PREDICTIONS that Innovative Finance ISAs (IFISAs) will attract substantial inflows amidst the falling popularity of their cash counterparts may be overly optimistic, discount investment broker Clubfinance has said.
While years of rock-bottom savings rates have caused cash ISAs to lose some of their shine, investors might continue to look for secured products and the safety of the Financial Services Compensation Scheme, instead of automatically turning to the much-higher returns offered by IFISAs.
“Government calculations for the cost of IFISAs could be taken to suggest that investment was expected to top £1bn per year,” said Clubfinance’s co-founder Philip Rhoden (pictured).
“Investor appetite is difficult to predict so the actual numbers for 2016/17 could turn out to be a real eye opener.”
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Rhoden said the government expects a £10m tax loss from the introduction of IFISAs. Assuming investors earn an interest rate of six per cent, this equates to £833m of funds it expects to go into the tax-free wrapper – which doesn’t take into account the additional inflows from savers’ likely switch from other ISA accounts.
“Some investors will certainly be tempted away from cash ISAs by the higher rates available from IFISAs, and I can understand why,” he said.
“The average ISA subscription in 2015-16 was £6,338, so in a year’s time, at one per cent interest, a cash ISA of that value would have earned £63.38. An IFISA paying five per cent would earn almost £320 interest from the same subscription amount. That’s a very meaningful difference.”
Cash ISAs are currently offering lower returns than many non-ISA savings accounts, Rhoden said, which explains why new subscriptions to the product fell slightly in 2015-16 compared to the year before and providers are reporting less interest.
Conversely, IFISAs typically yield between five per cent and eight per cent – against a tiny one per cent on cash wrappers.
“But the extra interest does mean there is more risk and investors need to understand and be comfortable with this,” he said.
“Cash ISAs are covered by the Financial Services Compensation Scheme, whereas IFISAs aren’t, meaning a person could lose their money if an underlying borrower defaulted on the loan.
“However, investors can offset a small part of the increased risk through diversification.
“And although returns may be slightly lower, investors may also be more comfortable with secured rather than unsecured IFISA products.”
Rhoden still expects that investors’ quest for diversification and returns will continue to drive the IFISA’s success, particularly in the crowd bond space – where Clubfinance operates, having been the first broker to launch its own crowd bond and IFISA.
“The market for crowd bonds is growing significantly and the arrival of more IFISA products in the crowd bonds sector is certain to see more investors considering diversifying their cash and stocks and shares ISA holdings into this new area.
“There is already some evidence of quality secured products being limited by supply rather than demand.”
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