I read recently that money is the new sex. But given that sex and money have been mixing it for thousands of years – and often getting together to, um, bury the hatchet – I think that’s a pretty bold claim.

What next? Food is the new water? Oxygen is the new carbon dioxide?1

Or maybe money is like sex because these days everyone is talking about it, but nobody is getting any.

Journalistic tropes aside, one thing money and sex have in common is that we’re fascinated by other people’s mattresses – what happens on top of them, and what they’ve got stashed underneath.

Which is all a long-winded way of saying I’ve come across some interesting statistics about the average savings in an ISA, broken down by salary.

And you know you can’t resist a peek!

MPs in ISA savings revelation

This tangle of juicy ISA statistics comes to us courtesy of Hansard, the official record of UK Parliamentary debates.

Written questions were asked about the average savings in an ISA by salary – I’d guess to make political hay when it was ‘revealed’ that those on lower earnings don’t usually have as much saved as those on higher salaries.

But one person’s axe to grind is another person’s prurient look behind the curtain of people’s ISA savings habits.

The first piece of data shows how many thousands of people in different income brackets (left hand column) have ISA savings pots in six bands (to the right), running from £15,000 to £500,000.

Note that these figures – apparently the latest the Exchequer has to hand – are from 2008 / 2009:

Income band	£15K to £20K	£20K to £30K	£30K to £50K	£50K to £100K	£100K to £200K	£200K to £500K
£0 to £5K	217	127	137	41	8	1
£5K to £10K	336	278	289	115	16	2
£10K to £20K	715	516	555	204	34	4
£20K to £30K	364	280	301	126	23	2
£30K to £50K	312	260	267	126	27	5
£50K to £100K	163	142	177	70	20	3
£100+ or more	66	72	92	56	19	4

Note: Bands rounded up to nearest the £1,000. Source: Hansard

For example, the most populous intersection shows that 715,000 people earning £10,000 to £20,000 have savings of £15,000 to £20,000.

Unfortunately, no details were asked or given about those with average ISA savings amounts below £15,000.

What about those with more than £500,000 tucked into an ISA?

This was asked, naturally enough! The original data has two further columns – one band for £500,000 to £1 million and then another for savings over £1 million. But none contain any data.

According to the Exchequer:

Information in respect of ISA market values above £500,000 is not separately available because of the limitations of the statistical sample from which the analysis has been drawn. However, fewer than 500 individuals are estimated to be represented in each of the separate ISA market value categories taking all the income ranges together.

I think this is saying the Exchequer estimates that fewer than 1,000 people have ISA savings of more than £500,000 (so fewer than 500 in the £500,000 to £1 million band, and the same for £1 million and over).

However an alternative interpretation I’ve read is that it means there are fewer than 500 for each of the seven income bands on the left.

I don’t think this is right, but it is feasible. Someone might earn less than £5,000 but have a rich spouse, and so eventually have a big ISA! Or they might have invested well and decided to live off their ISA savings, and no longer be earning. Or perhaps they have trust funds or an inheritance.

Some combination of those will also explain the 3,000-odd people who are earning less than £5,000 but have more than £200,000 in ISA savings.

How to make a million in an ISA

ISAs were introduced in April 1999, so to achieve a portfolio of £500,000 or more in ISA investments by 2009 would have been quite a feat.

However before ISAs there were similar savings accounts called PEPs, launched in 1986. In 2008, old PEPs automatically became stocks and shares ISAs, and I presume these stats refer to ISA savings that were originally wrapped up in PEPs, as well as pure-bred ISAs.

According to an FT article about ISA millionaires, as of 2012:

An investor who made full use of the maximum Pep or Isa allowance each year for the past 25 years would have invested £192,480 in total, which would have grown to almost £500,000 based on an average annual return of 7 per cent. With average returns of 11.7 per cent, they could have broken the £1m mark.

A nearly 12% annual return looks fanciful to today’s battle-weary investors’ eyes. But it will be interesting to see the same statistics in 2020, say, if we get the good spell in the markets that mean reversion indicates could be due after the lousy past decade.

I’d expect to see a lot more ISA millionaires by then.

