One of the most generous tax wrappers available, the ISA and its annual allowance of £20,000 (as of 2021/22) can be an important, tax-efficient consideration for many.
And an experienced investor's status as a sophisticated investor, high-net-worth individual or professional investor – and their willingness to take more risks in the search for higher returns – results in numerous ISA options to choose from.
In this recent video, Dan Smith (Head of Marketing and Investor Relations, CARLTON Bonds) speaks to Simon Lenney (Chairman, CARLTON Bonds) and Craig Peterson (Co-Founder and Chief Operating Officer, CARLTON Bonds) who share their insights into ISA considerations for experienced investors – discussing everything from the differences between a Stocks and Shares ISA and Innovative Finance ISA (IFISA), the importance of a diversified ISA portfolio, ISA transfers and more.
One of the most important points to remember is that experienced investors are not restricted to the Cash ISA, a savings product – considered to be synonymous with the wider ISA term – that offers rock-bottom interest rates.
Instead, provided they have the appropriate appetite for risk and seek independent financial advice before making investment decisions, experienced investors could look to the Stocks and Shares ISA or IFISA – which are both investment products – in order to maximise returns.
With a similar risk–return profile to the Stocks and Shares ISA, the IFISA is focused on peer-to-peer lending and debt-based securities.
In the session, Craig explains:
“[With an IFISA] essentially you’re investing into a product where loans are made to underlying projects, businesses or consumer loans.
We’re in a low interest rate environment, if people are sat with Cash ISAs that are not getting the returns they want and they’re happy to take some investment risk – and that’s a critical point, it is an investment product so as with all investment products, your capital is at risk – then [the IFISA] does allow for some portfolio diversification.”
In agreement, Simon suggests:
“To produce a balanced portfolio across the ISA wrapper, it does make sense [for experienced investors] to perhaps have a slightly higher spread of risk, and the returns we’re seeing across the IFISA tend to be in the region of between 4% to 8%.”
Discussing the ISA’s tax-free wrapper in general and whether the Cash ISA – which is at present offering a top rate of just 0.4% on easy-access accounts – would be worth it for some experienced investors, Simon explains:
“The ISA wrapper is extremely important to any investor because of the tax savings and we will not always be in a low interest rate environment. But if you look at the UK for the next five years, it’s highly likely we will be, and if you look at the UK for the last five years, it’s absolutely positive that we have been.
So, [it comes down to] what returns are you looking to get within a 10 year window depending upon your personal circumstances.
When you look at what you can do when you consider the wider options across [the ISA market], there is the Stocks and Shares ISA for the experienced investor to consider, but the IFISA [can potentially] deliver a higher return in perhaps a shorter space of time.
You don’t go into the equity markets on a short-term play, you go into it for the long-term.”
Speaking on how an experienced investor would explore whether an IFISA is an appropriate option for themselves, Craig said:
“There are a number of things to take into account with an IFISA – understanding the underlying business model and the risk profile of that business and lending model is critical.
If you’re looking at consumer loans and business loans, they will generally be unsecured lending. That in itself isn’t a bad thing, but it does mean there is no security there, it’s then down to the credit worthiness of the businesses and the consumers the loans are being made to.
If you look at asset-backed property IFISAs where there might be a peer-to-peer lending business model or a debt-based security such as a bond, those do have the downside protection, and I will say [...] it doesn’t guarantee returns, but it does give an element of protection to the lender or investor and that can be helpful.”
The ISA options available to experienced investors offer unrivalled opportunities to target high and completely tax-free potential returns – and it’s vital to fully understand just what is available to ensure you are maximising your ISA allowance each and every year.