A balanced and diversified portfolio is one of the core fundamentals of investing, including a range of assets from low-risk cash, to higher-risk alternative investments. But amidst all-time low interest rates, some experienced investors could find themselves rethinking the weighting of their portfolios.
At present, the Bank of England’s base rate remains at a rock-bottom 0.1%, whilst the Consumer Price Index puts inflation at 3.2% for the 12 months leading up to August 2021.
And some mainstream banks are offering Cash ISA rates at as little as 0.02%, with the best rate currently available on an instant-access Cash ISA just 0.6%.
It’s clear to see that interest rates are not keeping pace with inflation, and as the Bank of England predicts inflation will continue to rise to 4%, investors holding cash risk seeing the value of their capital eroded over the long-term.
Whilst the low-risk, Financial Services Compensation Scheme (FSCS)-protected Cash ISA undoubtedly has its place in the market for investors wanting risk-free, instant-access cash savings, the current unfavourable outlook for the asset could find experienced investors considering the addition of products such as the Innovative Finance ISA (IFISA) to their ISA portfolio.
Although the IFISA and Cash ISA should not be compared like-for-like – the former an investment product with capital at risk, and the latter a savings product with financial protection – the inflation-beating target returns of the IFISA can be particularly appealing for experienced investors.
Allowing said investors to hold assets such as property bonds and SME loans within the ISA wrapper, combined with target interest rates often upwards of 7%, it is understandable why experienced investors would consider moving a portion of their funds in low-yield Cash ISAs to an IFISA – and this is achievable, without affecting the annual ISA allowance, by utilising the ISA transfer process.
Transferring a Cash ISA to an IFISA
Underutilised but extremely beneficial to experienced investors looking to alter the weighting of their ISA portfolio, an ISA transfer enables the movement of some or all funds from one ISA product to another without deducting from the £20,000 ISA allowance.
This results in opportunities for investors to make alterations to their portfolio based on changing preferences, goals or market conditions – for example, to react to plummeting interest rates or a volatile equities market – regardless of whether or not their full allowance has been utilised for the year.
And as the return on £20,000 invested into a Cash ISA with a rate of 0.6% is just £20,484 over a four year period – whilst £20,000 invested into an IFISA with a target rate of 7% has the potential to generate £25,600 over the same period – ISA transfers could be beneficial to experienced investors now more than ever.
After seeking independent financial advice, an experienced investor with a substantial sum invested into a Cash ISA could choose to split this, transferring a portion into an IFISA for the potential of maximising returns.
As an example, experienced investor #1 has £60,000 in a Cash ISA. They invested their full £20,000 allowance into the product in 2018/19, 2019/20 and 2020/21 but are yet to subscribe their 2021/22 allowance as they’re disillusioned with the Cash ISA rates on offer and are looking for alternatives.
Therefore, experienced investor #1 could subscribe their full 2021/22 allowance to an IFISA whilst also transferring £40,000 from their existing Cash ISA – creating an ISA portfolio weighted towards the higher-risk/higher-potential return IFISA but still incorporating all-important instant-access cash.
On the other hand, experienced investor #2 has £40,000 in a Cash ISA invested in previous tax years and £20,000 in a Stocks and Shares ISA that was invested in this 2021/22 tax year.
Although experienced investor #2 has utilised their whole allowance for this year, they can still choose to transfer £30,000 from their Cash ISA to an IFISA as transfers are not governed by the annual ISA allowance.
Keep in mind though, whilst it is possible to opt to transfer just part of funds invested in a previous tax year, when transferring capital invested during the current tax year, you must transfer it in its entirety.
Furthermore, it’s crucial to follow the official ISA transfer process. Do not withdraw funds from one ISA with the view of reinvesting into another as withdrawals can remove the tax-free status of funds and reinvestment – no matter how soon after withdrawal – will be deducted from the ISA allowance.
Investing into an IFISA
For experienced investors, transferring funds from a Cash ISA to an IFISA results in the potential to target higher returns – whilst also taking on more risk – and see their capital achieve more over the long-term.
But in addition, it allows exposure to alternative investments which are uncorrelated to factors affecting more mainstream assets, such as the volatile nature of the stock market or the Bank of England’s record-low base rate.
And as IFISA-eligible assets such as property bonds have proven to be resilient throughout the Coronavirus pandemic – with demand for homes soaring whilst the market continues to be undersupplied – they could prove to be a key addition to an experienced investor’s portfolio.