Have YOU been throwing away your ISA earnings?
AS ISA season gets underway, many savers and investors would be forgiven for feeling a little despondent. New figures from Hargreaves Lansdown have revealed that Brits have missed out on at least £188bn in lost interest from low-yielding savings accounts over the past 10 years – the equivalent of £7,101 per household.
This is particularly prescient given that 5 March 2019 marks the 10-year anniversary of interest rates being cut to 0.5 per cent for the first time. Back in 2009, most economists predicted that interest rates would have risen to around four per cent by the end of 2012, but today the base rate remains at just 0.75 per cent.
Meanwhile, the FTSE 100 ended 2018 at a 12.5 per cent loss, and the market has been struggling to recover ever since.
However, the low-interest environment of the past 10 years has created space for alternative finance to flourish. Next month it will be three years since the Innovative Finance ISA (IFISA) was given the green light, and IFISA inflows are helping peer-to-peer platforms reach a series of new lending milestones.
So we thought it might be interesting to track the financial journey of £1,000 as it may have been invested in April 2016 to see just how different these ISA returns really are.
• £1,000 in a cash ISA
According to Moneyfacts data, in April 2016 the average easy-access cash ISA was paying just 1.06 per cent. This means that £1,000 invested in a cash ISA on 5 April 2016 would have been worth £1,010.60 the following year.
2017 has been named the worst year on record for cash ISA rates, with the average instant-access account paying just 0.62 per cent. This means that £1,010.60 would have earned just £6.27 in annual returns, making it worth £1,016.87 by April 2018.
By January 2018, the average cash ISA return was up to 0.74 per cent, so that £1,016.87 would be on track to return £7.52 by the end of the current tax year.
This means that £1,000 invested in the average instant-access cash ISA in April 2016 would be worth £1,024.39 by April 2019, before fees.
Average three-year earnings = £24.39
• £1,000 in a stocks and shares ISA (FTSE 100)
It is hard to define the average returns of a stocks and shares ISA, simply because there are so many different variations of the average stocks and shares portfolio. So instead, we are looking at the performance of a FTSE 100-tracking portfolio.
Between April 2016 and April 2017, the FTSE 100 returned an impressive 20.36 per cent, which would translate to £203.60 in earnings. However, between April 2017 and April 2018, the stock market fell by 1.8 per cent, turning that £1,203.60 into £1,181.94.
Between 5 April 2018 and 28 February 2019, the FTSE 100 had fallen by another 1.73 per cent, making that £1,181.94 worth £1,161.49. This represents capital growth of just £161.49 over almost three years.
As a caveat, it is worth noting that the FTSE 100 is unpredictable by nature, and its value continues to fluctuate depending on corporate trading results and ongoing Brexit uncertainty. It is also worth adding that most stocks and shares ISA investments are made across long-term horizons, and volatility aside, between 1 March 2009 and 1 March 2019, FTSE 100 investors would have still made double-digit returns.
Average three-year earnings = £161.49
• £1,000 in an Innovative Finance ISA
In April 2016, there were just a handful of IFISAs on the market. Crowd2Fund was one of the first platforms to offer the IFISA, with a target annual return of 8.7 per cent – a target which is still in place today.
Using Crowd2Fund’s IFISA as an example, a £1,000 investment in April 2016 would have produced a return of £87 by April 2017.
By April 2018, that £1,087 would have turned into £1,181.57, and by April 2019 – as long as there are no defaults – it should be on track to earn another £102.80. This brings the original £1,000 up to £1,284.37 within three years.
Average three-year earnings = £284.37