In March 2022, inflation hit a new three-decade high of 7%, with the Office for Budget Responsibility (OBR) suggesting that the fallout from the war in Ukraine could push it further to a 40-year high of 8.7% in the final quarter of 2022.
What’s more, the Office for National Statistics (ONS) have warned inflation could even reach double figures if rising fuel prices mean the energy price cap goes up again come October.
Meanwhile savings rates continue to fail to keep pace with soaring inflation, with the best interest rate available on a (non-ISA) instant-access account just 1.5% at present. It’s clear therefore that savers run the significant risk of their capital being eroded over the long-term, with its purchasing power diminishing in real terms.
But with the annual ISA allowance having reset once again to a generous, tax-free £20,000 on 6th April, experienced investors have opportunities to maximise their target returns by using the popular tax incentive to its full potential.
Whilst the Cash ISA is still the most popular of the four core ISA products according to the latest HMRC figures, its popularity has been waning in recent times. According to data from the Bank of England (BoE), there has been a substantial decrease in the total accumulated holdings of Cash ISAs for the first time since their inception, down from £295 billion in January 2021 to £289 billion in January 2022.
This is unsurprising when considering that the highest interest rate currently offered on an instant-access Cash ISA is 0.9%, and the BoE states that the average rate paid on a Cash ISA is lower still at 0.31% – both far below the 30-year high rate of inflation.
Though the savings-based Cash ISA can still be a useful product for those planning to save above the £1,000 personal savings allowance and wanting guaranteed returns and Financial Services Compensation Scheme (FSCS) protection, experienced investors willing to accept higher risks for the potential of capital growth could find other products within the ISA market more attractive.
Targeting inflation-beating potential returns with your ISA allowance
When looking to subscribe the ISA allowance to an investment-based ISA that has the potential to generate more substantial returns, the Stocks and Shares ISA was once the go-to for experienced investors.
But recently, global equity markets have been severely impacted by a number of factors, from the Coronavirus pandemic and fears of rising interest rates as central banks endeavour to cope with climbing inflation, through to the current war in Ukraine.
Therefore, whilst the Stocks and Shares ISA can still certainly form a valuable part of an experienced investor's balanced and diversified ISA portfolio as a long-term investment option, splitting the ISA allowance and incorporating an Innovative Finance ISA (IFISA) into your portfolio is a key consideration now more than ever.
This is particularly true as research from Peer2Peer Finance News found that the IFISA actually outperformed the FTSE All Share Index over the four years from 2018 to 2021, whilst also demonstrating more stable returns.
The IFISA allows experienced investors to hold alternative investments such as property bonds and SME loans within the tax wrapper, with its underlying assets uncorrelated with both the fluctuations of the stock market and the BoE base rate.
And when investing into a property-backed IFISA in particular, experienced investors could target returns often in excess of an inflation-beating 7%, all while gaining exposure to the UK property market, which has proven extremely resilient and performed exceptionally well even under extenuating circumstances.
To put these potential gains into perspective and truly highlight the power of the ISAs tax-free status, it’s worth noting that to target 7% outside of the ISA wrapper, this equates to a Gross Equivalent Return of over 12% for additional-rate taxpayers.
Experienced investors who are already witnessing the effects of rising inflation on their ISA portfolio – either due to the rock-bottom Cash ISA interest rates or volatile equities market – could also make use of ISA transfers to move funds to an ISA product that more closely aligns with their goals amidst current market conditions.
For example, an experienced investor with £50,000 subscribed to a Cash ISA from previous tax years who wants to rebalance their portfolio away from low-yielding cash to a higher risk/higher target return ISA product could transfer some or all of their capital to an IFISA and/or Stocks and Shares ISA.
In addition, they could also subscribe their £20,000 ISA allowance from 2021/22 to their IFISA and/or Stocks and Shares ISA, meaning both their past and current allowances are working their hardest to meet their investment objectives.
Using the ISA allowance to its maximum
It’s clear now more than ever that utilising tax incentives such as the tax-free ISA allowance to aid in maximising potential returns is crucial for experienced investors.
And with inflation expected to continue to soar whilst interest rates on cash remain slow-moving, investment-based ISAs with significantly more growth potential – such as the IFISA – should be a core consideration for experienced investors with the appropriate appetite for risk.