19 Mar 2014, 2:38pm
personal finance:
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  • why is the ISA season now, and what’s with the new 15k limit then?

    Hooray for an increased ISA allowance of £15,000. Now to be honest, through most of my working life, saving that sort of cash each year wasn’t really on the cards – more pressing forms of savings, in terms of paying off the mortgage, and in later years pension AVCs came to the fore. However, I have to do something with my AVC fund when I get a hold of it, and a few years of £15k allowance gets the job done a little faster. I’m kinda puzzled by the July start – does that mean I have to avoid contributing in April, but I’m sure that’ll get clearer in due course. The increased personal allowance is always welcome.

    And it seems that the artificial division ‘twixt cash and share ISAs will be abolished. Which is great – after all I want to hold a single ISA without buggering about shifting my old Cash ISA into my Shares ISA. The cash ISA is only a small rump from back in the day when I was trying to hedge against being ejected from The Firm in short order.  I’ve thought often enough about combining it into by Shares ISA, since I can’t get excited about 1% interest in a 3% inflation world, but an early retiree has to carry a large cash float. Plus there are reasons to worry about holding a lot of cash with a S&S nominee provider.

    Why do people use ISAs in such an odd way?

    Go on. Try getting one of these in London, or anywhere else, for less than £1. It was easy 30 years ago. That's how well cash holds its value!

    Go on. Try getting one of these in London, or anywhere else, for less than £1. It was easy 30 years ago. That’s how well cash holds its value!

    Four out of five ISA savers use only cash accounts. WTF is up with that? Cash is the most tedious, evil asset class, with its mendacious promise that it’ll never go down. Well, duh, yes, the number at the end doesn’t go down, but the real value decays like fresh fish. Cash dies at about 4% a year, presumably because they print that much more than the increase in goods and services that the cash is chasing. Particularly in troubled times like the seven lean years we’ve gone through.  They added insult to injury by devaluing the currency making everythign foreign dearer – from shares to iPads, though this seems to be starting to recover of late. In short, as a long-term asset class, cash stinks IMO. As an example of just how much, when I started work you could get a pint of beer in London for less than a pound. You try doing that now. As a rough rule of thumb, the value of cash halves every ten to fifteen years. This is not an asset class you can trust. The shocking volatility of stocks makes them look less trustworthy, but in the long run (>5-10 year mark) they tend to drift up in real terms, if you include dividend income. Whereas I have never known a ten year period where the value of £100 at the end has been anywhere near as much as it was at the start. The interest you’re paid on cash is an attempt to make you feel better about that bad behaviour – and then they bloody well tax you on the compensation for the loss of value due to Government behaviour, just because they can. All a cash ISA does is stop the tax bit, but time and time again I hear people say they prefer cash ISAs because they are risk-averse. Bollocks. It’s just a different kind of risk, a disguised one when the number at the bottom doesn’t fall by the value of each unit does. That’s still risk in my book, and a dishonest underhand one at that.

    Savers will be able to shield almost three times as much money from tax without taking the risk of buying shares

    Torygraph.

    Nary a whisper about the risk of it almost guaranteed to be worth less as time goes by unless interest rates exceed inflation, been a long while, that… My pension AVCs, held in cash since I left work, will have decayed in real value by 10%. Now I can’t honestly ask for people to play the violins in the background because I saved 42% tax on that and got a 20% bung from buying in a mix of FTSE100:global stocks in ’09 while the pound was being devalued by 25%, so the ermine is okay with leaving 10%+ on the table. But I do that because I have to, it’s definitely a bad idea to hold that much in cash, so exactly why 80% of ISA savers  electively hold such a rotten depreciating asset beats the hell out of me. The one thing cash gives you is optionality, but in return for the favour it leaks through your fingers over the years. I have never, ever, known any way of saving cash 1 where I could even match inflation, with the one exception of my NS&I Index-linked savings certificates, which I loaded up on just before they withdrew the blighters.

