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.”
Crowdfunding has been an interesting and innovative new area to emerge, but a reason for this is that cash is yielding close to zero.Darius McDermottJason 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.
Set up in 2001 under the Financial Services Markets Act, the FSCS is the UK’s investor compensation scheme for individuals who are customers of authorised financial firms. The FSCS steps in to pay compensation if the company an individual has been dealing with has failed and the company cannot pay the claims against it.
Ms Groves says: “Unlike a cash Isa, there is no guarantee that you will get your capital back, nor your interest for that matter if the borrower can’t pay. Also, the government’s Financial Services Compensation Scheme will not step in to bail you out if any of the loans or bonds go bad.”
Ms Owen confirms: "Funds held within an Ifisa are not protected by the FSCS because they’re backed by individual lenders, not large institutions, meaning that your capital is at risk."
Darius McDermott, managing director of Chelsea Financial Services, suggests crowdfunding has been "an interesting and innovative new area to emerge".
He adds: "But a reason for this is that cash is yielding close to zero. If cash Isas were at 5 per cent again there would be no reason to even consider them.”
Popularity in question
Will cash Isas lag behind other Isas?
Mr Fearnhead says: “While approximately £40bn was invested in cash Isas in 2017 to 2018, according to HMRC, their popularity is gradually diminishing.
"We saw the overall Isa market grow last year, but that was mainly driven by an increased investment in stocks and shares Isa – and those investors themselves have been stung by recent FTSE performance."
Mr McDermott thinks Brexit may, in fact, give cash Isas a slight boost in demand.
“I think [cash Isas] will remain where they have been for some time in terms of interest rates. However, due to uncertainties surrounding the UK economy at the moment, they will probably be popular still as investors are worried about Brexit and the stock market,” he says.
The FTSE 100 fell by more than 12 per cent in 2018, in part due to geopolitical risk.
Ms Owen adds: “The market is seeing interest rates being nudged north this year due to increased competition - Goldman Sachs’ Marcus savings account, offering rates of 1.5 per cent, being a key influencer.
"This means that individuals could be set to see slightly more reward for their loyalty, although the idea of returns outpacing inflation seems unlikely.”
saloni.sardana@ft.com
