8.5% HSBC bond too good to be true?

Question
Thank you very much for your answer to my last question which was exactly what I wanted to know.

This question relates to an article on the front page of the Money section of the Sunday Times yesterday, entitled "Ways to ride the rush for gold" in which Ali Hussain refers to a Corporate Bond from HSBC yelding 8.53% and redeemable (at face value) after 8 years.

It was unclear (to me) from the article whether this is a collective corporate bond fund managed by HSBC, or a single Company Corporate bond issued by HSBC, and because the detail was a bit vague, I was also suspicious whether such a product exists, or whether this was just a bit of journalistic hype. Whilst I appreciate the value of your investment in the interim will vary, the yield and redemption at face value seemed very good ? too good to be true ? Is the yield guaranteed at this level or does it depend on the performance of the holdings if its a collective fund ?Answer
The article refers to a HSBC corporate bond paying a ‘coupon’ of 9.875% which redeems on 8 April 2018, although HSBC has the option to redeem (referred to as ‘call’) on 8 April 2013.

This means if you bought £100 of bonds when originally issued you’ll receive £9.875 annual income with the return of your £100 in April 2018 or, as is more likely, in April 2013. Buy the bonds ‘second-hand’ now and you’ll still receive these returns but you’ll have to pay around £116 per £100 of bonds – i.e. they’re trading at a premium.

From this we can calculate two important figures, income yield and redemption yield, as follows:

The income yield shows income as a percentage of your investment, i.e. the £9.87 annual income divided by the cost of the bonds, £116, equal to 8.5%. This looks very impressive but ignores a major issue – if you invest £116 now you’ll only receive £100 at redemption, i.e. you’ll make a £16 loss.

To incorporate this loss into your annual return we need to calculate a redemption yield, in this case equal to a rather more modest 3.6% assuming the bonds redeem in April 2013.

So yes, the 8.53% figure mentioned in the article is a bit misleading as it’s the income yield – redemption yield is the more accurate figure to use as it reflects any gains or losses you’ll make on the price of the bonds now versus the amount you’ll receive at redemption.

Also bear in mind that corporate bonds are not guaranteed. Although unlikely, if HSBC hits financial dire straits then you might not receive income and/or your money back at redemption. And, unlike a savings account, such losses would not be covered by the Financial Services Compensation Scheme (FSCS).

In this instance I think a good fixed rate savings account is likely to be a better option, but corporate bonds can be worthwhile when the redemption yield offers an attractive premium to cash with an acceptable level of risk (i.e. the company is likely to pay both income and your capital at redemption).

Read this Q and A at http://www.candidmoney.com/questions/question292.aspx

How to tread carefully when stockmarket investing

So you’re nervous about stockmarkets but don’t want to sell out entirely – what can you do?.

General wisdom seems to suggest that it pays to stay invested in stockmarkets long term, which I reckon means 10-20 years. But if you’re nervous and/or pessimistic about the shorter term outlook for markets what should you do? I doubt you’d go out for a long walk if it looks like a bad storm is brewing, so why should investing be any different?

The trouble is, stockmarkets are even unpredictable than the British weather. I think there’s a pretty convincing case for believing stockmarkets will fall (see my recent article), but they could surprise and rise - which would be annoying if you’ve just sold off all your stockmarket investments. So how can you sensibly retain stockmarket exposure without getting crucified if markets do plunge?

Here are a few approaches you could take. None are failsafe and will likely lag in rising markets, but they’re probably better than doing nothing if you believe stockmarkets might fall.

Look for high dividends

Investing in companies that pay high dividends potentially offers two ways to reduce the impact of falling markets - the dividend income can help offset falls in the share price and the types of company that pay high dividends tend to be well established cash generators that fare better than many in difficult markets (ok, the banks are probably an exception!).

For example, the Newton Higher Income fund is paying dividend income of around 7% a year at present while the Schroder Income Maximiser fund (which sells off some potential future growth to boost income now) currently yields just over 6%.

Pick defensive shares

Dull, well established industries, such as tobacco, health and public utilities, tend to be pretty consistent. Smokers don’t seem to base their consumption on the economic climate and we all need to use water, electricity and medicine, recession or no recession. These types of company often generate lots of cash and pay nice dividends too, so there’s likely to be some overlap with the previous category.

