The following information should not be treated as personal advice - it's provided to help you make your own investment decisions. All investments rise and fall in value, which means you could get back less than you invest. As always, if you're unsure, please seek professional advice.
Will the ISA deadline be extended?
As the COVID-19 outbreak continues to disrupt the global economy, the UK government has been urged to delay the existing April ISA deadline to October, allowing investors additional time to accumulate the cash necessary to maximise the benefit of their chosen ISA schemes.
However as it currently stands, there has been no extension given to the ISA deadline, which means investors still have up to midnight on the 5th April to use their £20,000 tax free allowance.
Understanding how to use your tax free allowance is crucial before any investments are made. There are a variety of factors Investors need to consider before investing, including where you’re going to allocate your allowance, and how much of it you’re going to subscribe to which ISA product.
Read more: the annual ISA allowance explained
How can I use my tax free ISA allowance?
With a matter of days before the 2019/2020 ISA deadline closes, let’s recap on how you can use your tax free allowance.
The four main types of ISA are Cash ISA, Lifetime ISA, Stocks and Shares ISA and Innovative Finance ISA (IFISA). Below are three types of ISA products investors may be considering this tax year - each with their own unique features and profiles;
1. Cash ISA (instant-access, fixed rate and flexible)
Although now in decline, with 670,000 fewer accounts opened in 2017/18 than in the year previous, Cash ISAs for a long time have been the most popular type of ISA.
Their savings product profile means, unlike Stocks and Shares ISAs and IFISAs, your capital is protected by the Financial Services Compensation Scheme (FSCS) for up to £85,000 should the Cash ISA provider fail.
However with lower risk comes lower returns, with interest rates for the best Cash ISA at the time of writing this paying 1.3%.
There are three variations of Cash ISA (instant-access, fixed-rate and flexible), and Cash ISAs can be opened by anyone over the age of 16 who lives in the UK. They are aimed at individuals wanting to save in a low-risk way with easy access to their savings.
2. Stocks and Shares ISA
Best suited to investors with a long term outlook, Stocks and Shares ISAs come with a mid/high risk profile due to the volatility of the stock market - where the performance of investments can fluctuate.
Unlike investments in their own right, Stocks and Shares ISAs are instead a type of account that allow you to put your money into a variety of different investments - including bonds, funds and shares.
When comparing a Stocks and Shares ISA against other types of ISAs in terms of their return potential, a Stocks and Shares ISA could give you much higher returns than that of a Cash ISA. Because of the sheer variety of investments that can be held in a Stocks and Shares ISA, their target returns differ - though they’re often around 4%+.
However, with higher returns comes higher risk, and a Stocks and Shares ISA should be considered as a long term investment, allowing investors time for any losses to recover.
Although compensation can be claimed up to £85,000 from the FSCS if your fund manager goes bust and they are covered, there is no compensation available if investments perform badly.
3. Innovative Finance ISA (IFISA)
IFISAs are quickly becoming the ISA of choice for many investors looking for alternative investment options, with over £1 billion invested in 2019 since its introduction.
IFISA assets generally fall into one of two areas - peer-to-peer (P2P) lending and debt-based securities (DBS). With an IFISA, it’s possible for investors to see their capital used in everything from consumer lending right through to lending to new build housing developments through a property bond.
As a general financial product, IFISAs are accessible by all investors. However, there is a difference in who the two different IFISA asset areas - P2P loans and DBS - are targeted at. With the former appropriate for all investors (including restricted/everyday investors), the latter are directly aimed at experienced investors.
IFISA target interest rates at present fall between 4% and 8%, depending on the underlying asset (though higher rates are available, investors should be very careful where target returns exceed 10% per annum). IFISAs can provide a very welcoming middle-ground between Cash ISAs and Stocks and Shares ISAs, allowing for an amount of risk.
Like with a Stocks and Shares ISA, your capital is at risk, and returns are not guaranteed.
Read more: the Innovative Finance ISA guide
How has COVID-19 impacted the ISA market?
The impact of the Coronavirus on personal finances has been the topic of much discussion over the past weeks as the situation unfolds. Whilst the health of the population is now at the forefront of many people's minds, many investors are also looking towards the health of their investments and how their portfolio can be maintained during uncertain times.
In the past month we have seen the FTSE 100 fall faster than after the global financial crisis more than a decade ago. With fear rampant and markets extremely volatile, it’s not surprising to see some investors looking to liquidate their Stocks and Shares ISAs.
However, for medium-to-long term investors, market volatility as a whole shouldn’t be unexpected for those investing into a Stocks and Shares ISA with their performance correlated to stock market fluctuations. Throughout the history of stocks and shares, market crashes have had many triggers – 1987’s Black Monday, the Dot com crash and the global financial crisis. What is important to realise here is that past performance is not a reliable guide to future performance, and so far 100% of all stock market crashes have been followed by a recovery that more than redeems the fall.
Following a sharp fall in global markets, the Bank of England shiftly announced an emergency base rate cut of half a percentage point, followed by another one eight days later which took the bank rate to its lowest ever level of 0.1 per cent.
Whilst this may have been music to the ears of many mortgage holders and businesses in a bid to keep the UK economy afloat, for the many UK Cash ISA account holders this means only one thing - lower returns on their hard earned money.
Fluctuations in stock market performance and base rates aside, as the media outlets continue to deliver news at a speed near enough impossible to keep up with, it’s worth noting there is one ISA largely keeping out of the negative headlines, and that is the Innovative Finance ISA (IFISA).
Never has there been a more important time to consider the balance within an investment portfolio achieved by diversification, one of the many benefits of the IFISA.
With the target returns for IFISAs almost always exceeding the guaranteed rates of return from Cash ISAs - often by several percentage points - IFISAs have gone from strength-to-strength in just three short years.
Unlike the deposit taking product of a Cash ISA where capital is protected, that's not to say that IFISAs don’t come with an element of risk like all investment products.
The IFISA headlines that have made news in recent weeks suggest that the IFISA market is busier than ever despite the Coronavirus outbreak. With much of the UK put into lockdown, there was initial speculation as to the impact the current situation would have on the IFISA market.
Operationally IFISA providers are platform based, which in turn allows the core business to operate with little-to-no disruption as teams work from home, continuing to support their investor networks.
Looking closer to the underlying investments, in these times, for SME business loans, there will undoubtedly be a bigger need than ever for investors to provide additional support. This will bring with it increased risk, but the returns are very likely to be in line with this.
With property bonds, we need to look at the housing market and the underlying theme that there will always be a demand for housing. People will always need property, and in some of the biggest economic disasters of our time - such as the 2008 recession - the housing market came back stronger than ever.
Despite the government effectively closing the property market in recent weeks, business for IFISA property bonds still remains operational with many peer-to-peer lenders confident that they can start getting deals ready.
Against the current backdrop which recently saw stock markets suffer their worst week since Black Monday in 1987 and low interest rates offered by savings products such as the Cash ISA slashed even lower, the Innovative Finance ISA (IFISA) is becoming an increasingly popular choice for investors looking for ways to make their money work harder this tax season.
Just don’t forget to invest before the deadline of midnight on April 5th 2020.
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).