Individual Savings Account market values: 2008-09

The second table reveals that most people aren’t very serious about tax-free savings, regardless of what they earn:

Income band	Median ISA market value	Average ISA market value
£0 to £5K	£3,700	£9,000
£5K to £10K	£5,800	£11,900
£10K to £20K	£6,400	£12,200
£20K to £30K	£5,100	£11,700
£30K to £50K	£6,700	£13,300
£50K to £100K	£10,100	£17,500
£100K or more	£13,800	£24,500

Note: Salary band rounded to nearest £1,000. Source: Hansard

To me these numbers are dispiriting. Not just because even this preselected group of super-savers has managed to save so little (people without ISAs aren’t even counted here, remember) but also because ISAs are perhaps the best and most flexible tax break going, and savers aren’t fully exploiting them.

A six-figure salary and yet a mere median £13,800 tucked away in an ISA beyond the taxman’s grasp? Easy come easy go I guess.

There’s no distinction drawn here between cash and stocks and shares ISAs. I suspect the comparatively few hardy souls who dare to open a shares ISA are skewing the median ISA savings figure upwards to produce the average figure on the right. (According to research from Halifax bank, the average amount in its customer’s cash ISAs is up 23% this year to £8,949).

The dip in ISA savings for those earning £20-30K compared to the bracket below is interesting. Anyone got an explanation? Please share it in the comments.

Are you keeping up with the ISA savvy Jones?

So, how was it for you, darling? Did the earth move when you saw your own ISA savings compared to the average? Or was it an anticlimax?

Personally I’m just even more frustrated that I didn’t start fully using my annual ISA allowance until around 2003. I had plenty of cash saved by then, but I kept it in ordinary savings accounts.

What an idiot I was, given that unused limits cannot be carried forward to future years. Only this week I’ve had to do more tedious capital gains tax calculations on non-ISA protected shareholdings, in order to defuse future tax liabilities. I’m jealous of those with 25 years of PEP and ISA allocations to play with!

As I’ve said before, it’s worth using stocks and shares ISAs just to save paperwork, let alone the tax advantages. And who knows, maybe one day you could be swelling the ranks of the ISA half-a-millionaires-or-more?

That’s what I’m aiming for – the less-than-a-thousand club!

It sure beats the Mile High Club. The food is better, for a start.

1. Seriously, your lungs do not know to breath without a dash of CO2. [↩]

Some good reads from around the Web.

When I were a lad, budgets were budgets. Grown men would tremble before The Chancellor’s red box, wondering if he was about to tax their golf clubs out of existence, or cry “Loadsamoney!” and do the opposite.

In 1988 Nigel Lawson slashed the top rate of income tax from 60% to 40%, where it stayed for more than 20 years. In the 1970s Denis Healey soaked the rich with unapologetic redistribution – at least until he was forced to call in the IMF to bail out Britain.

And now? Making the headlines from this week’s budget was a 5% cut in what everyone agreed at the time was a temporary tax rate, a tiny freeze on the largesse the State shows to pensioners, and a welcome but for most relatively tiny hike in the personal allowance.

Put it through a budget impact calculator, and it isn’t likely to add up to more than few takeaway curries for the majority of Monevator readers.

Not so much class warfare as inter-generational tiddlywinks!

That’s not to say there aren’t real losers. The poorest are seeing their income fall under this government, but that’s because of benefit cuts.

Unfortunately we’re in a situation where many (including me) are less than confident those benefits were always well-targeted and helpful.

Instinctively I prefer the new emphasis on rewarding low-paid work, and removing the disincentives – with an appropriate safety net for the fallen and generous provision for the relatively few who truly can’t help themselves. (I don’t begrudge almost any amount of money being spent on quadriplegics or a soldier whose hands are blown off defusing a bomb).

At the other end of the ‘need’ scale, I’m losing out because as a childless person I’m still going to have to subsidise middle-class children in a world that has too many people in it, thanks to the fiddly new child benefit rules.

If you’re on the other side of that divide – you have kids – then make sure you read up on the new ‘cliff edge’, and calculate if it’s worth taking action.

But away from the stamp duty dodging enclaves of Chelsea and the estates without earners, it’s smokers, drinkers, drivers, and (thanks to a change in what’s classed as VAT-rated hot food) the eaters of Gregg’s pies who will feel most pain.

This ratcheting up of duty is a brilliant example of compound interest in action.

