ISAs 

Is there any value in cash Isas?

This article is part of
Guide to the Isa market

Is there any value in cash Isas?

Gone are the days when cash Isas seemed like the most sensible way to maximise your savings without taking risk. 

Some in the industry stress that while cash Isas are risk-free, inflation is eroding most of the gains savers are making, meaning clients who hold cash Isas are actually worse off. 

Inflation 

Julia Groves, partner and head of crowdfunding at Downing Crowd, says: “Cash Isas have traditionally been viewed as one of the safest ways to make your money work harder.

"But with current low interest rates and higher inflation, most British savers are actually losing around 2 per cent a year in real terms – doesn’t sound quite so safe now, does it?” 

This is in line with what several others say. 

Heather Owen, financial planner at Quilter Private Client Advisers, suggests: “While you may not see the balance of your cash Isa falling in pounds and pence, its buying power is steadily depleting in real terms.”

Jason Witcombe, a chartered financial planner at Progeny Wealth, points out: “But if it is money that needs to stay in cash for the short term, or is a form of insurance that allows you to take more risk with other assets, then a cash Isa can serve a useful purpose.”

Frazer Fearnhead, chief executive of peer-to-peer property lending platform The House Crowd, claims: “When it comes to cash Isas, considering the high potential of inflation to erode returns, it could be argued these types of account should carry a heavier risk warning than an Ifisa.”

An alternative to cash Isas?

Launched in 2016, Ifisas are linked to P2P lending activities by which smaller businesses access capital. 

Under an Ifisa, an individual can invest their annual Isa allowance - currently £20,000 for the 2018 to 2019 tax year - through P2P lending. 

Ifisas pose a higher risk than cash Isa accounts as P2P involves lending to unsecured individuals. 

Ms Groves says: “Figures suggests that, if anything, some cash Isa savers may be opting to plough money into stocks and shares Isas instead, as record inflows continue into the former, while cash Isa subscriptions carry on declining.”

She warns: “We find this concerning because a stocks and shares Isa is a significant leap in terms of risk and volatility compared to the relative security of cash savings."

“This is where the Ifisa can come in as a potentially distinctive and attractive alternative that sits apart from the two: taking some risk to potentially earn an inflation beating return, but without being exposed to volatile stock markets,” adds Ms Groves. 

This begs the question: should cash Isas be replaced, or complemented, by Ifisas?

FSCS 

Most experts believe that while Ifisas provide much more attractive returns to investors, they should not be mistaken for cash Isas as Ifisa investors are not protected by the Financial Services Compensation Scheme.