Invesco Perpetual (High) Income manager Neil Woodford has invested heavily in these areas for a while now.

Protected

Protected stockmarket funds and investments try to avoid a loss at all costs, but usually at the expense of decent returns in rising markets. For example, the Close UK Escalator 100 fund has returned just 12% over the last five years – less than cash. So-called ‘structured-plans’ that usually last for 5 or 6 years can fare a little better, but expect minimal returns if markets are flat or fall – for example, the Investec FTSE 100 Deposit Growth Plan 3 offers 100% of FTSE 100 returns over 5 years (capped at 52.5%), but this ignores dividends and you’ll simply get back your initial investment if the index falls over the period.

Short

If you want to be sure of making money when the market falls then you’ll need to go ‘short’ – basically the reverse of buying shares normally. By shorting a share you gain when its price falls. Holding ‘short’ investments alongside conventional ones can help hedge your bets.

Simple ways to do this include using exchange traded funds (ETFs) and spread-betting.

Some ETFs, such as the dbx Trackers FTSE 100 Short Daily, track an index in reverse, so for every 1% the index falls you profit by 1%.

Spread betting allows you to bet on share/index price movements, either up or down. For example, you could bet £10 per 1p a share price falls. If the share price falls from 100p to 90p you’ll make £100 profit, but you’ll lose £100 if it rises to 110p. Spread betting is potentially high risk, but straightforward and tax-free. You can read more about short ETFs and spread betting in my answer to his recent question.

Absolute Return

Absolute return funds typically try to use a combination of shorting and diverse investing to deliver positive returns regardless of markets. Unfortunately, they have a patchy track record of actually working and the managers tend to charge excessive fees (often a standard 1.5% annual fee plus a fifth of any profit). These types of fund are probably worth holding in moderation (choose carefully) but I’d be wary of trusting them for the bulk of your portfolio.

Conclusion

The sure-fire way to protect your portfolio from falling stockmarkets is to hold cash. But as this will miss out on any stockmarket rises (v difficult to predict) the above strategies offer a way to protect against stockmarket falls while leaving the door open to some return if markets rise. They’re not a perfect solution, but I don’t think one exists – if you know of one please tell me!

Read this article at http://www.candidmoney.com/articles/article154.aspx

How to profit from falling markets?

Question
If you expect the stockmarket to fall, what can you invest in that will go up as a result of a fall in the stockmarket and act as a hedge against the falls in share prices?

I'm sure I've read that you can do this but I can#t remember what you can buy and I'm not talking about absolute return funds.Answer
Profiting from falling share prices is called ‘shorting’ the market and there are two fairly straightforward ways for private investors to do this: exchange trade funds (ETFs) and spread betting.

ETFs are basically investment funds that are traded on the stockmarket, so you can buy them via stockbrokers (it should be possible to buy and sell for £10 or less online). A few ETFs short specific stockmarket indices, so (ignoring charges) for every 1% the index falls you’ll profit by 1%. There are also several that double your exposure (called ‘leveraging’), so for every 1% fall you’ll make 2% - obviously more risky.

Examples include the dbx Trackers FTSE 100 Short Daily and ETFS FTSE 100 Super Short Strategy (2x) ETFs.
Spread betting involves betting a fixed amount per point that an index/share price moves - you can choose up or down.

For example, suppose shares in Company X are trading at 100p and you place a spread bet of £10 per 1p (or ‘point’) that the share price falls. If the share price falls to 90p then you’ll make £100 profit, but if the price rises to 110p you’ll lose £100. The spread betting company will require you to put down an initial deposit (or ‘margin’) of around £50 in this example, but start losing money (even on paper) and this could increase.

As this simple example shows, both the risks and rewards can be high. On an initial £50 stake a 10% change in the share price could generate £100 of spread betting profit or loss, versus just £5 had you bought the shares. But, unlike buying shares, you can lose a lot more than your initial stake when spread betting. Mike Ashley, the Sports Direct founder famously lost £300 million in 2008 when a spread bet on the HBOS share price backfired.

