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?
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
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[ref]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 :)[/ref] 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[ref]okay, four fifths of you all[/ref] 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[ref]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[/ref], 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 😉