Twenty years ago this April, in an attempt to encourage people to take more personal responsibility for their finances, the government launched the Cash ISA, allowing savers and investors to benefit from the compounding of returns tax-free.
Much has changed in the investment landscape since then, particularly following the financial crisis in 2008, which heralded a low interest environment and introduced the world to quantitative easing and the alternative finance sector.
During this period, a whole range of tax-efficient wrappers have been launched to allow savers and investors to choose a product that best suits their needs, and allows them to shelter the assets they wish to invest in.
Annual allowances have risen dramatically as well and every tax payer can now subscribe up to £20,000 in each tax year to a range of ISAs, including Cash, Stocks and Shares, Innovative Finance, Lifetime and Help-to-Buy.
Introducing the IFISA
Innovative Finance ISA (IFISA) launched in 2016 but uptake was slow because delays in achieving regulatory approval meant that many of the larger platforms faced delays getting their products to market, and missed the initial deadline.
Three years on, many platforms have cleared this hurdle and the market is starting to gain traction – a comprehensive table of IFISA providers can be found here.
Cash ISA returns have remained stubbornly low and at current rates savers will see the real value of their money being corroded by inflation.
Moneyfacts says that the average instant-access cash ISA paid interest of just 0.94% in January; the best available rate was the 1.45% offered by a limited access Virgin Money product followed by the 1.43% offered by Shawbrook Bank which insists a minimum balance of £1,000 is maintained.
How to beat inflation
Albeit at its lowest level for two years, with inflation as measured by the Consumer Price Index (CPI) at 1.8% in January, every single instant access Cash ISA available is under water – the buying power of savers’ cash is savings declining in real terms .
Moneyfacts identified a couple of fixed-term Cash ISAs that did manage to beat inflation; Skipton Building Society was top of the class, paying 2.05% interest each year, in return for your commitment in locking up your cash for five years. Cynergy Bank’s two-year fixed rate Cash ISA just sneaked over the bar with an annual rate of 1.82%.
In contrast, our comprehensive comparison table includes IFISAs that target annual returns well in excess of inflation; for example, FundingSecure targets 16% annual return by providing asset-backed finance via its peer-to-peer lending platform with a minimum investment of £25.
FundingSecure targets 16% annual return by providing asset-backed finance
Meanwhile, IFISAs from Welendus and HNW Lending both target annual returns of up to 15% by offering short-term consumer P2P and asset-backed consumer and business loans respectively; Welendus requires a minimum investment of £100 and HNW £5,000.
Ablrate targets an annual return of 10-15% with its IFISA via asset-backed business loans and requires a minimum investment of £100.
Of course, these potentially attractive returns come at price and the additional risk of investing in P2P loans via an IFISA puts your capital at greater risk than popping it into a Cash ISA.
However, by diversifying your loan across a number of borrowers and perhaps sectors, the IFISA providers seek to spread your risk and many operate a lifeboat fund for those that suffer losses.
For investors with a lower risk appetite, happy with more conservative returns, there are a number of IFISAs targeting perfectly respectable returns of between 5% – 8%.
Crowdstacker targets an annual return of 6.8% by investing in secured business loans; LendingCrowd targets 6% via business loans.
IFISAs also offer plenty of scope for those seeking to explore other alternative lending opportunities – Downing targets 5.8% p.a. returns from crowd bonds, Goji’s IFISA aims to deliver 5% p.a. by aggregating loans across a range of different platforms and Landbay offers a more modest annual fixed target return of 3.54%, or a tracker rate of 3.25% by funding buy-to-let mortgages.
Having got off to a slow start, the IFISA is gathering momentum and could go from strength to strength if those currently getting poorer with Cash ISAs recognise it as something of a halfway house between saving and investing.