Because shares have a difference (or ‘spread’) between their buying and selling price, this is reflected by the prices used by spread betting companies, in fact they usually add their own small margin too. So in our example Company X’s share bid price might be 99p and the offer price 101p, then 89p and 91p when you close the bet. Your gain would be 99p – 91p x £10, i.e. £80.

On the plus side spread betting allows you to short a wide range of shares/indices and there’s no tax on profits nor any stamp duty. However, there is considerable risk, especially on larger bets per point of movement, so it’s not for the faint-hearted.

Read this Q and A at http://www.candidmoney.com/questions/question289.aspx

Am I being mis-sold an investment bond?

Question
I recently read an article where it was mentioned that you were concerned that investment bods are still being sold on the high street. Coincidentally I have recently met with my IFA who recommended I took out a Prudential Flexible Investment Plan, which I would have to keep for 5 years to avoid early withdrawal/closure penalties. I am looking to invest an amount up to £40,000 which does not have to generate income for me. I will be a basic rate tax payer when a pension starts at the end of October.

When I challenged him about this type of investment he was quite defensive and advised that they are still better than unit trusts.

I find it really difficult to understand the differences between types of investments (I do understand ISAs, equities purchased from single companies, ordinary savings accounts, etc) where the amount can be split between different asset classes.

I would be really grateful if you could advise me. Am I being taken for a ride?Answer
Being cynical the Prudential Flexible Investment Plan probably is better than a unit trust for your adviser (because it'll pay him more commission), but it's unlikely to be so for you.

The Prudential plan is an investment bond and, as these things go, it's one of the better ones because there's a good range of funds that can be held within.

However, it's important to appreciate that investment bonds are basically just a wrapper, subject to special tax rules, within which you can hold fund investments similar to unit trusts. So tax is what's key here.

Within an investment bond all investment income and gains are automatically taxed at basic rate and this can never be reclaimed. Provided you remain a basic rate taxpayer you'll unlikely ever have any further tax to pay, so it's neutral, i.e. no tax benefit for basic rate taxpayers.

If you're over 65 there is a potential benefit in that any annual withdrawals you make up to 5% of the sum invested don't count towards you increased age-related income tax allowance, although when you eventually sell the bond these withdrawals plus gains are treated as income when calculating your age-allowance that year.

Compare this to a unit trust or shares where gains are liable to capital gains tax and income, unsurprisingly, to income tax.

For a basic rate taxpayer the after tax income is effectively the same as an investment bond, i.e. it's been taxed at 20%. For those over 65 the investment bond might hold an advantage when withdrawing income re: the age allowance.

But gains can be offset against your annual capital gains tax allowance, currently £10,100. So on a £40,000 growth investment it's likely you can enjoy tax-free growth versus an investment bond where it would be taxed at 20%.

This could make a significant difference - assume £40,000 invested for 10 years with 6% annual gains before tax, a capital gains taxable investment would grow to £71,634 (assuming you use your allowance) whereas the bond would only grow to £63,925.

Better still, if unit trusts or shares are held within an individual savings account (ISA) then gains and interest (from corporate bonds and cash) will automatically be tax-free, while dividends will have no further tax deducted (basically no difference for a basic rate taxpayer). Also, ISA income does not need to be entered on a tax return so it won't affect your age allowance.

You can invest up to £10,200 into an ISA each tax year (rising by inflation from next year), of which up to half can be in a cash ISA.

If your ISA allowance is available and the adviser has ignored this when recommending the investment bond I am deeply concerned as it's blatantly poor advice.

If your ISA allowance isn't available then maybe the adviser believes the investment bond will be more tax efficient because it won't affect your age allowance, but the unit trust/shares route will still likely be the more tax efficient overall - hence I believe his advice is probably being driven by what's best for him, not you.

Unit trusts usually pay 3% initial and 0.5% annual commission. Check the commission the adviser will receive for selling the investment bond, it'll almost certainly be higher.

Maybe a good time to find a new adviser...

You can read more about the age allowance on our income tax page and my answer to this question, but here's a quick summary:

If you're aged over 65 you enjoy a higher personal income tax allowance, currently £9,490 if 65-74 and £9,640 if older (the standard allowance is £6,475).