    The other area where it seems my fellow-citizens are mad is what the hell is with this Torschlusspanik about ISAs now? You’ve had eleven flippin’ months to use your ISA allowance! For starters if you are saving cash from earnings, why save it elsewhere and then into an ISA in the last three weeks, though retaining optionality and the fact you can get a better interest rate outside an ISA has something to be said for it. But for an S&S ISA? Okay, so I stiffed myself this year and last by filling up the ISA early in the year so I had to sell some of The Firm to make space for opportunities as they came up – Direct Line last year and Royal Mail this year, so you want to pace yourself. Steady as she goes monthly S&S ISA saving as you earn the money is a match made in heaven for dollar-cost-averaging – particularly if you are investing in something that’s going down the toilet. Emerging markets spring to mind at the moment :) Contrary to popular belief buying when things look bad is often good for your wealth, provided you have the required intestinal fortitude,  here, here, and here :)

    So, ISA savers of Britain, when you get your grubby mitts on the new 15k allowance, it’s time to slap yourselves around the collective chops with a wet fish, and ask yourselves some searching questions, like

    • why are y’all 2 saving cash, in a ZIRP environment?
    • why do you leave it to the last minute? Why isn’t the ISA season in April, when you have a year ahead of you and can take advantage of saving the money as you earn it 3,  rather than March? Particularly the 20% that use S&S ISAs – you might as well get, your money working for you six months earlier on average.

    There’s n’owt as queer as folk, eh? Are we all such well-trained little consumers that we are suckers for the ‘closing down sale – everything must go‘ pitch rather than actually working out what we want an ISA to do for us? Let’s get our money put to work and gainfully employed sooner rather than later ;)

    Notes:

    1. a historical exception was in the good old days when you could borrow money from a credit card at 0% without any fees, but then any interest you can get on somebody else’s money is a good rate :)
    2. okay, four fifths of you all
    3. obviously if you earn £200k+ you can load up your ISA in the first month, but most of us struggle to fill an ISA in a year :) Steady as she goes seems to obvious way to go in that case

    Possibly the same reason that the UK is collectively obsessed with BTL – lack of imagination?

    Cash is ‘reliable’, dull and instantly recognisable, whereas equities are scary and intangible ;)

    “I’m kinda puzzled by the July start – does that mean I have to avoid contributing in April, but I’m sure that’ll get clearer in due course.”

    I believe the detail states that any contributions you make to an ISA between April and 1 July will get subtracted from your £15k n’ISA/NISA (do we really need to rebrand them?!) allowance.

    @Luke Like it :) It’s the reliability of cash to drip through one’s hands that scares me!

    @UTMT – that sounds good – indeed I plan to not go mad and hit it all at the start but pace myself across the year, which will fit well with that. I’m sure NISA is the name of some conrenr store near here. It’ll be an OISA next year anyway!

    Not your normal care with facts, ermine. Cash delivered *way* above inflation in the late 80’s, 90’s and early 00’s. What we see now is just mean reversion to reset that abnormal trend back to a real return of 0.5%, the long term average.

    Cash is a great asset class to hold in conjunction with equities etc. and for that we pay not an unreasonable price. But, yes, cash only savers are stupid.

    @SG in my defence I’ve never, ever, experienced that. You and Monevator, have said it’s been so and I take your word; I must have been either asleep at the switch or busy paying down my mortgage at the time I guess. I only saved enough cash to handle emergencies, relying on income to backfill the hole.

    Absolutely with you that cash + equities is a dream ticket, and not having to hold these in separate accounts is all to the good, subject to those counterparty concerns. I look forward to being able to move Zopa into my ISA holdings too! I’ve been caught on the hop having to flog stuff in the ISA where I had cash unwrapped that could have been used for the RM IPO. And retirees with a higher wealth but a lower income have to carry a much higher cash float than normal folk with a decent income, because having more income improves short-term resilience to take hits.

    20 Mar 2014, 9:38am
    by Grumpy Old Paul


    So there will be much marketing of funds targeted at cash ISA investors who can now move their ISAs into shares & funds. The marketing will cite 5 year returns which neatly omit the 2008 crash.

