How savers can avoid high-risk ISAs

Now that we are in the midst of the autumn ISA season, this is traditionally a time for savers to start hunting around for a good ISA deal, however, as the collapse of London Capital & Finance (LCF) earlier this year showed, savers need to be careful that they are not risking their savings by depositing money into a high-risk ISA.

ISAs have now been around for over 20 years and during that time they have gone from a simple, straightforward tax-free savings product, into today’s complicated ISA market. Savers wanting to deposit money into an ISA can choose from a wide range of products, including variable ISAs, fixed rate ISAs, Help to Buy ISAs and Lifetime ISAs – and these are just the different types of cash ISAs available.

In March this year, it was discovered that investors had been depositing money into a high-risk bond scheme set-up by LCF, believing that their money was being deposited into a secure fixed rate ISA. The marketing campaign for the LCF scheme was highly misleading, which, along with LCF being authorised by the Financial Conduct Authority (FCA), meant that a high number of people invested thousands of pounds into what they thought was a secure savings account offering an 8% interest rate without realising that they were risking their money in volatile investments. When LCF collapsed, all the money invested was lost. Although an investigation was launched, which is still ongoing, and arrests were made, due to the high-risk nature of the investments many people lost thousands of pounds of their hard-earned savings.

While LCF was misleading investors by positioning its product as an ISA, many savers and investors have a greater trust in ISAs than standard savings and investment products, however they offer no greater protection. Although the ISA tax-free limit is set by the Government, individual ISAs are not Government-endorsed, and as such they offer savers no more protection than standard savings accounts and stocks and shares investments.

At the moment, there are three types of ISAs:

• Cash ISAs
• Stocks and shares ISAs
• Innovative finance ISAs (IFISA).

Cash ISAs are the ones consumers are most familiar with and, along with variable and fixed rate ISAs, they also now include Help to Buy ISAs and Lifetime ISAs. Cash ISAs are the least risky type of ISAs available and, as long as the provider is authorised by the FCA they will be covered by  the depositor protection scheme, for balances up to £85,000.

Stocks and shares ISAs are more risky and involve investing money in stocks and shares. The only difference between a stocks and shares ISA and investing in normal stocks and shares is that the ISA version includes the tax-free allowance. As a result, investing in a stocks and shares ISA carries the same risks as investing in non-ISA stocks and shares.

Innovative finance ISAs (IFISA) enable investors to enjoy tax-free interest and capital gains from peer-to-peer (P2P) lending. Again, these types of ISAs are riskier as they are not covered by the deposit protection scheme, and the ISA status only reflects the tax-free status and does not guarantee more protection to investors than standard P2P investing.