Citi give me a Mandy Rice-Davis moment on NS&I

Way back when, I think it might have been my Dad, may have been some other wise old geezer, giving a young ermine some advice.

Never ever miss the opportunity, in some situations, to keep schtum and STFU.

The advice sprang to mind as I read that Citigroup are dischuffed that savers have the temerity to get into NS&I savings rather than watch their money slowly die as the rapacious banks refuse to give them a decent return on savings. Apparently the certificates are a bad idea according to Citi-

“While the new national savings index-linked certificates appear highly popular with many investors, we believe they are a bad idea for the government: they are likely to prove a highly expensive form of funding and will hinder the important task of reducing the UK banking sector’s reliance on wholesale funding,”

Obviously they are speaking from the point of view of what is best for the country, then, rather than as a form of egregious special-interest group pleading?

Well, that’s all right then. It also brought to mind another classic quote from the past, the elegant accuracy of Mandy Rice-Davies during the trial of Stephen Ward in the Profumo scandal.

Well he would say that, wouldn’t he?

Exactly, Mr Citigroup. You would say that, wouldn’t you? It’s so much easier than going back to your desk and working out how to offer a decent rate of  savings interest. Alternatively, just take my Dad’s advice and observe this is a situation to STFU.

After all, a fair amount of UK Government money has gone into bonuses for some of your buddies. It’s about time some of the lowly grunts that actually have to work for this money got a slice of the pie, don’tcha think? I haven’t loaded up my full 15k because I still have to earn the last couple of grand, probably not something that’s really an issue for Mr Citi, “Thought leader” extraordinaire.

No, I’m not taking the mickey. Seriously, “Thought Leadership” is one of citi’s Vikram Pandit’s core competencies, according to citi’s website. I think they’ve overstretched the mark here 😉

 

NS&I bring some good cheer on the financial front – widows, orphans and prudent mustelids get a break

It’s been a rough couple of years for cash investors. Okay, so investing in cash is a bit of an oxymoron. You can’t invest in cash, not in the modern developed world. The tragedy of democracy is that it has its dark side, and the dark side is that the electorate have the “I Want It Now!” attitude of a two-year old, without the cute smile that goes with the latter. The yelling and throwing the toys out of the pram, however, is endlessly present in the voting masses, and as a result the unfortunate parents that have to get this two-year old to bed get re-elected every five years promise to deliver toys worth more than the toddlers can afford. They print more money to pay for those promises, and the increasing amount of money sloshing around the system outcompetes your cash, so it is a claim on less work tomorrow than it was yesterday. Sometimes the parents politicians get it very wrong, and it all goes to pot very suddenly and in a really big way.

Thus it happens that inflation slowly rusts cash. That’s particularly bad at the moment because interest rates are low and yet inflation is high. Even if you could get an account that pays you RPI, you’d be taxed on the interest, so if you are a basic rate 32% taxpayer you need to get an account that pays a third more than inflation. Higher rate taxpayers can forget it, they get paid too much anyway according to the taxman, and that’s how they get levelled down so everybody is happy.

So don’t hold cash then. D’oh, it’s not hard. How about some of those nice shares, if you try really hard to forget about the events of 2007-8 shares can hit the ticket, though you still get taxed at least 10% on dividends before you get them. The problem comes if your roof falls in during a stock market crash, you end up as a forced sale and lose hand over fist. I dodged that bullet at the end of 2007 when I had to suddenly totally liquidate my index fund ISA in a ‘life changing event’ because I was still decently in profit, but had that happened six months later I could have ended up still paying that debt off now. Once you’ve heard that bullet ping past your ear and ricochet off the floor, you learn. Cash has its place, and that place is your emergency fund, and you do it first, so you don’t have to sell up into a bear market. Just. Do.It. Before you go all Gordon Gekko and hold stocks 🙂

The trouble is, cash is the only thing that is almost guaranteed to not suddenly throw a wobbly and fall in value by half. Everybody needs to have a cash buffer against the unexpected. Unless you are ERE who just uses a credit card. I admire and support his logic, which is impeccable, but I don’t have his courage. Once you have lived a year not owing a single entity any money, it is very hard to willingly return to owing money, though I note ERE uses the credit card to give him time to marshall his financial resources.

A good rule of thumb is an emergency fund of about half your annual outgoings, which for most people means half their salary (if it’s more they aren’t going to be saving anyway!). For the average Brit that’s £10,000. RPI is currently 5% so you get to lose 5% of your emergency fund eery year, or £500 a year. So you have to top up by £500 a year just to stay still, and insure yourself against the same amount of emergency next year as you could cope with this year.

Don’t know about you, but I can think of better things to do with £500 this year than the care and feeding of the emergency fund. So I am dead chuffed to see those nice people at National Savings and Investments offering index-linked savings certificates again. That way you lob your emergency fund into NS&I, and you get the following wins:

• You can cash in early if the emergency turns up, which is what an emergency fund is for, none of this no access for five years lark some term accounts do
• did I say they were tax free?
• They track inflation, and that’s RPI, none of this CPI chicanery here
• Pretty safe, if you lose money in NS&I a lack of cash will be troubling you less than you current immediate lack of tinned beans and an AK47. This is HM government, and they can always print the readies :). It’s not like saving with Icesave or Northern Rock

All in all, pretty awesome, a safe home for your cash. You aren’t going to get rich on it, but your cash is worth as much at the end of the five year term as it was at the beginning, there’ll just be more of it. I kind of like that in cash. Monevator and his chums were griping about the paltry rate of extra interest – he balked at 1% so he’ll be scathing about the current 0.5% + RPI offering. But I don’t mind that. I don’t expect cash to make me any money, I’d just like it to be a store of value, and for it not to suffer a slow inflationary death to pay for empty promises made by governments to financially illiterate electorates. If I want to make money I have to start buying into companies or start my own, or work for The Man.

