As we approach ISA season, investors have been urged to make the most of their tax-free allowance by using wrappers such as the Innovative Finance ISA (IFISA).
With soaring inflation eroding the value of savings and cash ISAs, the case for investing in inflation-busting products such as peer-to-peer loans and stocks and shares has never been greater.
Current rules mean that investors can only opt for one type of ISA a year, although they can transfer old ISA money into a new wrapper.
The array of ISA options available can be confusing, and analysts at fund supermarket Hargreaves Lansdown have called for a streamlined ISA market and for investors to be able to open an unlimited number of ISAs a year.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said three products should be rolled into existing ISAs: child trust funds into junior ISAs; help to buy ISAs into the lifetime ISA; and IFISAs into stocks and shares ISAs.
She claimed that ISAs are a “brilliant tax-saving solution” for the majority of investors and also a “lifeline for many savers”.
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“In the 23 years since the launch of the ISA, they have become the cornerstone of millions of portfolios, and home to an incredible £619.75bn (in both cash and stocks and shares ISAs),” she said.
“Over the years they’ve evolved and improved too. Allowances have been dramatically increased, tax breaks improved, investment options widened, and there are now solutions for all kinds of savers and investors – including children, and young people looking for a hand onto the property ladder.
“Of course, they’re not perfect. The expansion of the ISA range in recent years means they’re crying out for simplification. Streamlining would help people take advantage of ISAs, and avoid them being overwhelmed by too many options.”
Investors looking to diversify their portfolio away from the stock market could look at IFISAs, which have continued to deliver strong returns during the pandemic.
Exclusive research by Peer2Peer Finance News has revealed that IFISAs returned an average of 9.01 per cent last year and 9.04 per cent in 2020.
There is a wide range of IFISAs on the market, investing in business, property and consumer loans.
It is worth noting that higher returns can mean higher levels of risk, so investors should think carefully about their risk profile and objectives before choosing a product.
Inflation is forecast to hit seven per cent this year, meaning that the value of cash savings is eroding in real terms.
Digital savings bank RCI Bank has found that 74 per cent of UK adults who are not confident about reaching their financial goals this year believe the biggest barrier for them to do so will be the rising cost of living. Inflation hit a 30-year high of 5.4 per cent in December, amid rising energy costs and supply chain issues.
On average UK adults aim to save up to £6,767 in the upcoming year, with 10 per cent hoping to put aside between £2,001 to £3,000, the survey said. 40 per cent of those who made financial goals last year saved on average £3,372 more than they planned.