how it works:
- You invest money through a P2P lending platform or other alternative finance providers.
- Your funds are lent to businesses, property developers, or individuals looking for financing.
- You receive monthly interest payments, which can be withdrawn as passive income or reinvested.
Because it’s an ISA, all the interest you earn is tax-free—meaning you keep 100% of your returns.
How Much Do You Need to Invest for £500 Per Month in Passive Income?
Let’s do the maths to see how much capital you need to target a monthly passive income of £500.
With a 10% Interest Rate
- Annual return: 10%
- Required capital: £60,000
- Monthly passive income: £500
Scenario 2: 15% Interest Rate
- Annual return: 15%
- Required capital: £40,000
- Monthly passive income: £500
Scenario 3: 18% Interest Rate
- Annual return: 18%
- Required capital: £33,333
- Monthly passive income: £500
As you can see, the higher the interest rate, the less capital you need to generate the same passive income.
However, it is worth noting that high interest rates often come with higher risk. It might be worth settling for something on the lower end if it means having a more robust safety net.
How to Open an IFISA
Getting started with an IFISA is straightforward:
- Choose an IFISA provider: Look for platforms that offer competitive interest rates and a good track record.
- Sign up and verify your identity: You’ll need to provide ID documents and personal details.
- Fund your ISA: Transfer money from your bank or move funds from an existing ISA.
- Select your investments: Choose which P2P loans or alternative finance products you want to invest in.
- Start earning passive income: Once your funds are invested, you’ll start receiving monthly interest payments.
Where to Find the Best IFISA Providers
There are several IFISA providers in the UK, each with different investment options and risk levels. Here are some key factors to consider:
- Interest rates: Look for providers offering competitive returns (10%+ is ideal).
- Minimum investment: Some platforms allow you to start with as little as £100.
- Loan types: Some IFISAs focus on property-backed loans, while others finance small businesses.
- Liquidity: Some platforms allow you to sell your investments early if you need access to your cash.
It’s also important to look for security and insurance. IFISAs are not protected by the FSCS in the UK which means that your funds may be more vulnerable than they would be in a different type of ISA.
Some providers may back your funds with other assets, such as property or gold. It is worth looking into this before choosing a platform.
Risks to Consider
While IFISAs offer higher returns than Cash ISAs, they do come with risks. Here’s what you need to keep in mind:
- No FSCS protection: Unlike bank savings accounts, IFISAs are not covered by the Financial Services Compensation Scheme (FSCS).
- Loan defaults: If a borrower fails to repay, your investment could be at risk.
- Liquidity risks: You might not be able to withdraw your money immediately if you need it.
To manage these risks, diversify your investments across multiple loans and choose platforms with solid due diligence processes.
Final Thoughts
If you’re looking to generate £500 per month in passive income, an IFISA could be a powerful tool to help you reach your goal.
With high interest rates and tax-free earnings, it’s a compelling alternative to traditional savings accounts. However, it’s important to understand the risks and choose your investments wisely.
Before you dive in, consider speaking with a financial advisor to make sure an IFISA aligns with your overall investment strategy. If you’re comfortable with the risks, this could be a game-changer for your passive income goals.
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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.
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