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. [ref]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 ;),[/ref], 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…