Cash ISAs have lost investors money: it’s time to consider an IFISA

The most well-known member of the ISA family, the Cash ISA has been offering staggeringly low interest rates for some time, but in response to COVID-19, they have fallen to rock-bottom.

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Data shows savers who subscribed £10,000 to a Cash ISA 10 years ago would have actually had their capital eroded – with the value now being just £9,772, even after any interest has been added. This is due directly to rises in the cost of living, with interest rates on cash savings failing to keep up with inflation.

While the Cash ISA still has its place in the market – for cautious investors in particular – its dwindling interest rates cannot be ignored, and for experienced investors wishing to grow their capital, it could be time to consider an Innovative Finance ISA (IFISA).


The effect of COVID-19 on the Cash ISA

There aren’t many aspects of life that the COVID-19 pandemic hasn’t impacted in one way or another, and the Cash ISA – and ISA market more generally – is no exception. 

In March 2020, the Bank of England cut their base rate to 0.1% in response to the Coronavirus’ financial implications, the lowest in the Bank’s 365 year history - and there’s even talk of negative interest rates.

In the aftermath, Cash ISA rates plummeted. According to Money Saving Expert, the highest easy-access Cash ISA rate is, at-present, offering just 0.55%. For those unlikely to need access to their Cash ISA savings in the short-term, fixed-rate options are providing slightly higher rates, currently sitting at up to 1.15%. 

Read more:interest rates are at rock-bottom, here are your options to maximise ISA returns

Most would agree it’s advisable to have cash savings in the event of an emergency, and an easy-access Cash ISA could be a good option for this due to its tax-free wrapper and the ability to withdraw from it as and when you need to. 

However, for those looking to invest for the medium to long-term, with the aim of growing their capital, there are more potentially lucrative options in the ISA family that afford investors the same tax-free benefits


ISA options for experienced investors

When most think of an ISA, the Cash ISA and Stocks and Shares ISA – along with the now defunct Help to Buy ISA – are usually the first that come to mind. 

But in April 2016, the IFISA was introduced, allowing investors to hold peer-to-peer loans and debt-based securities tax-free. Since then, it has surged in popularity, with subscription numbers growing 18% in the 2018/19 tax year. 

It is important to be aware that no direct comparison should be made between the Cash ISA and IFISA. The former is a savings product covered by the Financial Services Compensation Scheme (FSCS), while the latter is an investment product whereby investors’ capital is at risk and returns are not guaranteed. 

Read more:download the IFISA guide

However, for experienced investors with the appropriate risk appetite, the IFISA has the potential to target inflation-beating returns, often between 4% and 8% per annum. 

On top of this, advantages of an IFISA include:

  • Higher target returns than many mainstream investment products

  • A range of asset choices, from property to green energy

  • Asset-backed options

  • The ability to realise returns quarterly or at maturity

As with all ISAs, the IFISA also benefits from completely tax-free returns and has a subscription limit of £20,000 in 2020/21 - potentially more when ISA transfers are considered. 


The IFISA vs Stocks and Shares ISA

The well-established Stocks and Shares ISA is undeniably many investors’ go-to when looking for an investment ISA, but its popularity is diminishing. In the 2018/19 tax year, subscriptions fell by £5.2 billion from the previous year. 

Like the Stocks and Shares ISA, the IFISA is an investment product, and both accounts are able to target higher rates of return than the Cash ISA – though these are not guaranteed. 

But the two accounts have some differences, and personal circumstances and preferences will determine which is the best option for any individual investor. 

To start, both the Stocks and Shares ISA and IFISA have a medium–high risk profile. However, the stock market can be extremely volatile – as witnessed throughout the Coronavirus crisis – and the value of investments can both rise and fall rapidly. 

One example of this is easyJet, whose stock market value dropped by around £1 billion in less than a week in February 2020, due to growing concerns about COVID-19’s impact on airlines and the travel industry. Similar volatility was seen across most other airlines and a number of other industries, particularly those in travel and hospitality.

On the other hand, whilst the IFISA is not subject to the fluctuations of the stock market, there is still a risk of borrower default, meaning capital is at risk. 

But importantly, there are asset-backed options available within an IFISA, which offer an additional layer of security. For example, an asset-backed property bond, whereby the investment is secured on assets of the borrowers, such as land and property. In these scenarios, the assets can mean there are a variety of options to provide the returns the investors are targeting, with the most appropriate chosen dependent on market conditions at the time.

Critically, both the IFISA and Stocks and Shares ISA should only be considered appropriate for investors willing and able to lock funds away for the medium to long-term. 

It’s typically advised that capital in a Stocks and Shares ISA be invested for a minimum of five years, whereas the term of an IFISA investment will, usually, be between two and four years. 


Choosing an ISA

While an appropriate consideration for all-important cash reserves, the Cash ISA often won’t cut it for experienced investors wanting to make their money work harder. In fact, as the data above details, it can provide you with less real money capital than you first invested. 

But investors don’t need to look far - we can remain within the ISA family - to find an alternative to consider.  With target returns of between 4% and 8%, asset-backed options and a large choice of underlying assets – allowing greater control over where funds are invested – the IFISA could be a key choice for experienced investors willing to take more risks in the search of higher returns.


The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).