For every £2 your income exceeds £22,900 you lose £1 of allowance, although you can't fall below the standard £6,475. This means that for some aged 65-74 their income between £22,900 and £28,930 is effectively taxed at 30%, i.e. 20% basic rate tax plus the lost personal allowance which is equal to 10%.

So, depending on your income, the investment bond could save you 10% tax on income versus a unit trust/shares (ignoring ISAs). But then a unit trust/shares will save you 20% tax on gains - likely to be more valuable over time unless you require a high income and don't use ISAs.

Read this Q and A at http://www.candidmoney.com/questions/question286.aspx

Why is the stockmarket rising when economies are struggling?

You'd expect stockmarkets to reflect the relatively bleak economic outlook, so why have they risen in recent weeks?.

Stockmarkets have generally been heading upwards lately, with the FTSE 100 today closing at over 5,600 points - its highest close since late April.

This is good news if you own stockmarket investments, but seems odd given there's still talk of global economic troubles and the possibility of some economies, including the UK, slipping back into recession.

So what's going on? Are the markets being overly optimistic? Or do they know something we don't?

Reasons to be optimistic

Most economies are out of recession - there are fears that the US and major European economies will fall back into recession (the so-called 'double-dip'), but for now they're technically out of recession and showing very modest growth.

Corporate profits are generally positive - there's no doubt that markets have been boosted by some strong earnings announcements from companies around the globe in recent months. The positive results are generally thanks to a combination of leaner companies (due to shedding some excess fat during the recession) and growing demand as the worst of recessionary gloom lifts.

Central banks may boost economies - even though there's widespread concern that Western economies will struggle, there's widespread belief that central banks will step in and pump money into economies to keep them moving.

Dividend yields attractive - the FTSE 100 yield currently averages about 3.3% net of basic rate tax (with some companies yielding well over 5%), which compares favourably to gilts at around 3-4% before deduction of tax. Some argue that shares are therefore undervalued, although you could also argue that gilts are overvalued...

Interest rates look set to remain low - this is generally good news for stockmarkets as it makes it cheaper for companies and consumers to borrow, which leads to more spending. Low interest rates on savings also encourages more people to buy shares rather than save.

Reasons to be worried

The impact from tax rises and spending cuts has yet to be felt - they could have a significant impact on consumer spending, hence company results and stockmarkets, especially in the UK. It's still very early days and once in full swing the Government's austerity measures could prove very painful for many.

Economies are still struggling - while most developed economies are now out of recession, they're far from firing on all cylinders. Things are finely poised and it won't take much bad news to send some economies straight back into recession.

Unemployment troubles - although US unemployment has steadied, it was still 9.6% in August 2010 - more than double the 4.6% in August 2007. High unemployment hurts consumer spending, which is bad news for companies - although it can help by driving down wage costs.

Emerging markets still depend on developed - growing prosperity in emerging markets means companies in these markets increasingly benefit from domestic demand, but they still rely on exports. If Western consumers are hurting from higher taxes and unemployment they'll probably buy less, hurting emerging stockmarkets in turn.

Why are gold, gilts AND stockmarkets riding high?

In simple terms gold and gilts are seen as safe havens, favoured by investors when nervous about stockmarkets. So it seems strange their prices have generally held up during the recent stockmarket resurgence (ok, gilts have fallen in price, but only by a little).

The best explanation that I can come up with is that although stockmarket sentiment has picked up lately, there's still plenty of nervous investors to prop up demand for gilts and gold.

The UK stockmarket is not an island

I know I've said it before, but when looking at the UK stockmarket it's important to remember that many of the companies listed on the London Stock Exchange trade globally. This means their fortunes depend on economies overseas and not just the UK - only around a third of UK stockmarket revenues come from Britain. Of course if overseas economies suffer that's a problem, but it does provide some insulation from the UK economy where prospects are arguably more gloomy than many overseas economies.