    I predict that within 2 years there will be a correction of at least 20%. I don’t know what will trigger it – “events dear boy”! Then there will be a lot of hacked-off investors. Gideon had better hope that this happens after the general election!

    My libertarian instincts collide with my awareness of human frailty and ignorance. However, I welcome the simplification of ISAs but recognise that the overwhelming majority of beneficiaries of the increased ISA allowance will be those who are already better off than most.

    This old git also notices that the well-established habit of attempting to buy the grey vote continues with new pensioner-only savings vehicles. This despite the fact that pensioners have fared far better than most other demographic groups since the credit crunch. Eventually young people will notice and that will be very interesting to observe.

    @GOP – > cash ISA investors who can now move their ISAs into shares & funds

    Counldn’t they always do that? I considered more than once shifting my lousy two year’s worth of cash ISA into my shares ISA, but never got round to it, hoping interest rates on cash would at least rise to match inflation (hollow laugh)

    This despite the fact that pensioners have fared far better than most other demographic groups since the credit crunch

    I’d modify that perhaps to well-off pensioners – I guess there are still a lot of people on the SP or less who aren’t?

    Pensioners by definition are living off capital, so the difference in impact is an aspect of the shift of power away from labour towards capital. Your theme is taken a little further in this NASA study as reported in the Graun. Basically we’re doomed in the next few decades anyway. So if you have capital (and a lot more than I have!) get on the yacht and party like it’s the end of the world, ‘cos the alternative to this

    …. appears to be on a sustainable path for quite a long time, but even using an optimal depletion rate and starting with a very small number of Elites, the Elites eventually consume too much, resulting in a famine among Commoners that eventually causes the collapse of society. It is important to note that this Type-L collapse is due to an inequality-induced famine that causes a loss of workers, rather than a collapse of Nature

    ain’t gonna happen

    “While some members of society might raise the alarm that the system is moving towards an impending collapse and therefore advocate structural changes to society in order to avoid it, Elites and their supporters, who opposed making these changes, could point to the long sustainable trajectory ‘so far’ in support of doing nothing.

    There’s always Shelley’s Ozymandias to remind us…

    “My name is Ozymandias, king of kings:
    Look on my works, ye Mighty, and despair!”
    Nothing beside remains. Round the decay
    Of that colossal wreck, boundless and bare
    The lone and level sands stretch far away

    20 Mar 2014, 12:21pm
    by Grumpy Old Paul


    @Ermine,
    Yes, My mistake about not being able to transfer cash ISAs into S&S ISAs; the restriction was in the converse direction.

    Pensioners in receipt of the State Pension have benefited from the triple lock and so have enjoyed 2.5% or greater increases for the last few years which exceeds the increases most people at work have received.

    I’ll wait until I see the FT at the weekend to assess the budget. I’m not yet in possession of enough facts. The devil is always in the detail which is usually buried in Treasury papers.
    The Nasa report looks interesting. I’ll have to give it a read.

    22 Mar 2014, 12:31pm
    by Willem de Leeuw


    Cash was awesome when the crisis began – 6.5%+ instant access or one year deposit from reputable institutions like Nationwide in, IIRC, 08/09, *even* ABN Amro were paying 5.5% (though they were nationalised…) – and low and even negative RPI for a short while.

    Then, when it began to appear to be safe-ish to do so, you were able to nibble on blue chip dividend payers at reasonable prices.

    Cash has its role in every portfolio, just make sure you chase the best rates and avoid tax as best you can to keep up or slightly beat (1 to 2% real) inflation. Think optionality and rarely all or nothing.

    Isn’t the massive news the pension change, rather than the (actually sensible) ISA changes?

    I’m amazed George found another way of making a whole load of cash available to prop up house prices – this time pensioners moving into BTL!

    […] and witty commentary you should have a read of ermine’s (Simple Living In Suffolk) posts here and […]

    […] They know what the end of the tax year is all about, FFS, and although I normally expect people to get their act together about the end of the tax year for ISAs and SIPPs it’s not like Osborne gave us huge amounts […]

     

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