He (the chancellor) announced that the limit on ISA savings will be raised to £10,200, for the over 50s in the current 2009/10 tax year and for everyone else from April 2010.  But buried in the fine print was the news that the increased limit won’t be available until 6 October for the over 50s.  In keeping with the existing ISA rules half of the annual allowance can be invested in cash or the entire amount in Stocks & Shares based ISA.

So, what does it actually boil down to? Well the best ISA rates we could find right now will pay 3.5% interest, whether they are still paying that in October is another matter, but let’s press on.  The additional £1,500 invested in an ISA from October 6th would generate interest of £26.02 in the current tax year.   For a 40% tax payer the tax saving is a mere £10.40

Of course it’s better than nothing, yet the amount of newspaper column inches given over to a £10.40 tax saving this year is disproportionate to the size of the tax benefit.   Yet, if as we predict interest rates and inflation begin to rise, the tax benefits will become substantially higher in the coming years.

I would qualify that argument a little because the chart shows if you were buying a house in 1996 or 1997, when house prices had bottomed in relation to GDP, things would probably have turned out well for you (they did for my neighbour).  The graph also suggests that house prices aren’t as cheap as they have been in last market bottoms, as do other figures such as house prices to average earnings.  

Dennis answered questions on the impact of a cut on interest rates on savers, whether it is a good idea to take out a fixed rate savings product to lock in higher rates, and the neede to keep rainy day money available in these uncertain times.

I’m reminded of an argument by Charles P. Kindlberger in his book Manias, Panics and Crashes.  Kindlberger gives a history of different speculative bubbles and shows a feature of many of them is that frauds are perpetrated that only come to light after the bursting of the bubble.

If history is a guide, we’ll see more fraud uncovered before this shakeout is over.  As Warren Buffett says, ‘you only find out who is swimming naked when the tide goes out’. 

As he says, “I consider [the per capita ranking] to be more meaningful than the official rankings which just reflect world power derived from economic might.”

Bill has an interesting taken on the data, but be warned he uses the unique-to-the-US ranking style, tallying the total number of medals, rather than the number of gold medals ranking used by the rest of the world.  Coincidentally Team USA are ranked first in the world on a US ranking only, not in golds won.   

According to the author the conventional view is that America’s economy has been more buoyant than Japan’s in the last few years.  The rate of growth in GDP backs this up, with annual real growth in GDP of 2.9% versus Japan’s 2.1%. 

There’s more to the story than the headline figures though, and the article argues “the single best gauge of economic performance is not growth in GDP, but GDP per person…a rough guide to average living standard.”

Looking at GDP growth per capita as it’s known between 2003 and 2007, Japan has actually done better than America because Japan’s population has been shrinking. 

With countries where politicians take credit for booming economies such as Australia, figures look less flattering through the lens of GDP per capita because population has grown rapidly at the same time.  In the 5 years to 2007 the Japanese and Australian economies have expanded at the same rate.

If we agree that GDP per person is a better measure maybe we should apply the same thinking to the Olympics – gold medals per capita anyone?

The Director of a property search company was talking about a few lucky clients who are now living rent free after selling their property.  She went on to say that her clients have, “put their money in the bank at six percent interest, and that pays their rent, so some of them are effectively living rent free.” 

I know what she is thinking – my wife and I have had the same discussion.  If you can live on the interest, you still have the capital left, so in effect you are living for free, right?  Wrong. 

Unfortunately it doesn’t work that way.  When you lend your money to a bank they will pay interest, this partially compensates you for delaying the purchase of something else with your money (new Porsche anyone?).

Go back to 1975 and we find inflation touching 25% a year.  Suppose at the start of 1975 you had £10,000 on deposit after selling your house.  With that money you could have bought 4 Porsche 911s.  But the bank is offering you 25% interest so against your better judgment you put the Porsche brochure in the sock drawer and use the interest to pay your rent.  You decide to live “rent free.”

At the end of the year, you’ve received £2,500 interest which you’ve given to the landlord.  But every time you look in the sock drawer the Porsche brochure grabs your attention and after a year you decide to dip into your savings to buy that Porsche you’ve always wanted – you saved for a year right? 

Unfortunately for you Porsche workers demanded more money, the price of oil and steel increased and Porsche were forced to raise their prices – now your £10,000 only buys 3 Porsches and a tank of petrol…oh and your landlord has decided to put up the rent, the price of his Porsche has also gone up.

Inflation isn’t as extreme today, but the same principle applies.  You can save your capital and spend your interest to live “rent free,” but the longer you do this the less you will be able to buy with your remaining capital.  And even if you save the interest the value of your money is eroded, as over the longer term the interest you earn after tax is less that you need to beat inflation.

If you are currently renting and can’t rent for free you should be praying for property prices to drop by more than your rent.  But that’s another story… 

Are you worried about the markets? Thinking of cashing in your chips at the investment casino? It’s been a dreadful year for most investors, and the last few weeks have been particularly dire.

His advice is to stay calm and bear his points in mind.  You can read the rest of the Top Ten Tips for Worried Investors in the articles section of our website.

The wording used by these institutions is somewhat interesting, take the following from Birmingham Midshires: Regardless of the balance in your account your rate will be fixed at 1.00% gross per annum, so no matter what happens to the bank of England base rate in the future your rate will remain the same. It then goes on to show that the last base rate move was down, from 5.25% to 5.00% per annum.

They write as though they are doing their savers a favour, reducing the interest rate from 3.66% to 1.00% - only now it is fixed in case the Bank of England base rate plummets from 5.00% to under 1%.

And the Nationwide are no better, closing certain accounts and reducing the interest rate to a paltry 0.3% (according to the letter received by one of our clients). This is from the building society that has based an entire advertising campaign on treating its customers fairly, no big hook rates to lure in new savers whilst excluding existing savers. In Nationwide’s case they simply reduce the interest rates for all savers, new and old.

So why are they doing this? Inertia perhaps? If there is a large slug of money that will not move from the old account to a better paying account, then the bank or building society suddenly finds itself sat on several millions where it only need pay a very low rate of interest, thus helping to boost profits. If it can do this enough times to enough accounts who knows exactly how much money will be stuck in accounts that pay a minimal amount of interest.

If you want to get an idea of just how frequently banks and building societies change accounts, take a look at their websites and look for closed accounts. This appears to be a business within a business, and must be quite lucrative overall otherwise why would they do it?

Yesterday the inflation figures were announced alongside Mervyn King’s open letter to the Chancellor about why inflation has moved to 3.3% year on year in May, and what he proposed to do about it. My job was to put all this into words that the regular listener to any of the GCAP Media radio stations (Capital 95.8, Classic FM etc) would understand.

That’s not an easy task when talking in sound bite sized chunks. Added to which this isn’t inflation driven by exuberant consumerism, so the traditional cure of raising interest rates isn’t going to work that well. Looking through the numbers, the largest contributors to the increased inflation figure comes from rising prices for food and energy, which includes motoring costs. The prices of these are outside the control of the Bank of England, and raising interest rates is merely going to add to the worries of ordinary consumers who are beginning to buckle in larger numbers – I read also that the number of repossessions has risen significantly this year compared to last.