Amidst much discussion surrounding the Cash ISA and its efficacy, it’s understandable that many savers and investors may be questioning whether an ISA more generally is still a viable option for growing their capital.
As interest rates hover around historical lows whilst inflation was at a three-decade high of 5.5% as of January 2022, investors holding cash face the purchasing power of their funds being severely diminished in real terms.
In January, the UK’s first ISA millionaire, Lord Lee, stated a Cash ISA is “not something I can recommend” and declared it a “great tragedy that so many people have significant amounts of money just sitting there earning next to no interest”.
Even as the Bank of England (BoE) raised their base rate for a second time in three months to 0.5% – it was raised from 0.1%, where it had remained since March 2020, to 0.25% in December 2021 – Cash ISA rates have, as yet, been largely unaffected.
At the time of writing, the highest rate offered on an instant-access Cash ISA is just 0.65% – clearly failing to keep pace with the rate of inflation, which according to experts could be pushed to as high as 7% by April 2022 due to surging energy bills.
Figures released from 2021 also revealed that it was a particularly bad year for the Cash ISA, with a record 23 accounts paying 0.1% or less and six paying 0.01%. By comparison, only 12 accounts paid less than 0.1% in 2020.
As a result, on the full £20,000 ISA allowance, savers would have earned just £20 in interest throughout 2021 – a sure knock to any confidence investors may have had in the product’s potential to generate a substantial return.
For risk averse savers and experienced investors looking to have some cash savings as part of a diversified portfolio however, the Financial Services Compensation Scheme (FSCS)-protected Cash ISA may still be an appropriate option due to its completely tax-free returns.
But it’s crucial to remember that the ISA market now has much more to offer than just the low-yielding, savings-based Cash ISA. Experienced investors with a higher risk appetite who are in search of higher target returns also have the Innovative Finance ISA (IFISA) and Stocks and Shares ISA to consider.
Whilst the well-known Stocks and Shares ISA is the go-to for a lot of investors wanting to reap the tax-efficient benefits of an ISA while investing, many may be looking to reduce their exposure to the equities market as it suffers severe fluctuations and its outlook remains unpredictable.
And this is where the IFISA can be a particularly powerful addition to an ISA portfolio, allowing for diversification with increasingly popular alternative investments.
Maximising potential returns with an IFISA
The IFISA – which enables experienced investors to hold peer-to-peer loans and debt-based securities under the tax-free ISA wrapper – has been a clear success, exceeding the milestone of £1 billion in inflows in 2019/20, just three years after it was first introduced in April 2016.
This is somewhat unsurprising when considering the product offers underlying assets such as the investor-favoured property – at a time when the UK property market is showcasing strong performance and a continued positive outlook – with target returns on the property-backed IFISA often in excess of an inflation-beating 7%.
Outside of the tax wrapper, this equates to a Gross Equivalent Return of 12% and above for higher-rate taxpayers, once again highlighting the importance of making tax-efficient investments in order to maximise potential returns and proving an ISA could still be an extremely beneficial option.
In addition to the financial opportunities an IFISA provides, it can also be a means of getting involved in ESG and impact investing for experienced investors interested in doing so with property.
For small and medium-sized housebuilders, property bonds have and will continue to be instrumental in supporting them to deliver much-needed housing in the UK. And investing via an IFISA means investors benefit from the aforementioned attractive, tax-free target returns whilst also making a positive impact on an economic, societal and even environmental level.
Using your ISA allowance in 2022
It’s clear that whilst the Cash ISA may be an unappealing option for experienced investors hoping to see their capital work hard against the current turbulent economic backdrop, there are other ISA products that make for a crucial consideration – namely, the IFISA.
With the new tax year just around the corner, bringing with it a reset ISA allowance of £20,000, using both any remaining 2021/22 allowance and the reset allowance come 6th April to its full potential should be a core priority for investors at present.
And as making tax-efficient investments is more important than ever, the ever-popular ISA – with its generous ISA allowance – remains a crucial addition to an investor’s portfolio.
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