It seems the penny has finally dropped - the amount invested in Cash ISAs last year is down 33% from 2015-6 saving levels.
With interest rates so low, I am bemused by investors who use their increasingly generous annual ISA allowance - now £20,000 p.a. - on their savings rather than investments (for those comfortable with the risks).
Does it make sense to use all your tax-free allowance on a lower return if you are both a saver and investor?
The introduction of the personal savings allowance may be a contributing factor to last year’s lower Cash ISA volumes - a higher rate taxpayer earning today’s average 1% p.a. on his or her savings can stash away £50,000 before having to pay tax on the interest.
But if interest rates start to increase and that money is outside an ISA wrapper, you will start to be taxed. An alternative is, of course, a Stocks and Shares ISA – subscription amounts are up from £21.1bn in 2015-6 to a record high of £22.3bn in 2016-71 but that still leaves some £18bn that is no longer being invested in Cash ISAs, without a home.
As a P2P investor, you may well already have an answer with the Innovative Finance ISA (IFISA).
Is cash still king?
The alternative finance sector has seen major growth over the last ten years with more than £10bn of loans made to people and businesses. The opportunity to also earn these potential returns tax-free may be a no-brainer for early adopters, but I believe it could also play a major role in bringing P2P lending and Crowd Bonds (a form of debtbased security) to the mainstream.
Let me be clear that this is not about taking all your savings and ploughing them into alternative finance – Crowd Bonds and P2P lending put your capital at risk, and do not have FSCS deposit protection (you can lose some or all your money). But if you are investing AND saving, surely your ISA allowance works harder for you to protect the higher potential returns than those currently on offer on your savings?
Take Alison from the adjacent table for example. Alison is a higher rate (40%) taxpayer and has £20,000 that she would like to invest in an ISA in the 2017/2018 tax year. She wants to make the most efficient use of her ISA tax benefits and decides to take a closer look at three different options: investing in a Cash ISA, investing in a Stocks and Shares ISA and investing through the IFISA. After considering her options and the additional risks relating to Stocks and Shares ISAs and IFISAs, Alison decides the most efficient use of her ISA allowance is by investing in a Crowd Bond through an IFISA.
Crowd Bonds offer the potential for significantly higher returns than currently available through cash ISAs – typically between 4 – 7% p.a. over a short to medium term. And since they are generally illiquid and held for a fixed term they are not exposed to the short-term volatility that comes with investing through a Stocks and Shares ISA. So, for those investors that are happy to take on the higher risk that comes with debt-based securities, the IFISA could prove an attractive option in today’s low interest rate environment.
With the annual ISA allowance at £20,000 and as there is no investment limit on transfers of existing ISAs from previous years, those looking to diversify their ISA portfolios and invest in assets uncorrelated to the stock market, the IFISA may be worth a look. (It’s always important to check with your current ISA providers whether there are penalties fees to pay on exit.)
We launched our online investment platform in March 2016, raising more than £46 million across 21 bonds to support UK businesses in a variety of sectors including renewable energy, care homes, property development and community pubs. In doing so, we have offered members a weighted average interest rate of 5.9% p.a.
Since we launched the Downing IFISA 10 months ago, nearly a third of our members have opened an IFISA account, accounting for approximately 30% of total bond orders, and we expect this to continue growing.
And with the tax year end fast approaching, maybe it’s time to ask: you are making the most of your ISA tax benefits, aren’t you?