If you’re looking for an alternative to the trusty cash ISA, there are plenty of places to look. Cash ISAs have long been popular for their low risk nature and tax efficient wrapper status, but the interest rates on offer are currently very low. So where else can you look to maximise your returns?
1. Invest into a Stocks and Shares ISA
This type of ISA offers the same tax free wrapper for any growth and income gains you make on the stocks and shares that you hold within it. For the tax year 2017-18, the limit is a newly generous £20,000 (compared to £15,240 for the last financial year).
You can hold individual company stocks, buy into a unit trust or an investment trust, invest in open-ended investment companies or invest in government or corporate bonds. In general these ISAs do tend to offer a better return over cash in the longer term, but you’ll likely need to invest for at least 5 years due to the typical fluctuations in the stockmarket.
Some products now invest your funds for you according to your risk profile, but usually you can choose where to invest yourself. It’s worth reading up about each product in more detail, and comparing the fees to discover which is right for you.
Remember too that they are riskier, and there is no guarantee on the interest you will make (in the form of dividends) or that you will get back as much as you originally invested.
2. Invest into an Innovative Finance ISA
Alternative investment, or P2P finance can be invested through Innovative Finance ISAs.
These are a brand new type of ISA product which allow investors to hold tax efficient investments most commonly in the form of person to person lending.
This direct model attracts higher interest rates – sometimes up to 10 per cent – but the risk is higher and this form of lending isn’t regulated. Just like with stocks and shares, your funds will not be protected by the Financial Services Compensation Scheme.
However, the industry is tightening up and many lenders have been operating for some years now without problems. Consolidation has been occurring in the market, with some platforms merging, while others refine their business model.
Look for lenders with a strong brand which have signed up to a code of good practice. Watch out for FCA operating guidelines increasingly coming into play as the market matures.
3. Invest into Property
Property has always been a popular investment for people with a lump sum, with those who have knowledge of the market making impressive returns over the long term.
Some make income from renting a property out or from equity growth, and some simply buy and develop a property with a view to flipping it for a quick profit. This type of investment is only for the experienced however as it is easy to make a loss if you aren’t careful.
For those who do not have a healthy appetite for risk in terms of void periods, difficult tenants and damage to the property but wish to invest in property, there are alternatives to being a landlord.
4. Invest in a Pension Plan
A pension is a highly tax efficient form of investment which offers at least 20 per cent on top of your contribution by way of tax relief. If you are employed you will also benefit from employer contributions. However, bear in mind that you cannot access your pension until you are 55, so this is a long-term investment form for the future so may not be a true alternative.
As with any investment it depends on your classification as an investor, your risk profile and your current situation. It’s always useful to have easily accessible cash in times of crisis or for flexibility.