Cash ISA vs IFISA: how do returns compare?
IT IS close to 20 years since the cash ISA launched, helping investors to benefit from the compounding of returns tax-free.
The investment landscape has changed significantly since April 1999, particularly following the great financial crisis in 2008, which brought in an era of low interest rates and quantitative easing. It also saw the rise of the alternative finance sector.
What’s more, the range of ISAs that are available for savers has widened significantly. Today, an individual can allocate all or some of this tax year’s £20,000 allowance to a range of ISAs, including cash, stocks and shares, Innovative Finance, Lifetime and help-to-buy.
The rise of the IFISA
Although the Innovative Finance ISA (IFISA) wrapper officially launched in 2016, the savings vehicle got off to a slow start. This was because many of the larger platforms faced delays getting their products to market, as they were waiting for regulatory permissions. Close to three years on, platforms have cleared this hurdle and the market is starting to gain traction.
With less than two months to go until the end of the tax year, how do target IFISA returns compare to cash ISA rates?
According to Moneyfacts, the average instant-access cash ISA paid out an average interest rate of 0.94 per cent in January of this year.
This compares to the best available rate of 1.45 per cent, which is offered by Virgin Money. However, savers can only make two withdrawals each calendar year. This is followed closely by Shawbrook Bank which pays 1.43 per cent on minimum balances of £1,000 – a balance which must be maintained throughout the year.
How to beat inflation
It is worth noting that inflation, as measured by the Consumer Price Index (CPI), stood at 1.8 per cent in January. Although this represents its lowest level in two years, it still means that the top interest rate available for an instant access cash ISA is below inflation, so savers will see the value of their investments eroded by rising prices.
One way to beat inflation with a cash ISA is to lock into a fixed-term ISA. The best on offer from Skipton Building Society pays 2.05 per cent interest each year and involves locking up your cash for five years, according to Moneyfacts.
The second best option only narrowly beats inflation: Cynergy Bank’s two-year fixed rate cash ISA offers an annual rate of 1.82 per cent.
In contrast, our guide shows that investors can access IFISAs which target annual returns of up to 16 per cent – well in excess of inflation. For example, FundingSecure’s IFISA targets this level of return by providing asset-backed finance via its peer-to-peer lending platform and requires a minimum investment of £25.
Meanwhile, IFISAs from Welendus and HNW Lending both target annual returns of up to 15 per cent. Welendus’ IFISA invests in short-term consumer P2P loans and is available for a minimum investment of £100, while HNW Lending provides access to asset-backed consumer and business loans and has a minimum of £5,000.
Ablrate’s IFISA targets an annual return of 10 to 15 per cent via asset-backed business loans and requires a minimum investment of £100.
Of course, it is important to note that investing in P2P loans via an IFISA is higher risk than setting up cash ISA. However, these risks should be reflected in the returns you receive.
Read more: IFISAs: Plenty to play for
For investors with a lower risk appetite who are happy with more conservative returns, there are a number of IFISA options which target returns between five per cent and eight per cent. Crowdstacker’s IFISA, for example, targets an annual return of 6.8 per cent by investing in secured business loans. Meanwhile, LendingCrowd’s IFISA targets a six per cent return via business loans.
For those looking for a different exposure via their IFISA, Downing’s tax-free product aims to achieve 5.8 per cent by providing access to crowd bonds, while Goji’s IFISA targets a return of five per cent by investing in a range of loans across different platforms.
Landbay’s IFISA offers a more modest annual fixed target return of 3.54 per cent or a tracker rate of 3.25 per cent by funding buy-to-let mortgages.
To find out more about the IFISA options that are available, check out our guide.