For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
ISA season: Why the IFISA could be right for you
There is barely a week to go until the conclusion of the 2017/18 financial year, which means that, as ISA season begins to hot up, time is running out to take advantage of your ISA allowance. Although the fortunes of the ISA have been mixed since the financial crisis, it’s worth taking a breath to appreciate just how much this allowance has grown over the years. Back in 2009/10, those with cash and/or stocks & shares ISAs could shield just £7,200 of subscriptions each year from tax. Today, this figure has soared to £20,000, and this will be unchanged for 2018/19.
Yet it should be noted that no part of the annual £20,000 ISA allowance can be carried over into the following tax year. As such, savers and investors are often advised to either ‘use it, or lose it’.
But amid the malaise of the cash ISA, and the current jitters in the stock market, is this ISA allowance still as valuable as it once was? The answer is an emphatic yes.
What has happened to the cash ISA?
“You’d have to be crazy to open a cash ISA!” reads many an online comment thread. It’s a sweeping statement, which doesn’t apply to everyone. But there is some merit behind it.
There are presently six categories of ISA on the UK market: cash ISAs, stocks & shares ISAs, Junior ISAs, the Help to Buy ISA, and the more-recent Innovative Finance ISA and Lifetime ISA. Yet it was cash ISAs which initially drove the popularity of the ISA framework. In short, the product is easy to understand, and operates much like a simple savings account (bar some additional ISA rules and restrictions). And, prior to 2008, returns of 5-6 per cent were commonplace.
However, since the crash, and the subsequent nosedive in Bank of England rates, cash ISAs have suffered a decline – one which has been increasingly pronounced over the past two years. According to the Financial Times, in 2016-17 the number of new cash ISAs opened dropped by 1.6m to 8.5m, while the total amount subscribed fell by around 50 per cent to £39bn.
Of course, poor rates of return are primarily to blame. The best deal at present on an easy-access ISA is 1.3 per cent AER, while you would need to lock your money away for at least 3 years in a fixed-term ISA before breaching the 2 per cent barrier. Yet with inflation at 2.7 per cent, your money is still set to diminish in real terms no matter which provider you choose. So even with the benefit of cover from the Financial Services Compensation Scheme (FSCS), a cash ISA as a choice of savings is, in effect, a guaranteed loser.
Yet it is the advent of the personal savings allowance which has accelerated the decline since April 2016, given that basic rate and higher-rate taxpayers no longer have to seek the sanctuary of a cash ISA to shield savings interest from tax. Based on current savings rates, the personal savings allowance should ensure that the vast majority of cash savers can avoid paying any tax at all on any interest earned outside their ISA.
Is the stocks & shares ISA doing any better?
No doubt, those with stocks & shares ISAs will have reaped the benefits of a remarkable bull run over the past 18 months. Although cash ISAs still account for 77 per cent of overall subscriptions to date, Hargreaves Lansdown reported that the number of people transferring from cash ISAs to stocks & shares ISAs was on the increase, and had been steadily above 40 per cent of all of its transfers.
It’s also important to note that the name belies the fact that bonds, unit trusts, investment trusts, exchange traded funds and even cash can be held within a stocks & shares ISA, so there is the opportunity to diversify your portfolio even within the wrapper itself. And, given the fact that the tax-free dividend allowance is set to be cut from £5,000 to £2,000 on 6th April, the stocks & shares ISA is set to have a few more takers.
All that said, equities remain the primary component of this account type, and recent activity on UK and global stock markets has been volatile to say the least. It must be factored in that there is no FSCS cover against the performance of investments like these, and their value can go down as well as up. So, while the stocks & shares ISA is an excellent option for seasoned investors, it will not be suitable for everyone who is looking to flee the poor returns of a cash ISA, and thus explains why the number of accounts subscribed to each year has been stagnant for the past decade.
Why the Innovative Finance ISA presents a great alternative…
Of the four other types of ISA, three are inextricably linked to cash and stocks & shares ISAs, and/or are a subset of each. The only one which is genuinely unique is the IFISA - an account which is almost exclusively offered by peer-to-peer lending (P2P) platforms.
And this is only one of the reasons it stands out from the crowd. The headline attraction of P2P lending is, of course, the attractive rates of return - not only are annualised rates of over 5 per cent very common, but returns are usually predictable and steady too – unlike those associated with more high-risk investments such as equities. Moreover, P2P allows consumers access to an asset class previously reserved for banks and other financial institutions.
True, there is no FSCS cover in the event of borrower default, but most major FCA-regulated platforms have impressive track records in terms of risk management and arrears and default performance. At Lending Works, for example, every penny of capital and interest has been received by its investors to date, which is largely due to its market-leading lender protection measures.
It is also very easy to open an IFISA (it can be set up online within the space of just a few minutes), and this lending product doesn’t bear the complexities you might associate with other asset classes. Indeed, the peer-to-peer lending sector is fast building a reputation for transparency and user-friendliness.
That P2P income can now be shielded from tax within an IFISA only adds to the appeal, as does the fact that P2P earnings outside an ISA also qualify for the personal savings allowance, meaning a ‘double tax efficiency’ can be enjoyed.
How has the IFISA fared to date?
HMRC has only released data for the 2016/17 tax year thus far, and, given that no major platforms had gone live with the IFISA until February last year, it is no surprise that only £17m was subscribed across a total of 2,000 IFISAs in that period.
Interestingly though, the average amount invested within IFISAs per individual was in the region of £8,500, which was almost identical to that of stocks & shares ISAs (£8,600), and comfortably exceeded the corresponding figure for cash ISAs (£4,600). That in itself represents a strong vote of confidence from those who opened an IFISA last year, and with most leading platforms having now gone live with their IFISA product – and some even having to close the door to new lending capital as a result of huge demand – all indications are that the numbers are set to increase dramatically for 2017/18.
Is the IFISA right for you?
While alternatives such as the Help-to-Buy, Lifetime and Junior ISAs have provided consumers with some welcome additions in terms of choice, they’ve done nothing to bridge the gap on the risk-reward spectrum between saving and investing. For many a frustrated cash ISA saver, the risk associated with stocks & shares ISAs has been a bridge too far, as has the complexity.
That’s where the IFISA has uniquely and single-handedly stepped up to the plate. Notwithstanding the fact there is a strong degree of variety among peer-to-peer lending platforms, and the type of loans they facilitate, this sector has delivered a genuine midpoint between cash and stocks & shares in terms of the risk taken on by the investor, and their expected return.
Lending via peer-to-peer, and by extension the IFISA, eliminates inefficiencies, turns the tide on high-street profits and does so in an uncomplicated and convenient manner - benefits which will surely resonate with a lot of people.
So, whether you’re looking to find a home for the bulk of your ISA allowance at the last minute, or simply diversify your portfolio, you could do a lot worse than shop in the IFISA section – one with a set of offerings which are superbly placed to revolutionise UK financial services for the good of the consumer.
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The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
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