I don’t know if you’ve heard, or like me been a lucky beneficiary, but investment returns in public stock markets are in double digits this year. So far in double digits in fact that, I’m told, fund managers with 12% returns are in the bottom quartile. But as you know, returns that are quoted are not usually those that you get because of fees, commissions and charges. Then of course there is the tax to pay and when tax free products come along then the prospect of enhancing returns by 60% (the arithmetic of going from 60% after tax to 100% after tax) is so tempting that we usually pile in without further thought. I mean who can beat that?
Er, my IFA can, at least when it comes to Child ISAs. ISAs have been around a while now and so when the Government replaced Child Trust Funds
(aka Gordon’s Giveaways) with a more savvy product it was expected that it would produce similar returns and provide a benefit to children with independent funds that are tax free. But the fact is that it doesn’t actually. After two years of rising stock markets our Child ISA is still worth less than was invested, whilst everything else is up. Why? Essentially because, new products, with new tax breaks, need new providers from some, but not all, fund managers. The restricted range is such that the difference in returns, when compared to a smart investor such as my IFA, is so large that Child would be better off if Adult invested the funds, ignored the tax breaks, and gave the money to Child for his 18th.
So this good idea seems to have backfired: by the time that Child has invested, and grown up, and discovered that he has actually lost money, then he won’t be that chuffed (I know cos I asked him) and new Tory voters won’t be sprouting up on every street corner.
Maybe a better idea would be to offer them a loan to pay their deposit to buy the house that is going up in value too? Clearly that is an idea that has gained traction in Smith Square.
But house prices are not increasing as much as investments. And that, actually, is a good thing. The sooner we can wean people off the notion that if they buy a house then they will make money, the better off we will all be. Houses are the least productive asset in the world: they don’t produce anything (except maybe babies) and investing in them actually enriches banks more than it enriches those that masquerade under the title of owner, even when their % entitlement is little more than the box bedroom at the back. It would be far better to remove these tax breaks, especially on residential houses (whose growth is tax free) so that choice is free.
Free is fair, not for the fairies
People would then invest more in companies, where the capital is put to productive use, and returns will then be even higher. And houses will be cheaper. That’s not magic, it’s true.