Too Many Savers Are Missing the IFISA opportunity
Evidence is mounting that savers are missing out the IFISA opportunity because they remain unaware of all of their ISA options.
We recently wrote about the different types of ISAs. We noted there the five different types of ISA:
- Cash ISAs;
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime ISAs
- Junior ISAs
It pays savers (and their advisers) to know what each type is so that they can make informed decisions regarding potential returns and what is right for them. Although they have a tax-free savings allowance annually of £20k no matter which type of ISA they choose, savers are missing out by failing to do their research.
No-one needs to wait until the ISA deadline to review their ISA options. Indeed, there’s a lot of evidence that even people who do have their money in existing ISAs are missing out.
Whilst 82% of UK adults prioritise shopping around to find the best deal, sadly no time is spent on researching the best ISA savings rates – and as we will see, this can mean an expensive oversight.
Note that some of the data quoted looks a little aged because the timeline for publication of ISA statistics has changed. The full HMRC national statistics publication is now updated each April. We’ll aim to report it when they publish in April, but the ISA deadline for this year will be here sooner, so it’s an important subject to tackle(1).
ISAs are not some passing fad: ISA investments are on the rise. 11.2 million Adult ISA accounts were subscribed to in 2018-19, up from 10.1 million subscribed to in 2017-18(1), and with this much money at stake, it’s vital that people understand their options.
Who holds ISAs?
According to HMRC’s Individual Savings Account (ISA) Statistics, June 2020, there were 22 million Adult ISA holders in 2017- 18. These were analysed by income band for the year.
Higher-income groups show a stronger preference for stocks and shares ISAs over cash ISAs, whilst the opposite is true for lower-income groups. The IFISA is barely registering, despite offering a fantastic alternative, because people remain unaware of the option.
In 2017-18, only 12% of individuals subscribing to only a cash ISA invested the full £20k limit for the year – unsurprisingly the proportion subscribing up to the maximum increases with income (around 7% in the lowest income groups, around 57% in the highest).
The greatest number of savers is aged 65 and over, and these savers have the highest average ISA savings value. However, 57% of this group made no further subscriptions in the tax year 2017-18.
The gender split of numbers of ISA subscribers is relatively equal overall - in 2017-18, males accounted for a slightly higher proportion of higher value ISAs, and females for a higher proportion of the lower value ones.
So how can these savers improve their ISA returns? Here are three easy ways:
- Investigate ISA Options including IFISAs
The government introduced the IFISA in April 2016 to advance the growing alternative investment market and allow investors to take advantage of peer-to-peer (P2P) lending and debt-based securities (with a generous tax wrapper). Prior to the introduction of the IFISA, investors had to declare income from P2P investments, and the gains were taxable (5).
This is no longer the case.
Research(1) showed that just 8% of UK adults are aware of IFISAs (Innovative Finance ISAs). Only 10% of men are likely to have heard of IFISAs, and for women, this is only 6%.
In the financial year 2017-2018, only 31,000 savers opened an IFISA, compared to the 2.8m individuals who opened a stocks and shares ISA, and the 7.7m savers that put money into a new Cash ISA(1).
In that 12 months, those with portfolio/bond style IFISAs earned approximately 5.75% on their money. As world markets fell, stocks and shares ISAs experienced high levels of volatility(1).
By contrast for the IFISA market, according to Carlton Bonds, 2019 was a big year for the Innovative Finance ISA (IFISA) market as it crossed the £1 billion investment mark(5). So why are more people unaware or resistant?
There are still numerous online articles that describe IFISAs / Peer to Peer investments as high risk. In the early days of P2P lending to people with poor credit ratings, this was probably somewhat true. However, this view is now outdated.
The UK now boasts a matured and more regulated P2P market. Today’s IFISAs come in many shapes and forms. Our own (easyMoney) IFISA, for example, is based on conservative property loan investments, a market which in the UK has been incredibly stable. (Find out more below.)
According to CBRE’s forecasts for 2021, “Residential property has been the surprise outperformer during the pandemic, with fears of a repeat of 2008’s housing market collapse proving unwarranted. Investment levels into institutional rented property have been sustained and will hit new records throughout the next few years. Fiscal support for the owner-occupied market has maintained prices and transaction levels [….].”
Obviously, it’s up to investors to inform themselves about what they choose to invest in, but there’s an IFISA out there for everyone, and many are offering far better returns for investors, less volatile than the stock market.
