How secure are my savings inside a cash Isa? Most people assume their nest-egg is safe as houses because cash is risk-free. For those Isas which are invested in cash, this is true. But what if, in fact, your cash Isa is invested in something else altogether?
There is a certain sort of Isa on the market called an Innovative Finance Isa. If you look at the marketing material, it looks very like a cash Isa, except the rates are much better. This can often be double what the banks or building societies are offering. Great – but there’s a catch.
These Isas were introduced in 2016 and are all above board. However, even though they look like cash Isas, you are actually investing in debt – other people’s borrowings. Generally it tends to be what’s know as peer-to peer lending. This is a relatively new way of lending money to individuals or companies through a website. It cuts out the middleman (traditionally the bank) so your savings go directly to help Minnie Mixit start her cupcake café. It allows Minnie to borrow more cheaply and for you to get more interest. The only problem is that you don’t know whether Minnie is a good baker or whether she can run a café. If she can’t, you’re going to lose your money. This is partly why you get so much interest: the risk is high.
Unlike standard cash Isas, these sorts of Isas are not covered by the Financial Services Compensation Scheme (FSCS). This scheme refunds you (up to a certain limit) if your Isa provider goes down and loses your money. Investors (about 14,000 of them) with London Capital & Finance recently found out to their cost what this can mean. The company went into administration and it’s not yet known whether investors will recover their money. There’s no safety net either as LCF was not part of the FSCS plan.
Perhaps as a result of the LCF collapse, the Financial Conduct Authority has recently issued a warning to investors to think twice before putting their money into peer-to-peer investments, which can also be called mini-bonds. It’s obviously a concern so I’d like to share some simple warning signals that your money may not be as secure as you think.
1. Is the interest rate very high?
Most cash Isas from the high street pay less than 3% a year. If an Isa is offering much more than this, check the underlying investments: they probably aren’t cash.
2. Is the product and/or company covered by the FSCS?
If not, you should probably avoid the investment.
3. Are there any fees?
Cash Isas are free. If there are any costs attached to withdrawing your money or selling on your Isa to others, you are not investing in cash.
See our SMM guide to savings for more tips.