Verdict - I'm not sure the upturn will last

On balance, I think stockmarkets are suffering from a bad case of short-sightedness. Yes, there's been some positive profits announcements recently, but can most of these companies keep up profits growth if economies fall back into recession? I doubt it. And yes, central banks might step in to lend a hand, but this is like sticking tape over a leaking pipe - it might work for a while but it's not a permanent fix.

So stockmarkets, like too many things in life these days, seem to be obsessing with the present and paying too little attention to the future. I expect we'll get a stream of bad news at some point over the next few months and they'll fall back again...until the next batch of good news.

That's not to say you should ignore stockmarkets for longer term investment, but I'd tread carefully and expect volatility to remain high for a long while yet.

Perhaps stockmarkets have become like schoolboy football. Investors are too busy chasing news all over the pitch to take stock of the situation and organise a formation likely to succeed.

Read this article at http://www.candidmoney.com/articles/article152.aspx

How to boost my civil service pension?

Question
I am 60 and I have accumulated some 21 years of civil service pension which will give me a pension of around £23k per year. I intend working for another 5 years and so will accumulate another 5 years of pensionable service . I would like to boost my savings towards my pension.

Am I better off paying into a superannuation fund i.e taking advantage of the fact that the sum invested will come from my pre-tax income or should I pay tax and invest what would then be a reduced amount in Sipps or something similar?Answer
If you contribute money into a pension, whether your civil service scheme or otherwise (e.g. a stakeholder pension or SIPP), then you'll normally receive tax relief on your contributions. This means a £100 gross contribution will effectively cost you £80 if a basic rate taxpayer and £60 if a higher rate taxpayer.

So I think your first decision should be whether to contribute the extra money into a pension (whether your civil service scheme or another) or use a different savings vehicle, e.g. an individual savings account (ISA).

Contributions into an ISA don't benefit from tax relief, but when you eventually take income from an ISA it's tax-free - whereas pension income is taxable.

There's no right or wrong answer here. If you're a higher rate taxpayer now and plan to take a tax-free lump sum from your pension when you retire, then a pension is likely to offer the greater tax advantage (as it looks like you'll be a basic rate taxpayer in retirement). But an ISA is more flexible (you don't have to exchange the fund for an income on a certain date) and tax-free income could be increasingly valuable if tax rates rise.

Either route is unlikely to be a bad decision, but it's worth giving some though as to which is likely to be most beneficial to your situation. You can read more about pensions versus ISAs on our ISAs page.

If you decide to top up your pension you'll have two main options. Either to buy extra annual pension within your civil service scheme or contribute into a money purchase type pension where your pension will depend on the amount contributed, investment performance and annuity rates.

You'll need to contact your pension scheme administrator to get a quote for buying extra annual pension, as the cost varies between schemes and depends on your age and time until retirement. Assuming you're in a local government pension scheme the cost is likely to be around £90 per month per extra £250 of annual pension at retirement for a male aged 60 retiring at 65 (£100 if female). The advantage of this route is that there's no investment risk on your part, you'll know exactly how much extra pension you'll receive at retirement.

Contributing the money into a stakeholder or self-invested pension means taking risk. If investment performance is good you might do better than buying extra civil service pension, but there's a fair chance you'll do worse.

Only you can decide whether you're happy to take the risk of using either a money purchase pension or ISA in pursuit of a higher pension, but given you're only five years from retirement I'd be tempted to err on the side of caution and seriously consider buying extra pension entitlement within your existing pension scheme.

Read this Q and A at http://www.candidmoney.com/questions/question285.aspx

Where to switch closing Skandia pension fund?

Question
Skandia are closing a pension fund and the defaut/do nothing option is to switch to the "Skandia Prof. Fidelity Flexible Managed Fund" which carries higher charges (TER 1.3% vs 0.9%).

Problen is I've been unable to find out anything about the recommended fund. Nothing on the Skandia or Fidelity web sites or on Trustnet. Fidelity don't appear to have a fund of that name (yet?). Skandia say in the letter that the new flexible fund (actually they don't call it a new fund) will be managed more "flexibly" but "without the oversight from Skandia".

Q1: This sounds awfully like a 44% increase in fees for doing less work? Who is getting the extra fee money, Skandia or Fidelity?

