Anecdotally, ‘ISA season’ is not quite the event it once was; years of a low interest economy have resulted in virtually every Cash ISA returning less than inflation, the introduction of the Personal Savings Allowance has resulted in many investors with smaller pots receiving their returns tax-free anyway and those able to afford to do so, and ‘in the know’ are increasingly spreading their investments across the tax year to maximise the benefit.
However, the government is increasingly keen for us to take more personal responsibility for our financial future, and the tax-free ISA wrapper, in all its guises is likely to remain a key part of a long-term investor’s toolkit.
With more choice than ever (more here) it is important to find the right version for you, with the freedom and flexibility to shelter the investments you are drawn to; it may be no guarantee of future performance, but how have they performed in the recent past?
A recent study by DIY investment platform Hargreaves Lansdown revealed that Brits have missed out on at least £188bn in lost interest over the past ten years – £7,101 per household – because they have stuck with low-yielding savings accounts.
The ten year period it analysed was that since interest rates were cut to 0.5% for the first time in March 2009; at the time economists predicted that interest rates would hit 4% by the end of 2012, but today base rate is just 0.75%.
If Cash ISAs struggled in 2018, Stocks and Shares ISAs had a pretty torrid time, tracking the FTSE 100 down as it posted a 12.5% year on year loss – its biggest fall in a decade.
Cash ISAs struggled in 2018, Stocks and Shares ISAs had a pretty torrid time, tracking the FTSE 100 down as it posted a 12.5% year on year loss
However, one response to the low-interest environment has been the development of the alternative finance sector and the launch of the Innovative Finance ISA (IFISA) in April 2016; after a slow start IFISA inflows are helping peer-to-peer lending (P2P) platforms reach new lending milestones.
Industry publication Peer2Peer Finance News recently compared how different the ISA returns would have been from £1,000 invested in April 2016 in a range of different wrappers.
Inflation as measured by the Consumer Prices Index (CPI) was 2.3% in the twelve months to March 2017, 2.5% in the twelve months to March 2018 and sneaked down to 1.8% by February of this year.
Thus for the period of comparison, the corrosive effect of inflation would have meant that an average return of less than 2.2% p.a. would have been a net loss in terms of the purchasing power of that investment.
Moneyfacts says that in April 2016 the average easy-access cash ISA was paying just 1.06%; £1,000 invested in a Cash ISA on 5th April 2016 would have been worth £1,010.60 the following year. Losing interest? It got worse.
2017 was the worst year on record for Cash ISA rates, with the average instant-access account paying just 0.62%; this would have added just £6.27 interest during the year, meaning that the account would have been worth £1,016.87 by April 2018. Hmm.
2017 was the worst year on record for Cash ISA rates
By January 2018, average Cash ISA returns had ‘soared’ to 0.74%; £1,016.87 should therefore return £7.52 by the end of the current tax year.
£1,000 invested in the average instant-access Cash ISA in April 2016 would be worth £1,024.39 by April 2019, before fees.
Average three year earnings – £24.39 (£8.13 or 0.81% per year)
FTSE 100 Stocks and Shares ISA
Stocks and Shares ISAs differ between those that are ‘packaged’ by a financial institution – often a bank – or the empty ‘baskets’ offered by the DIY investing platforms into which investors create their own portfolio of investments.
Clearly the results that are achieved depend upon that choice of investments; however, for the sake of comparison, a FTSE 100 tracking portfolio was used.
Between April 2016 and April 2017, the FTSE 100 performed well, returning 20.36% and would have added £203.60 in earnings to the £1,000 invested.
However, the market turned turtle the following year – its 1.8% fall reduced the value of the investment to £1,181.94 by April 2018 – and continued to decline; by the end of February 2019, the FTSE 100 had shed a further 1.73%, reducing the pot to £1,161.49.
Average three year earnings – £161.49 (£53.83 or 5.38% per year)
The study highlighted that the FTSE 100 is unpredictable by nature, that most Stocks and Shares ISA investments are made over a long time horizons, and that between 1st March 2009 and 1st March 2019, FTSE 100 investors would have achieved double-digit returns.
Innovative Finance ISA
The study used the example of Crowd2Fund, which was one of the first platforms to launch in the UK to compare the relative performance that could have been achieved with an IFISA.
The company came to market with a target annual return of 8.7%; one that is still in place today.
£1,000 invested in a Crowd2Fund IFISA in April 2016 would have produced a return of £87 by April 2017.
By April 2018, £1,087 would have turned into £1,181.57, and by April 2019 should earn a further £102.80; the original £1,000 has become £1,284.37 within three years.
Average three-year earnings – £284.37 (£94.79 or 9.48% per year)
The differences are stark; savers with Cash ISAs are seeing the spending power of their money eroded each year by inflation.
the 9.48% average returned by Crowd2Fund eclipses the 8% dangled by the ill-fated mini bond
For those that are not comfortable with the roller coaster of stock market investing – and who knows what Brexit is going to throw at us next – the IFISA may be the answer; returns that are not correlated to stock market performance and platforms that in their short life have not thrown up any nasty surprises.
Investors that ploughed £236 million into London Capital & Finance may wish they’d shopped around – the 9.48% average returned by Crowd2Fund eclipses the 8% dangled by the ill-fated mini bond.
For more information on the IFISA see ‘Is the IFISA ‘the perfect middle ground between poor returns and volatility?’