The investment management industry might not be much good at generating returns – a monkey with a dartboard would do a better job of beating the index than most fund managers. Nor is the industry good at keeping its costs down, or disciplining the giant companies that it nominally controls.
But there is one thing that it does really well: and that’s creating a marketing blitz. When the promotional campaign is backed up by some juicy tax breaks from the government, it can be guaranteed to pull out all the stops.
Expect a blizzard of promotion for the latest wheeze – the Junior Isa. If your toddler can be distracted from Peppa Pig for a few minutes, and the ‘tweenager’ in your house dragged away from playing Angry Birds, they can start deciding whether Vietnam or Mongolia is the place to put your money for someone who, given the way life expectancy is going, may be around well into the 22nd century. Parents – in the admittedly unlikely event that they have any money left over after paying for their children – will be allowed to invest £3,600 a year for each child: the money will accumulate free of tax, just like the adult version. But, in truth, most of them shouldn’t bother.
In principle, there is nothing wrong with the idea of a Junior Isa. Britain has a pitifully low savings rate, and despite what the simplistic Keynesians might tell us, economies that save more do better over time. The more capital available for investment, the easier it will be for companies to grow.
Indeed, it is probably even more important for the generation of children being born right now to save than it was for their parents. Falling birth rates mean there won’t be so many young people around in the future. They can’t count on the next generation to pay their pensions – they will have to save for them instead. The high cost of education, of getting a foot on the housing ladder, and paying for their own children, means today’s children will need a lot of capital behind them. For all those reasons, the more they save now, the better.
We can expect to hear all those arguments from fund managers pushing the new Isas. Expect fancy tables as well, showing how, if you just put a few grand into the markets for little Archie now, then with compound interest, and projected returns of 5% a year, he’ll be able to retire to his own island in the Caribbean by the time he is 40 – even if he never gets a job in his life.
But there’s a problem. There is no point in coming up with gimmicks like Junior Isas to get us to save more while returns are so pitifully low. The Bank of England (BoE) is deliberately engineering inflation at the expense of savers. That becomes clearer and clearer with each month that passes. Inflation is now above 5%, and that’s just the official rate. Yet the BoE is holding interest rates at record lows of just 0.5%, and has just embarked on another round of quantitative easing, designed to make money even cheaper.
The strategy is clear: to get out from under Britain’s huge debt mountain by inflating it all way. Since the government has not protested about this policy, we can only assume it is a willing accomplice in the BoE’s strategy. That might make a certain amount of sense. It is certainly easier than paying all the money back. But it is very hard on anyone who saves. Savers are effectively being robbed to rescue all the people who ran up too much debt during the bubble. It means that all those parents who put cash into a Junior Isa will be victims of this theft on a daily basis.
Equities are not much better. We are now into the 11th year of a bear market with little end in sight. The FTSE 100 hit its all-time peak of 6,950 in 1999, and doesn’t show much sign of regaining those levels any time soon. The FTSE has performed worse than most major markets: the German DAX and the S&P 500, for example, both managed to exceed their 2000 peaks in 2007 before crashing again.
There is plenty the government could do to help the equity markets. It could get rid of stamp duty on shares. It could cut corporate taxes. It could offer capital-gains tax breaks for anyone holding shares for more than a year to promote the kind of long-term holding that the equity markets need.
But instead, the government has done nothing. The chances are that anyone investing in the FTSE 100 index, which is what most investors in an Isa are likely to do, will lose money.
A very sophisticated parent might be able to invest well enough to make a Junior Isa worthwhile – the rest are just going to end up helping to pay off the national debt.
• This article was originally published in MoneyWeek magazine issue number 560 on 21 October 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.