Q2: Should we be concerned about the lack of oversight Skandia mention or are all pension companies doing that these days?

Q3: Should we be looking at other Skandia funds instead? or even transferring to another provider?

The holder is a 50 year old unemployed or rather early retired woman living on other investment income. She isn't contributing to this fund anymore nor is she drawing from it. However she may need to draw some income from it when she reaches 55 (help with school fees). Basically she isn't critically dependant on this fund but obviously wants it to do well and not go on high fees.
Answer
Skandia Professional has closed around 20 funds over the last couple of months, so I'm not sure which fund the holder owned. Nevertheless, it should be possible to find some cost effective alternatives, despite Skandia Professional pensions not having as a wide a fund choice as other Skandia pensions.

To answer your first two questions: any extra fee is very likely going to Fidelity and it's rare for pension providers to oversee funds except for those they manage themselves. In any case, while ok, I wouldn't rank Skandia amongst the best fund managers so their lack of oversight is probably inconsequential.

The Fidelity Managed fund (listed under flexible funds in the following list http://www.skandia.co.uk/funds/pdfs/fundrange_pdfs/aug10_Professional.pdf) has actually performed very well and the Skandia Professional fund list suggests its TER is 0.9%. There are other decent managed fund alternatives to consider too, including Professional Blackrock Managed (TER 0.85%) and Professional Newton Managed (TER 0.5%). There are also a few index trackers with TERs of around 0.2-0.25%, although being stockmarket based these would likely to be too risky held on their own.

So staying with Skandia Professional is likely to be the most straightforward and cost effective option, perhaps spreading the pension across a few managed funds to spread risk.

Read this Q and A at http://www.candidmoney.com/questions/question284.aspx

Save your savings

If you haven't checked your savings in a while you could be in for a nasty surprise. Around a third of variable rate accounts are paying 0.1% or less annual interest..

If you have savings in a bank or building society variable rate account there's about a 1 in 3 chance you're earning just 0.1% or less a year. Granted, you can't expect much when the Bank of England base rate has been stuck at 0.5% since March 2009, but as it's possible to find accounts paying over 2% there's no reason for savers to put up with appallingly low rates.

Why do some banks pay 0.1%? Simple, because they can get away with it thanks to legions of lazy savers. And in some ways we should be grateful to those lazy savers, because paying 0.1% on some accounts gives banks the cash to offer artificially high rates on other accounts designed to attract new customers.

I updated some data I put together a few months ago on this and the situation is getting worse, not better, with the number of accounts paying 0.1% or less increasing. And with base rate likely to remain at 0.5% for a while longer yet I expect this trend of falling savings rates to continue.

So the key, unsurprisingly, is to play the game by reviewing your savings regularly and not hesitating to switch to a better rate elsewhere if yours starts to wane. Yes, it's a chore, but if you have a reasonable amount of savings it'll be time profitably spent - an extra 1% is worth £100 a year per £10,000.

Here's a summary of the main banks and building societies, to give you a feel for who the worst offenders are:

Bank/Building Society	% of ALL accounts paying 0.1% or less*	% of OPEN accounts paying 0.1% or less*	% of CLOSED accounts paying 0.1% or less*	Total accounts reviewed*
Barclays	62%	25%	73%	34
Lloyds TSB	59%	20%	79%	29
Royal Bank of Scotland	58%	45%	69%	24
Cheltenham & Gloucester	53%	38%	71%	15
Natwest	53%	50%	57%	19
Newcastle BS	49%	15%	59%	84
West Bromwich BS	49%	68%	26%	41
Co-Operative	48%	22%	67%	21
Halifax	48%	48%	N/A	21
Santander	45%	38%	48%	58
HSBC	35%	43%	17%	20
Nationwide	34%	28%	45%	29
Leeds BS	32%	38%	27%	59
Skipton BS	29%	0%	32%	127
Principality BS	24%	11%	40%	33
Alliance & Leicester	19%	0%	19%	27
Yorkshire BS	16%	19%	0%	25
Chelsea BS	8%	0%	9%	63
Coventry BS	8%	6%	10%	39
Northern Rock	3%	17%	0%	38
Average/Total	34%	30%	37%	806
* includes all variable rate personal savings accounts. Rates used assume the lowest allowed balance is held. Temporary bonuses ignored if they may have already ended. Data compiled on 06 September 2010. Source: www.candidmoney.com

You can find out more about switching savings accounts in our Review Your Savings Accounts Action Plan.