So hats off to NS&I. I’ve just tossed £8k in their direction. I can now decommission my Cash ISA, which had been guardian of my emergency fund until now. However, I’m not going to withdraw the cash, I will do a transfer in to my Shares ISA, so I have effectively transferred my cash ISA to NS&I Index-Linked certs, and have the opportunity to still put in £10k for the year 2011/2012. Whether or not I get to achieve that is another matter, because saving £10k a year is challenging enough, but saving £17k a year in post-tax income is pushing the boat out a bit for me.

So hats off to NS&I. That’s emergency fund, Job Done for me. Roll up to NS and I’s web-site here and grab yourself a slice of the action. They are a perfect fit for an emergency fund, with their £15k maximum. If you need an emergency cash fund of more than that you are someone of a seriously nervous disposition 😉

Cash ISAs outnumber Shares ISAs by four to one – Why?

According to the Torygraph, Cash ISAs are four times as common as stocks and shares ISAs. It begs the question, why? Particularly now, when you sweat buckets to try and match RPI, you end up having to lock the cash away for ages in an environment where interest rates will probably have to go up, why do people put up with the pain?

Okay, so I hold one, because in the dying days of FY 2008/09 I came to the conclusion that I may soon not be working due to ugly events at work, and needed to start saving as much as possible against that possibility. I didn’t have much time to think, so I shoveled that year’s savings into a Cash ISA and topped it up a month later in April 09. Then started on a shares ISA – I had liquidated my entire shares ISA holdings in 2007 due to a life changing event, fortunately before the credit crunch 😉

Until 2007, I’ve only even held shares ISAs, initially when they first came out a Virgin FTSE tracker which was one of the few CAT qualifying ISAs for less than outrageous charges. They got poorer value as time went on, and the FTSE100 tanked over the next 7 years anyway.

I also had a Schwab self-select ISA in the dot-com boom and bust to teach myself the hard way why you shouldn’t churn your portfolio. That got sold to Barclays, who, cheeky pups, began to levy charges just to hold the damn thing so they got kicked into touch in favour of iii. My current shares ISA is the first time I’ve got ahead of the game, amazing what a an older and perhaps clearer head does for you, some quality education from Monevator plus sitting on your hands and not churning the damn thing does. That old boy Warren Buffett has a point – if you’re going to buy then buy as if you will hold for ever.

However, I would assert that a Cash ISA has no reason to exist in todays UK financial landscape. It stands charged with several deficiencies:

• Nowadays it loses against RPI, which is the only real measure on inflation IMO
• It reduces the amount you can put in a shares ISA that year
• It comes with strings attached like long lock-in periods if you want a half decent rate
• You can put a maximum of £5340 into one per year

Compare that with the alternative, National Savings Index-linked savings certificates. Okay, so they aren’t actually available at the moment, but are expected to be soon, and if they aren’t you can still open a Cash ISA sometime next year. They have the advantage of

• matching inflation if held to maturity (3 or 5 years)
• relatively immune to bank failures 🙂
• a maximum investment of £30k per issue (in practice about the same as Cash ISA limits with the issue durations but you can front load the purchase as opposed to dripping in year on year with Cash ISAs, should you have a large lump sum to invest)
• Tax free interest
• you can get your stake back at any time, though with loss of the last year’s interest.

What the heck is not to like? What is the point of a Cash ISA these days, and why aren’t they forced to raise their game with the existence of such awesome competition?

 

Nuts – No NS & I linkers for you lot for the moment

National Savings, they of the horse chestnut logo have decided that they’ve sold enough index linked certificates to the fearful savers of Britain and they’re not doing that any more for a while.

I liked these. The index linking, to RPI, was great. It’s the government you’re lending to, so they will be the last to fall in a run on banks, which is nice. And they’re tax free, so they are a great place to stash some cash to hold it in real terms, almost risk-free. By the time these become risky you will be able to hear the hoofbeats of the Horsemen of the Apocalypse, and you know you’re going down with ship UK… Presumably this paves the pay for some savings certificates linked to the CPI not the RPI, which as we all know is a true reflection of inflation as real people don’t use fuel or pay housing costs, natch.

The official reason is that NS&I has met its targets for savings this year. The conspiracy theorist in me thinks “yeah, right. What is it that you guys know about forthcoming inflation and government policy that you’re not letting on. As these two guys posted to the Daily Torygraph

The only (risk free) way to protect your savings from inflation being withdrawn. Is this an indication that inflation will rise further still?

Looks like it.

They’re are going to steal everyone’s wealth via inflation, taxes, debt repayments and printing of more funny money. The last train out has just left the station.

[…]

Break out the tin hats and the sick-bags people. It’s gonna be a bumpy ride down. Also screws my plans where I am regularly buying the three-year version every month to give me an RPI-hedged income for three years.