Savers have been attracted to the product due its tax free “wrapper”, along with assurance from the government that up to £85,000 of deposits will be protected should a bank go bust. However, it’s no secret that returns from Cash ISAs over the past few years have been derisory.
According to data from personal finance website Moneyfacts, the average easy access Cash ISA rate fell from 2.56% in January 2012 to just 0.37% in May this year². Over that time the annual ISA allowance has almost quadrupled from £5,340 to £20,000. But given the fall in rates, even savers who are now taking up their full allowance are earning less tax-free income than they were 5 years ago, as the table below shows.
The main attraction of these financial assets, such as the “crowd bonds” offered by Financial Conduct Authority (FCA) regulated crowdfunding platform Crowd for Angels, is that the interest rates on offer are higher than on Cash ISAs – up to 12% in some cases. What’s more, they can be used within the overall ISA allowance in order to boost returns – the ISA allowance can be used in any proportion across Cash, Stocks & Shares and IF-ISAs.
TABLE: EFFECTIVE ANNUAL INTEREST RATES ON DIFFERENT CASH/IF-ISA CONTRIBUTIONS
Of course, like with any investment, the increased returns offered by crowd bonds come with higher risk.
The 12% being offered on The Asset Exchange crowd bond is in contrast to a current best rate of 1.25% on a 2 year fixed rate Cash ISA³. But lending money to businesses puts investors at risk of the company not paying back the capital or interest which it owes. So in other words, some or all of your capital is at risk by investing in crowd bonds, with Cash ISA deposits largely considered to have very low capital risk.
Additionally, unlike with Cash ISAs, there is no Financial Services Compensation Scheme to fall back on should the product provider (crowdfunding/P2P platform) go into default. You should also be prepared to hold crowd bonds for their full duration as they are not likely to be readily realisable should you need your capital back quickly.