I’m always on the lookout for the best ways to boost my savings, particularly as we’re saving up for a house for the next couple of years. When you’re saving money for the long-term, it’s really important to think carefully about where you put that money so that you get the very best return. Recently, I’ve been looking into Innovative Finance ISAs as a way to give our long-term savings a boost.

Innovative Finance ISAs are a relatively new way to save. They were launched on 6th April 2016 as a method that savers can use to stash their cash away with FCA-regulated and approved peer-to-peer lenders.

What is an Innovative Finance ISA?

The Innovative Finance ISA (IFISA) works in a similar way to a cash ISA.

The IFISA allows savers to use their annual ISA allowance to lend funds through peer-to-peer schemes, whilst receiving tax-free interest and capital gains in return.

Providers will often invest in specific areas. For example, Just ISA invest funds into litigation, helping people who can’t otherwise afford to get the legal help they need.

How much money can I save?

For the tax year 2018-2019, the amount you can put into an IFISA is 20,000. Bear in mind that this is the total amount that you can save overall in ISA schemes.

One of the big drawbacks with the traditional cash ISA is that after your introductory period, the interest rate usually drops dramatically, typically settling at around 2% interest. With an Innovative Finance ISA from a provider such as Just ISA mentioned above, you’re looking at an interest rate of 8% – 4 x that of the cash ISA.

Investing your full allowance of £20,000 this tax year at 8% and leaving it for 25 years would give you a total balance of £146,803. That’s an impressive return.

What are the risks?

Unlike the traditional cash ISA, there is an element of risk with an Innovative Finance ISA. With such high interest rates on offer, perhaps the element of risk doesn’t come as a surprise.

The main risk to take note of is that unlike a cash ISA, an IFISA is not protected by the Financial Services Compensation Scheme – you need to make sure you understand any risks properly before investing your money.

Am I eligible?

Any UK tax payer over the age of 18 is eligible for an Innovative Finance ISA. So, if you have some money to invest, then this could be a great option for you.

Because of the element of risk with this type of saving, it’s important to make sure that you can afford to invest and that you don’t need access to the funds you’re investing in the immediate future. You need to think of an IFISA as a long-term investment option, so perhaps you may use this as a way of saving for your retirement.

*This is a collaborative post.