What about the investors?

The budget didn’t have much of consequence in it for private investors.

There were a few tweaks to VCT and EIS rules that won’t be relevant to many readers, although I have some of the former.

There were no big changes to mainstream concerns like capital gains tax, dividends, ISAs, and pensions.

The annual scare stories about the abolition of higher-rate tax relief also came to nothing – as usual.

Every year I get emails from worried readers about a supposed imminent end to higher rate tax relief, along with press releases from financial firms saying all higher rate taxpayers should put their life savings (/£50,000) into pensions before higher rate relief is abolished.

Why don’t I write about it, they ask? Because it might happen one day, but I don’t expect it under this government. I expect to keep hearing about how it’s coming!

(If you are lucky enough to be paying the 50p tax rate, then it could be worth getting tax relief at 50% while you can).

A few of the non-personal finance details might have consequences for investors:

• Speeding up planning could be good for housebuilders.

• Lower corporation taxes may mean more money retained for reinvestment or dividends.

• There were some new reliefs for North Sea oil companies.

• There is also tax relief for TV productions and video games and animation studios, which might conceivably help some investments. (ITV shares rose slightly on the news).

The crackdown on stamp duty avoidance on £1-2 million+ properties also has an investing dimension.

Could it finally cause a wobble at the top of the London property market? Prime London has some of the signs of bubble conditions, so I wouldn’t rule it out.

2012 budget roundups from around the web

As for what we did get, here’s some useful Budget 2012 roundups and tools:

• BBC: Budget 2012 at a glance
• BBC: Complete budget 2012 archive
• BBC budget calculator with sensible emphasis on booze and drink
• The Guardian’s top 10 changes
• Telegraph’s take on the winners and losers
• Even The Guardian can see 20-somethings are worse off than Grannies
• Budget 2012: A big splash with a little cash – The Economist
• Institute of Fiscal Studies’ number crunching slides [PDF]
• A crackly discussion from accountants Deloitte [Podcast]
• HM Treasury’s archive of Budget 2012 documents
• Inexact estimates justify 50p to 45p rate cut – Stumbling & Mumbling

Finally, I was disappointed that we didn’t see some Keynesian response to very high youth unemployment, which isn’t even producing the great music of the 1980s as a by-product.

Getting them into debt at university is an unpleasant stop-gap solution!

[continue reading…]

A few good reads from around the web.

When a politician goes one way on an investment, it’s very often a good idea to run the other:

Politicians are not investors or traders

Consider Gordon Brown’s sale of Britain’s gold, which marked the bottom of the market ahead of a decade in which it rose five-fold.

Politicians first priority is to get reelected

Maybe that’s fair enough in a democracy. But it inevitably leads to short-term gains and long-term pains.

Politicians usually put national interests ahead of individual investors

Again, as it should be. But don’t say you weren’t warned!

For example, let’s imagine you’d done the right thing, saved for your old age, and bought an annuity with your retirement pot, while keeping some cash back for emergencies.

Instead of rewarding your good behaviour, governments across the Western world have chosen to bail out the indebted and feckless via ultra-low interest rates, as a byproduct of staving off an even worse financial downturn.

I don’t think they’ve made the wrong decision, from their point of view, and perhaps the nation’s, especially in the short-term, when moral hazard can be conveniently chucked out the window. But if you’re a pensioner living on a fixed income – or indeed anyone without debts to be eroded by inflation – you’re paying for it.

It’s in this spirit that we should consider Chancellor George Osborne’s plans for the UK to issue 100-year government bonds (gilts).

The BBC reports:

In his Budget next week, Chancellor George Osborne will announce that he will consult on creating a new “super-long” gilt that could even be issued with no set redemption date.

The theory is that these super long-term gilts would allow the government to lock in the current record low interest rate for a very long time.

If the bond proved popular with investors, future governments would pay less debt interest for years to come.

I think this is a great idea, from George Osborne’s perspective. In fact, I’ve been suggesting to friends for months that governments (and companies for that matter) should take full advantage of the past three years of bearish fear and insecurity that has driven bond yields to record lows.

“When the ducks quack, feed ’em,” as they used to say on Wall Street.

I should think bond yields being higher at some point in the next 100 years or so is one of the best bets you could make, just after “always back the broker.”