Read this article at http://www.candidmoney.com/articles/article151.aspx

Mis-sold an investment bond?

Question
Should I surrender my Investment Bond with St James Place (£60,000)? After reading your comments in the Daily Mail I'm concerned the bond has been mis-sold.

I have had it for 3months, on advice from a St Jame's Place adviser to surrender 10 year old With-Profits Bonds, which incurred a MVR penalty. I'm 71 and a basic rate taxpayer. On reflection I think this is too much of a long-term investment for me.Answer
There's two things to consider re: investment bonds: the tax treatment of the bond 'wrapper' and the investment(s) held inside.

I think investment bonds are a white elephant for most people because the tax 'benefits' are likely to be non-existent and certainly less appealing than other options such as ISAs and holding unit trusts and shares directly.

Investment bonds must pay tax on both income and gains at basic rate, currently 20%. This can never be reclaimed, not even by non-taxpayers. So for a basic rate taxpayer there's no tax saving whatsoever.

Compare this to a unit trust or shares where gains can be offset against an annual capital gains tax allowance, currently £10,100, meaning the vast majority of investors can enjoy tax-free growth. Dividends are automatically taxed at basic rate (which cannot be reclaimed), but tax deducted on interest from cash and corporate bonds can be reclaimed by non-taxpayers (and when held within an ISA).

So, as a basic rate taxpayer, suppose you held identical funds via a unit trust and an investment bond, you'd expect the investment bond growth to be 20% lower than the unit trust - simply because of the way they're taxed.

As you're over age 65 there's also another issue to consider. When you sell the bond, any gains will be notionally added to your income that year which may reduce your age-related personal allowance. Although if your investments produce income you may benefit meanwhile as you can withdraw up to 5% a year (of your original investment) from an investment bond without it affecting your age allowance that year.

All in all, advising basic rate taxpayers to buy investment bonds very rarely makes any sense at all. There may, on occasion, be a tax benefit for higher rate taxpayers, but I won't confuse the answer by covering that here (read our life insurance investments page if you want to find out more).

Moving onto the investment held inside. Most investment bonds now offer quite a wide range of conventional funds in addition to with-profits, traditionally the investment bond mainstay. But aside from with-profits there's unlikely to be an investment option within an investment bond that you can't get outside, for example via a unit trust.

What types of investment should you be holding at age 71? Well ,it depends on your exact needs but I'd imagine you're after income with low risk. You can probably achieve this within an investment bond but, as noted earlier, it may not be the most tax efficient option for you - especially if you have not used your ISA allowance. And you should porobably look to hold the investment bond for 5-10 years due to a combination of charges and underlying investment risk.

What should you do?

Based on the information you've given I have serious concerns that you've been mis-sold an investment bond, especially if the adviser did not use an available ISA allowance. It looks like the adviser has done what's known in the trade as a 'churn' - that is he/she has moved you from investment to another simply to pocket commission (investment bonds tend to pay high commissions), rather than because it's in your best interests. The fact you had to pay a penalty (MVR) to leave the with-profits bond (check whether there was an option to sell MVR-free on a certain date) only for the money to be invested in another investment bond sounds like bad advice to me.

Surrendering the bond now will probably incur a penalty, leaving you worse off.

If you think you've been mis-sold the bond I suggest writing to St Jame's Place stating that you are unhappy with the advice given because it is not tax efficient and inappropriate for your needs. State that you wish for the bond to be surrendered and for St Jame's Place to absorb any initial/exit charges and losses incurred so that you do not lose out. Then take your business elsewhere.

And if the adviser doesn't oblige take your complaint to the Financial Ombudsman Service, which is free for consumers, and they will hopefully exercise some common sense and rule in your favour.

Read this Q and A at http://www.candidmoney.com/questions/question283.aspx

A few months are a long time in life insurance

Life insurance is something you tend to buy and forget. But premiums can change significantly in a short space of time, as I've found out, potentially saving you hundreds of pounds..

