Stocks and Shares ISAs; is there an alternative?
With UK interest rates going nowhere fast and inflation knocking on the door of 3%, it’s no wonder that yield-hungry savers and investors are looking for returns that prevent the value of their capital from effectively slipping into reverse. The challenge is how to secure capital appreciation without diverting cash into assets that carry an unacceptable level of risk – the latter being a matter of personal choice and/or financial tolerance.
Many people have turned to ISAs – Individual Savings Accounts – which [from this year now] provide a tax-free haven for up to £20,000 of new savings and investments per annum. Together, Cash ISAs and Stocks and Shares ISAs, both introduced in 1999, had attracted £518 billion by 2015-16. Significantly, the split between the two is roughly 50:50 although each delivers a very different rate of return accompanied by different levels of risk.
A tax-protected return of, say, 0.7% on a Cash ISA does not add up to very much by way of reward when compared to inflation, but at least the individual’s money should be safe. By contrast, a potential return of, say, 5-10% on a Stocks and Shares ISA looks appealing, but the danger is that investors and savers have a tendency to expect continuing returns at these levels – even though they know that “past performance is not a reliable guide to future performance”. Are we due a stock market correction soon, are tech stocks in bubble territory? Nobody can ever know for sure when the next correction is due.
Despite such prominent warnings, investors often do not recognise the potential short term volatility of the stock market, which means that if they are unlucky with when they invest, they can suffer a significant paper loss in a bad year. Conversely, they might see a significant rise in a good year. If investors are in for the longer term, then the peaks and troughs will probably iron out, but if they are looking at shorter time horizons, such volatility can be quite damaging to the value of their ISAs.
Another factor that has to be taken into account is the level of management fees. Stocks and Shares ISAs can be provided by stockbrokers, high street banks or asset managers, but they all levy charges that can eat into returns. Typically, there may be an initial fee, followed by annual management fees: these typically vary between 0.25% and 2% per annum. Most managers charge fees each time a trade is made, and some charge for withdrawals. Remember too that if the ISA is invested in the Stock Market through a fund, rather than shares in individual companies, then the manager of the fund will also be charging an annual management fee. Sensible investors will check all potential fees and expenses first, before deciding where to invest their money, because these fees can make a significant dent in potential returns.
A recent alternative to solving the investors’ dilemma is to take a closer look at Innovative Finance ISAs (IFISAs) which were introduced in 2016. IFISAs enable investors to earn the ‘intermediate’ returns available from different asset classes such as corporate debentures and crowd bonds or P2P loans. Returns offered by many IFISA providers are comfortably ahead of inflation and if well-chosen can be underpinned by both sensible levels of diversification in the underlying holdings, as well as Alternative underlying asset security.
Triple Point Advancr, offers fixed term, secured, bonds, paying up to 6.2% AER and upon investing are immediately backed by exposure to a wide portfolio of over 50,000 leases and loans.
Unlike Stocks and Shares ISAs, where investors rely on their own knowledge of individual companies quoted on the Stock Market, or the knowledge of others that comes at a cost, IFISAs rely on the credit underwriting skills of the provider and involve none of the volatility to which the market can be prone.
Well-chosen IFISAs can be a smart alternative to Stocks and Shares ISAs when it comes to protecting your savings from inflation. If the right IFISA manager is selected, they can provide strong diversification and security and can also be a lower risk investment than the stock market.