10 Apr 2013, 11:09pm
personal finance
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  • The ISA conundrum, and a Cyprus memento mori…

    The Ermine ISA has had three and a half years in it. I still have the cash ISA with the other half year in it 😉 So overall that’s about 36k lobbed in the pot. Now the FSCS protection on nominee providers is 50k. 1, so I’m good for another year with TD, eh?

    Not so fast. The whole point of an S&S ISA is that it is meant to appreciate in value, basically if I contribute this year’s money to the ISA I will go over the 50k limit. Plus obviously I’d like the ISA to keep on growing, if you please, so there wants to be some headroom in there.

    Now if you add any money at all to an ISA in this tax year, you have to stick with that ISA provider for this year, so it pays to think about this before I do anything with this year’s ISA allowance. I like to spread my contributions across the year, though I will up the rate if things like 2011’s summer of rage happen, or the Euro goes titsup, or Mad Kim goes willy-waving with his nukes. Obviously assuming there’s enough of the world left standing 😉

    Something else we’ve learned from a divided Mediterranean island, is that anybody who has any money in an account over the government guarantees is considered a rich bastard who needs to help with the national debt. The more cynical who sleep on a bed of gold and line their walls with tinfoil will correctly opine that because governments have a monopoly on the use of force they get to do as they damn well please in times of real trouble. which is true, but let’s hope those sort of times don’t arrive, because how much is in your ISA is probably not one of the most pressing concerns at that juncture.

    Nevertheless, when there is some simulacrum of democracy running, it seems that you’re still going to take a hit if you are a minor Rich Bastard. Truly rich bastards have of course spread their vast wealth far and wide. I don’t think the Rothschilds are that troubled if their ISAs go down the pan, and Warren Buffet’s Roth IRA is probably not the largest part of his holdings either. However, it does matter to me, and from recent events in Cyprus, it pays to avoid being considered a Rich Bastard. I would have thought that thirty years of paying taxes would be considered a decent enough attempt on the National Debt, but it seems not.

    I can’t recall any UK ISA providers going bust, but the US firm MF Global shows that brokers can go bad. It’s the same old same old – power corrupts, and money is crystallised power, so get too much of it in one place and the effect of it on frail human integrity can pass critical mass. We are still blinking in the daze from the result of the last chain-reaction of  too much money controlled by too few hands. And I’d say that the financial system is still deeply damaged and there are still big debts on private and Government books. Being an identifiable financial milch cow is unwise, so I need to find another ISA provider. Not because I believe TD Direct are a bunch of crooks and the Toronto-Dominion bank is about to go titsup. But just in case they have their internal thief, their Nick Leeson, Jerome Keraviel or Kweku Adoboli.

    It’s not that easy to select an ISA provider these days, because the effect of the FSA shakeup of the fees structure, the RDR, means that something that looks good now may turn out not so good a year down the line. There’s no point in me doing the analysis when there’s this comparison chart at Monevator that summarises the issues. But it still lacks the crystal ball to see what the fee structure will change to in future as RDR settles down. It is often fearsomely expensive to shift a S&S ISA – you either have to sell all the holdings and shift as cash, or shift each line of stock, for which there can be a hefty transfer charge. I was lucky enough to avoid that when I transferred my iii ISA to TD Direct because iii were trying to avoid any more negative publicity from their fees hike, they intially wanted their £15 per line of stock. I had 13 lines of stock at the time, so that would have been £200 to show a clean pair of heels. You just don’t want to do that too often, it would knock about 10% off my dividend income for the year.

    I’d like to carry on with running a HYP – indeed I’d probably buy more of what I have already, and break out a bit into sectors I don’t have yet, particularly oil, mining. However, I may take some time out for this year, allocate my ISA allowance and ride RDR out with a 100% Vanguard Lifestrategy fund with Hargreaves Lansdown, on the grounds they’re big, and one fund can’t be too expensive to shift out if necessary. Plus there’s the issue that I’m not sure I was getting a better return for focusing effort on making money from money, rather than allocating the same amount of effort to alternative passive incomes. As long as it doesn’t start to look anything like work, that is 😉 I’m still glad I did it, and the principles of making money from money still hold. I just don’t need the streetfighting with rapacious transfer fees at the moment if I need to move because of RDR. Hopefully TD won’t go bad like iii, and my existing HYP can continue to grow there and work for me. This is the first year that I’ve managed to sell nothing at all, apart from two find I had in iii when they threatened to start charging for buying and selling funds. Much of the secret to stock market investment seems to be to choose well, and then sit on your ass and leave it be.