- Think Before Relying Uniquely on Cash ISAs
To offer an idea of the size of the ‘missing out’ issue, the total amount saved in Cash ISAs in the 2017-2018 period was £270bn. Given that the total number of subscribers was 15.9m, the average investment in an ISA was slightly over £17k (1).
In 2018-19, the number subscribing to cash ISAs subscriptions increased by 1.4m from 2017-18. The number subscribing to stocks and shares ISAs fell by 450,000 in the same period. Yet the share of accounts subscribed to in cash has increased to 76% of accounts, compared to 70% in 2017-18(3).
According to Nationwide, ‘Cash ISAs 2021’, 8.5 million adults that subscribed more than £44 billion into Cash ISAs in the last tax year - £268 billion is currently held in Cash ISAs.
Investors are receiving record low returns on cash ISAs, with market-leading interest rates only offering around 1.0% to 1.10% AER on 3-5 year fixed rate ISAs at the moment.
This low rate seems unlikely to change. The European credit crisis, huge public borrowing, and more recently Brexit and COVID-19 are putting pressure on central banks to keep interest rates close to zero(4). Indeed, Laith Khalaf, a financial analyst at AJ Bell has predicted the chances of an interest rate CUT in 2021 as now being at 50 per cent (6).
Swapping some or all of that cash out into a different type of ISA could prove a far smarter investment.
- Shop Around/ Review Your Options
On average people swap their main utilities and household policies (including car insurance, home insurance, broadband and mobile phone provider) once every 2.5 years. They spend an average of 12.1 hours researching cross the board.
By contrast, of those of who have switched Cash ISAs, their average time with an ISA provider was 4.6 years (almost double) and the average time spent making a switch was 1.6 hours, representing an average of just 20 minutes a year.
Almost half (48%) of those with Cash ISAs have never switched provider at all. That represents £130bn that has never been moved(2).
The 7.7m savers that put money into a new Cash ISA earned an average of just 0.7% from High Street Banks on that money - just £119 compared to an average return of £977 for the same money invested in an IFISA – a difference of £858, tax-free (2).
Those that shopped around and changed their car insurance provider estimated they saved on average £415.20 per year; for home insurance switchers, the saving average was £303.60 per year; changing broadband resulted in a saving of £146.40 per year; and changing mobile phone saved £124.80 – a total of £990.20 across four different product types.
By contrast, by switching only their Cash ISAs, those savers could have gained more than £850 – a lot less work for a single big saving.
The data may well be indicating that people are unaware that they can move their cash ISA money around into another type of ISA at very little cost but far bigger returns.
It’s clear that by not reviewing their ISA options and their Cash ISAs, savers are missing out on significant returns. There are lots of great options out there that will offer great/better returns than doing nothing or simply relying on cash ISAs.
Note: The easyMoney IFISA
The easyMoney flexible IFISA loans against property, a relatively stable market in the UK. The average loan duration is 11 months, and its loaning is conservative - only 75% of the value of the property is loaned to borrowers, often less. (You can read more at our statistics page).
With a loan book of almost 50 million, easyMoney (and its management team, which has a combined experience over 100 years) has experienced 0.00% default rate to date.
easyMoney gives its investors the freedom to sell their loans before the maturity date in its Secondary Market (no fees applied). Over the last 12 months, the average time to sell loans is only 2.6 days.
You can find out more here: https://easymoney.com/ifisa.
There’s even a downloadable guide to IFISAs.
1. Opinium Research amongst 2,000 UK adults (aged 18+) in January 2019
2. Relendex, March 2019
3. Individual Savings Account (ISA) Statistics, June 2020, HMRC
4. Nationwide, ‘Cash ISAs 2021’
5. Carlton Bonds website, January 2021
6. “Savers told 'don't look gift horse in mouth' as deadline to use up allowances looms”, Jess Sheldon, Daily Express, Jan 5, 2021
e-Money Capital Ltd trading as easyMoney is authorised and regulated by the FCA (FRN 231680). Instant access to your money is not guaranteed. The property industry is subject to market conditions and therefore your capital is at risk. Peer-to-Peer Investments are not cash savings accounts so they are not covered by the Financial Services Compensation Scheme (FSCS). Past performance does not guarantee future results. Tax treatment is dependent on individual circumstances and subject to change.