Why? Because the vast majority of people hold cash Isas - and unless you are meticulous about chasing the top rates, you are likely to have lost money. Today, just 130 out of 209 cash Isas offer rates that beat Consumer Prices Index inflation at 1.3 per cent, according to Moneyfacts.co.uk. The firm says that the effect of inflation on savings means that £10,000 invested five years ago would have the spending power of just £8,734 today - a fall of 12.66 per cent.
Isa investors need more lower risk sources of good rates. And the good news is that this may be within reach. The government is consulting on plans, announced by George Osborne, the Chancellor of the Exchequer in Budget 2014, to allow peer-to-peer (P2P) lenders to place their loans within an Isa wrapper.
A P2P Isa will be an attractive third option between cash and stocks and shares. It will finally offer savers more choice in a market of stagnant rates: an option between low-yield cash and high-risk stocks and shares. Tax free returns of 5-10 per cent via P2P lending will be manna to interest-starved investors. However, these higher returns come with higher risks.
The P2P market works by investors lending to other individuals or businesses via websites such as FundingCircle, RateSetter and Zopa. But these lenders aren't protected by the Financial Services Compensation scheme, so in the event of the firm going bust you won't be eligible for up to £85,000 compensation, as you are with deposit accounts.
There are risks in P2P lending which could be increased by an influx of Isa money. The industry is on route to lend £1bn in 2014, according to figures from the Peer-to-Peer Finance Association. But this is only as big as some unit trusts, while £40bn was placed into cash Isas in 2012-13.
P2P lenders say that finding lenders is easier than finding good borrowers. The ideal borrower is looking to fund a new kitchen or car. P2P firms have the tricky task of matching the numbers of lenders and borrowers and a huge influx of Isa money could cause them a problem with the risk of a lowering of lending standards.
Tax-free P2P lending through self-invested personal pensions (Sipps) was previously restricted by government rules which required pension providers to hold higher levels of capital as a buffer for non-traditional investments. That left small self-administered schemes, which are usually only available to company directors, as the only tax wrapper that could accommodate P2P lending. However, the Sipp capital requirement rules were relaxed in the Budget.
As a result, P2P platforms say they are in talks with Sipp providers to form partnerships. One that is already off the ground is an initiative by P2P lender ThinCats. However, to access this you have to become a member of financial portal SIPPclub, which is free but entails certifying you are either a high net worth individual or a sophisticated investor.
TOP CASH ISAS
| Provider | Details | Rate |
| Top Fixed Rate Isas | ||
| Coventry Building Society | Fixed Rate ISA (23) 30.11.2018 | 2.60% |
| Julian Hodge Bank | 5 Year Fixed ISA | 2.50% |
| Principality Building Society | 5 Year Fixed Rate Cash ISA Issue 132 | 2.50% |
| United Trust Bank | ISA 5 Year Bond (Transfers in only) | 2.50% |
| Virgin Money | Virgin Fixed Rate Cash E-ISA Issue 99 | 2.50% |
| Top Variable Cash ISAs | ||
| Islamic Bank of Britain | Notice Cash ISA | 1.80% |
| Hinckley & Rugby Building Society | 120 Day Notice Cash ISA Issue 2 | 1.75% |
| Post Office® | Premier Cash ISA Issue 7 | 1.55% |
| BM Savings | ISA Extra (Issue 11) | 1.55% |
| Teachers BS | Cash ISA Notice 90 (Issue 5) | 1.50% |
Source: Moneyfacts.co.uk as at 18 November 2014