An even better bet is that 100-year bonds will provide a derisory return, once inflation is taken into account, although we do not know the coupon yet so it’s hard to be entirely confident. (Even I’d consider putting some money into a 100-year bond paying over 6%, but that’s nothing like what will be offered!)

Of course, accurately valuing the returns due from a 100-year bond is the stuff of fantasy. It relies on benign expectations for interest rates that hold for a century.

Consider all the events of the past 100 years – that’s going back to before World War 1, remember – and you’ll see how barmy it would be to buy such a bond at any sort of low yield.

There are already undated long-term gilts on the market that prove my point, as The Telegraph also warns:

Gilts – or bonds issued by the British Government – may appear to be as safe as the Bank of England. But they are vulnerable to any increase in inflation in the period before they are redeemed because this will reduce the real value or purchasing power of both the coupon or income they pay and their maturity value on redemption.

There is nothing theoretical about this – as patriotic investors who bought gilts issued to pay for the First World War found to their cost. Andrew Bell, chief executive of the giant Witan Investment Trust, calculated that £100 invested in War Loan stock nearly a century ago would be worth little more than £2 today.

That calculation takes account of the reduction in the purchasing power of money since 1914.

For nearly as long as I’ve been investing, undated government bonds have been presented as a sort of curiosity piece, showing how silly investors were in olden times. Only recently has this image been undone, as the price of Consols and other irredeemable bonds have soared in the wake of the financial crisis.

Funny how purportedly obvious, inarguable truths are turned on their head if you hang around long enough in investing.

In that spirit, I should note that it’s not impossible these 100-year bonds will be a great buy. But I don’t think it’s remotely likely.

The end of the great bond bull market?

Perhaps I’m one of the last acolytes still infected by the ‘cult of equity’, and I’m ignoring for instance the persistently low bond yields that followed Japan’s bubble bursting in the late 1980s.

If so, I’m in good company. Only a few weeks ago Warren Buffett warned that these ultra-low bond yields were dangerous assets ready to blow.

The Economist also saw signs this week that the bond cycle may finally be turning, asking:

Are we witnessing one of those historic turning points in markets, on a par with March 2000 (when the dotcom bubble burst) or March 2009 (the post-Lehman low)?

The issue is not so much with equities which are continuing the stop-start recovery that has lasted for three years. The interesting issue is the bond market.

Remember, these are extraordinary weird times. Look at the blue line in this graph (from The Finance Blog):

That blue line – representing flat near-zero interest rates from the Bank of England – is bizarre. It’s so odd that you could stretch that graph back 300 years, and you wouldn’t see another period that looks remotely like it.

In contrast, you only need to go back as far as the lifecycle of a typical Hollywood trilogy to see interest rates over 5%.

I wouldn’t be surprised if these 100-year bonds prove to be as blatantly signalling a change in the market as the P/E of the NASDAQ in the dotcom boom, or Gordon Brown offloading our gold reserves in the depths of its bear market.

Many semi-active investors like me have already voted with our feet, and long ago moved money out of government bonds accordingly. That proved a terrible decision in 2011, when gilts soared, but I’m confident it’ll prove the right decision in the medium to long-term.

Passive investors face a dilemma. Many portfolios have a set allocation of fixed interest in bonds.

If they decide to hold and face the music, I wouldn’t blame them. The whole point of the strategy is to avoid being wrong-footed by ‘obvious market calls’.

An alternative for the more flexible might be to cut your government bond exposure, but increase your allocation of special bonus interest rate chasing cash.

Institutions can’t move a few tens of thousands into special fixed rate savings bonds paying say 4%, but we can. I’d suggest you consider using that flexibility, and avoiding the low-yield bond menace.

True, cash isn’t equivalent to bonds, and it won’t rise if the stock market crashes. One response might be to hold more cash than you otherwise would, to reduce your risk in that way instead.

By George, I think he’s got it

As usual, The Daily Mail is utterly wrong on these bonds. It argues Osborne is trying to offload our debts to future generations.

The truth is we’ve already incurred these massive debts, whether explicitly or implicitly (such as through State pension commitments). The question is what interest rate we pay for those debts.

If George Osborne can get suckers to buy his 100-year promise at a multi-century low interest rate, I salute him as a taxpayer.

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