IFISAs are investment products, while Cash ISAs are savings products, but that's not the only difference between the two.
Innovative Finance ISAs (IFISAs) allow investors to invest in debt-based securities and lend funds through the P2P lending market without paying tax on interest or capital gains. On the other hand, Cash ISAs are a savings account designed to hold only cash, and the interest earned on the cash savings is tax free.
So, the big similarity between IFISAs and Cash ISAs is their tax wrapper. However, there are many ways in which they differ.
To be eligible to open an IFISA, you must be 18 years old or over, however you can open a Cash ISA from the age of 16. Suitability differs significantly too, with Cash To be eligible to open an IFISA, you must be 18 years old or over, however you can open a Cash ISA from the age of 16. Suitability differs significantly too, with Cash ISAs being a great choice for those with a lower risk appetite - as your capital is not at risk - and IFISAs being better suited to those with a mid/high risk appetite.
The potential returns offered by Cash ISAs and IFISAs are notably different. To match their low risk, the rates of return on a Cash ISA are low - significantly lower than that of an IFISA. Cash ISAs also often struggle to beat the rate of inflation, meaning savings can be eroded by rising prices.
IFISAs on the other hand offer rates of between 3% and 15% per year, depending on the type of IFISA an investor decides to go for. These higher rates of return are met with mid/high risk though, and unlike with Cash ISAs, capital is at risk.
Risk vs return
As briefly mentioned above, Cash ISAs and IFISAs have different levels of risk. Cash ISAs sit at the lower risk end of the spectrum, while IFISAs are mid/high risk. This means, of course, that IFISAs can offer better returns (see above), but your capital is at risk and returns are not guaranteed. Cash ISAs have lower risk, and because they’re a savings product - not an investment product - you will always get back the money you deposited, though with rates barely keeping ahead of the rate of inflation, the value of the capital may be eroded.
Cash ISAs, unlike IFISAs, are also covered by the Financial Services Compensation Scheme (FSCS). This means that if your Financial Conduct Authority (FCA) authorised ISA provider was to fail, your savings would be protected up to £85,000.