August 2021 saw UK inflation’s biggest jump on record according to the Office for National Statistics Consumer Price Index, rising to 3.2% – the highest figure in almost a decade – from 2% the month prior.
Meanwhile, savers and investors currently have around £944 billion sitting in low-yielding instant-access savings accounts, with the highest interest rate for such accounts available at present just 0.66% – or 0.6% for the tax-free alternative to a traditional savings account, the Cash ISA.
With interest rates clearly failing to keep pace with inflation, investors holding cash will see the value of their funds eroded over the long-term if they fail to look for methods of maximising their returns.
However, research from YouGov and Canaccord Genuity Wealth Management has found that a number of high-net-worth individuals aren’t taking the risks that soaring inflation poses to their wealth seriously enough. Of 1,006 high-net-worth investors surveyed – all with £750,000 or more in savings and assets – 55% are “unconcerned about the impact of inflation on their savings and investments”.
But in September 2021, the Bank of England forecasted that inflation’s exponential rise will continue, heading towards a staggering 4% – double the Bank’s target rate.
If the rate of inflation does soar to 4%, every £10,000 saved by investors would be worth only £9,610 in real terms, a loss of £390, and altogether this would result in savers losing £36.8 billion in spending power.
David Goodfellow, Head of Wealth Planning at Canaccord, stated “the simple rule of economics dictates if interest rates are lower than inflation, inflation will erode the real value of your cash savings over time. If savers have surplus cash holdings, they are likely to be better off investing at least a proportion in a diversified portfolio”.
Therefore, now is the time for experienced investors with the appropriate appetite for risk to consider products offering potential inflation-beating returns. There are a number of options to suit differing portfolio requirements, but a product we often speak about due to its multitude of benefits – such as tax-free returns typically in excess of 7% – is the Innovative Finance ISA (IFISA).
Targeting inflation-beating returns with an IFISA
For experienced investors, the IFISA offers opportunities to invest into popular, alternative assets – from SME loans to property bonds – whilst targeting returns often between 4% and 8%. And because of the ISA wrapper, these returns are also tax-free, helping to maximise them further.
When considering a property-backed IFISA in particular, a target rate of circa 7% is typical, far outperforming even the increased rates of inflation we’ve seen of late and are expected to see for the foreseeable future.
Though a Cash ISA and an IFISA should not be compared like-for-like – the former is Financial Services Compensation Scheme (FSCS)-protected and low-risk, whilst the latter is high-risk and returns are not guaranteed – experienced investors saving cash could consider transferring some of their capital to an IFISA for the potential of beating the predicted upcoming increase in inflation.
The return on £20,000 invested into a Cash ISA with a rate of 0.6% per annum compounded over a four year period is just £20,484. On the other hand, £20,000 invested into an IFISA with a target rate of 7% has the potential to generate £25,600 over the same period.
And keeping in mind that additional-rate taxpayers would need to target a rate of return over 12% outside of the IFISA wrapper to achieve equivalent to 7% within the wrapper, the benefits of the tax-free nature at boosting returns are particularly evident.
In addition to the potential to beat inflation with a property-backed IFISA, the product also enables experienced investors to invest for impact into an asset that has proven resilient over the last 18 months as the Coronavirus pandemic took its toll on the likes of the equities market.
Though many sectors faltered in the face of Covid-19, the performance of the housing market was astoundingly positive – for property investors in particular. And amidst the UK’s housing shortage, the demand for the likes of property bonds – and therefore their potential to generate an attractive return for investors – is unlikely to diminish.
Investing into a property-backed IFISA
It’s clear that rising inflation presents a risk to investors’ capital as long as it’s held in savings accounts with all-time low interest rates.
Where possible for experienced investors, contributing some of their funds to a product such as the IFISA – which as well as targeting inflation-beating returns also boasts the advantage of said returns being free from both income and capital gains tax – is a core consideration now more than ever.
And though the IFISA allows investment into a number of assets, the property-backed IFISA in particular could be a key option for experienced investors interested in investing into the much-favoured asset to back small and medium-sized housebuilders and aid in tackling the current housing crisis.