    It appears that provided you aren’t contributing to the ISA in the current year, you can shift out a lump from an ISA provider or just one line of stock for instance, which may be the solution for if/when my TD HYP grows beyond the FSA protection limit. If I don’t add to it this year I should be good for a couple of years yet there.

    Oh and thanks to the good citizens of Cyprus and indeed the nameless EU bureaucrat who let the cat out of the bag. Hold more than the EU protected limit in any one account at your peril…

     

     

     

    Notes:

    1. Note that the protection on investment accounts is against the nominee getting frisky and running off with the cash or going bankrupt, it isn’t on the companies you invest in going bust ;),

    The limit on FSCS protection for savings was increased to 85k (from 50k) a couple of years ago, unless you are referring to something else.

    I believe that applies to cash, but this from Hargreaves Lansdowne seems to indicate your shareholdings are only protected to 50k.

    The trouble is that ISA holdings are generally nominee holdings in which you are the beneficiary, the name on the share register is that of the ISA provider. So if HL goes titsup then I believe it’s still the case you can jolly well line up at the back with all the other creditors for everything over 50k 🙁 The cash protection limit was subject to the EU change but I think the ISA nominee protection is UK only, hence the discrepancy.

    This is a reason why I tend to invest in paper instead. I do not have to rely on the Nominee accounts or ISAs. As a matter of fact, I doubt that my investments will ever grow to the point where CGT is charged. So, ultimately so no point for either Nominee or S&S ISAs. 🙂

    Yes ermine, my paranoia risk aversion runs pretty deep too. I think of particular note was the initial troika diktat of a skim off everyone’s account, deeply concerning bandito policy from institutions I really thought were above that.

    ISA’s have to be in a nominee account, you’re covered for broker fraud up to £50,000 under the FSCS. You can check if your broker is authorised / covered at the FCA , it’s worth remembering this kind of scheme works to protect you from rogue companies (assuming their records are accurate and up to date…) not sure it’ll do much good in a wider crisis.

    ISA’s I’ve decided are Beelzebub’s own financial honeytrap. I know they are dirty and wrong but I just can’t give up that sweet tax free loveliness and surely it doesn’t really matter my assets are not held in my name?

    When push comes to shove I think we’ve been shown if its digital it’s fair game, so all you can do is try to ensure someone else’s fruits are hanging lower and hope it’ll never happen.

    @JSP if you’re going to buy and hold for ever, can’t fault your logic. However, beware. If a stock goes beyond your CGT limit, it tends to happen all of a sudden. At least in my case it is The Firm, which is a slow-moving behemoth, a non-galloping elephant, and I’ve already flogged 10k last tax year, I will flog some more this year. Looking at the pool you fish in, if things come good, you could have this hurt multiple times, though you may also have offsetting losses 😉

    @Nathan, Cyprus was a dark guide into the troubled times we may have ahead. I still recall listening to the tale from my German great-grandmother, in a lovely old poeple’s home with fascinating goldfish in the pool, as she told me how she lost her life savings to rapacious governments – twice. The Cyprus story is a dark harbinger of things yet to come. In troubled times, you take what you can run with, and leave the rest behind. I have had the privilege of hearing fron two generations of people who had to do just that 😉

    This is living memory. It will be renewed, ‘ere twenty years have come to pass, IMO.

    Ermine, Thanks for raising the protection issue. The horse’s mouth:

    http://www.fscs.org.uk/what-we-cover/eligibility-rules/compensation-limits/investment-limits/

    which is annoying as I am already over that. Guess adding another broker is the only way.

