How can fintech help to solve waning demand for the UK's favourite tax wrapper?
There are only three weeks left of the current ISA season. Ten years ago, we would have been inundated with calls from the banks and building societies telling us about their latest ISA offers. There was great demand back then for these products, offering annual returns of 5-6 per cent or more. We used to be disappointed to miss out when the banks turned us down, too overwhelmed with investment demand.
Fast forward to 2018 and the environment for cash ISAs looks very different. Interest rates on cash ISAs are dismally low, and this has led to an engrained lethargy around the ISA season.
Despite efforts by the government to make ISAs attractive again – today’s £20,000 annual allowance, for instance, is almost three times bigger now than it was back in 2008 – the appetite among investors has fallen considerably. The amount invested in cash ISAs alone plummeted last year, falling from £58.7bn in 2015/2016 to £39.2bn in 2016/2017. That’s a massive 34 per cent drop in appetite for the nation’s favourite tax-free savings option, in one year alone.
And who can blame investors. Tax changes and record low interest rates have sent the returns on offer from cash ISAs into the doldrums. In addition to this, the process of applying for a cash ISA can be painful (often requiring signatures and a raft of scanned documents). It’s not surprising that the hassle of applying for an ISA outweighs the investment return.
In the years since the heyday of high-paying cash ISA options, a number of new ISA programmes have been launched by the government to entice new investors into the space or to widen the range of options. New ISA formats like the Lifetime ISA for savers under 40, or the Innovative Finance ISA for P2P lenders have emerged, attempting to fill the gap for yield-hungry investors. Indicative numbers reveal, however, that these new initiatives are taking time to lift off and investors are understandably cautious about investing in these new schemes. By January this year, only six providers had launched a Lifetime ISA, and several of the larger P2P lenders have postponed launching their IFISAs until the future.
In this age where it seems like the love affair with the ISA might be over, it is the innovators in the market who are bringing investors viable options. Those of us tackling the situation have to ask ourselves: is creating even more new models of ISA the right way forward?
At LendInvest, we pride ourselves on thinking differently. We want to provide retail investors with a way to access our loans, but to do it in a highly regulated structure that has the highest protections for investors and that can be accessed in an ISA if required.
That’s one of the reasons why we’ve added retail bonds to our diverse mix of investment products; we’re helping retail investors around the country invest in property finance loans, that are also helping ease the housing crisis with funding for new and improved housing.
Retail bonds are, for the majority of people, suitable for inclusion in their ISAs (and SIPPs). They’re also a robust and respected form of liquid investment that benefit from being listed on the London Stock Exchange. They can be traded during their lifetime and have a track record for being significantly less volatile than equity stocks.
Rather than reimagining the tax-free investment in a whole new guise, we’ve found an established well-liked investment option, wrapped it in an existing tax-free wrapper, and opened it up within an asset class that was previously unattainable to retail investors.
The innovation in this approach is its simplicity. It’s common sense, simple and easy to use – the way finance should be.
It was fascinating to see MPs call this month to replace all ISA formats with a single, one-size-fits-all approach. They obviously appreciate that the system has become burdened with too much confusion. The principle behind an “Everything ISA” has its flaws but also has a lot of merit. Not only because it’d be simpler and quicker to manage, but because it doesn’t try to relabel something that’s become unpopular as something that promises to be better.
As this tax year draws to a close, a sudden uplift in cash ISA investments looks highly unlikely. What remains to be seen is how the investment community and the government will adapt and give investors a decent product that we can all love again.