    Perhaps one way of mitigating individual broker risk would be to have an account with a different one and buy a put option in the first?

    Then if the first pinches your money, one would expect its share price would plummet and you’d make some back on the put?

    Too clever for me though…

    According to the TD site, you have £50k covered for shares. Confusingly, for cash on deposit, it appears to be covered by the European scheme of €100k, which is about £85k!

    Yes, it’s £50,000 for broker accounts, £85,000 for cash.

    The reason it’s £85K is because that was the equivalent of €100k at the height of the financial crisis, when regulators feared capital flight as people arbitraged protection.

    Of course now the opposite could be happening post Cyprus.

    I agree it was a reminder of the risks, but I don’t see that spreading your ISA money *for this reason* makes any sense. If the government in the UK is ever forced to do a raid of this nature to get a national bail out, it’d surely raid all ISA accounts?

    Spreading your money for the (highly unlikely) risk of a broker going down and fraud meaning that your ISA money wasn’t protected is worth doing IMHO (though of course you reduce your maximum exposure but increase your risk as you add more potential points of failure).

    The only solution I see the Cyprus issue is going offshore a la the Rothschilds of this world.

    @SG thanks for nailing the bottom line on that! You need a different provider this year too 😉

    @greg, that’s livin’ dangerously!

    @ Monevator > it’d surely raid all ISA accounts?

    Even the Cypriots haven’t aggregated the account totals yet, though to be honest they mey well get there. The troika’s actions there are truly disgraceful, either the EU wants a currency union, in which case Northern Europe needs to suck it up and shoulder its responsibilities too. Or they don’t, in which case a controlled split is necessary. However, even they haven’t gone the total wealth tax route yet in Cyprus.

    The price you pay for the ISA protection is the government knows all about you. But if more than Cyprus financial stress happens, it’s for younger people than I to do the battle for their futures, mine is gone. Some things are too big to fight or to hedge. A S&S ISA is almost self adjusting – it’ll be worth squat anyway under the sort of thing that makes governments drop the protection scheme.

    It’s not the government I fear most, it is the hidden and twisted wreckage of the financial system that still hasn’t flushed out some of the bad loans raising the counterparty risk. I don’t have the skill or the information to call if TD, or iii, or Hargreaves Lansdown or anyone else is exposed to stupendous liabilities than may nuke them. I just look at the number of household names that were huge but got hurt and know that I don’t know, and have no way of knowing. So the government guarantee is the best I have got, and it’s worth the pain IMO. It’s a right PITA to break up an ISA – how do you rebalance, f’rinstance, between the silos?

    I don’t know what other people do, I never expected to have this sort of problem, but before I have finsihed investing I’ll have it again. What do people with SIPPs do, for instance, where this is doing the heavy lifting for their whole retirement income, they must shatter their holdings into multiple providers if they want a decent retireement income?

    I think you could handle multiple ISAs pretty simply as long as you keep it simple in one of them:

    Use HL for a single massive holding in a Vanguard Fund and use TD for everything else. You don’t need to rebalance and are taking advantage of the pricing structure of the two. I’m not sure how you make sure you only put money into one of them each year. Alternating would make sense.

    If you have a passive OEIC in TD that becomes large enough for the 0.35% fee to become more than £24 a year, use the next “TD year”‘s allowance in HL instead and get the same fund. Then you can sell the one in TD and use the money as equivalent to that year’s TD allocation.

    It’s not like with taxable accounts where you would have an annual nightmare of consolidation!

    @Greg I think you may be assuming that each year’s ISA account has the 50k limit? I don’t think that’s the case. Basically as soon as you have about 40k in an ISA with a provider, you must never contribute new money to that provider again – ever. Unless you are very unlucky with your selection of stocks 😉

    Arguably as soon as the value of your holdings drifts over 50k you need to transfer out the amount over 50k to another provider. The problem is that there aren’t that many good ISA providers in the UK. Even looking at Monevator’s list there’s really only HL, Charles Stanley, iWeb, Bestinvest left that I would consider.

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