If you've looked around the site you might have come across the Buying Life Insurance Action Plan, providing you with handy tips on how to get a good deal on appropriate cover.

As it'd been a few months since I wrote the page I updated the sample life insurance quotes yesterday. You don't expect these things to change by much, after all, average life expectancy changes over years, not months, so I was surprised to see quotes changing, for better and worse, by up to 15%.

While it might not sound like much, it could affect the total cost of a life policy by hundreds of pounds over the term held.

Here's a quick summary (monthly premium quotes for 20 year level term assurance of £200,000 for a 30 year old non-smoking male):

Broker/Insurer	Quote 13/4/2010	Quote 15/9/2010	Change in total cost
Cavendish Online	£7.75	£7.03	-£173
Moneyworld	£7.75	£7.03	-£173
Moneysupermarket	£7.57	£7.95	+£91
GoCompare	£9.16	£9.45	+£70
CompareTheMarket	£9.21	£9.02	-£46
Aviva	£10.64	£10.78	+£34
Tesco	£11.07	£9.34	-£415
Direct Line	£12.12	£13.28	+£278

You'd expect small changes from time to time, as insurers raise or lower premiums depending on how hungry they are for business. But why such significant changes?

In the case of discount brokers Cavendish Online and Moneyworld, who already cut their margins to the bone by waiving all commissions in exchange for a small fee, it must be the case of an insurer deciding to give them especially attractive quotes in a bid to win more business.

Price comparison site Moneysupermarket was the cheapest last time but quite a bit more expensive this time. They display quotes from both insurers and brokers and the previous quote appeared to be from a broker who'd either negotiated an exceptionally good deal from an insurer or was offering a loss leader to try and win more customers - not repeated this time. GoCompare and CompareTheMarket changed a little, but still remain very uncompetitive.

Aviva's quote remained more or less the same, but far more expensive than buying the same Aviva policy through one of the discount brokers. Tesco slashed their premium to become just expensive, rather than extortionate. And Direct Line remains on another planet by hiking an already expensive quote to nearly double that from the discount brokers.

If there's a lesson to be learned here it's don't be afraid to shop around for a better life cover deal from time to time - as premiums can change significantly.

There's nothing stopping you from taking out a new policy if you find a cheaper deal, just don't cancel the old one until the new cover is in place. Yes, it's not the most interesting of tasks, but it could be a very profitable one.

Read this article at http://www.candidmoney.com/articles/article150.aspx

Discounted gift trust worthwhile?

Question
I have about £500,000 to invest and, to avoid IHT, it has been suggested that I put this into a Pru Growth Fund in a Discounted Discretionary Trust.

There is a considerable Commission payable to the Adviser but this will be paid by Pru not myself.

Do you have any views on this or alternative suggestions? Your advice will be much appreciated.Answer
There are two issues to consider here: the quality of the advice given and how much you are being charged for it.

Let's start with the latter:

Investment bonds (the type of investment being recommended here) typically pay initial commission of around 4% plus annual commission of 0.5%, or a single upfront payment of around 6%. So based on a £500,000 investment the adviser is effectively charging you around £20,000 initially plus £2,500 a year for as long as you hold the bond, or a one-off amount of about £30,000 - not bad for a few hours work...

Please don't be deceived into thinking commissions are not a fee you end up paying. Prudential may well pay the adviser directly, but the commission ultimately comes out of charges Prudential levy on the investment.

A far more cost effective route would be to find a fee-based adviser who charges either reasonable fixed or hourly fees and rebates/waives all commissions. Using this route should cut the cost for initial advice to £2-3,000 (at most) followed by a few hundred pounds a year for keeping an eye on things. And the charges you pay on the underlying investment(s) will be reduced by the amount of commission that would have otherwise been paid (or, if this isn't possible, the adviser will hand you a check for the commission received).

Now onto the advice:

There's really only one way to avoid inheritance tax (IHT) on your assets - give them away. Smaller gifts within annual allowances will fall out of your estate straight away, otherwise you'll have to live for at least seven further years until the potential IHT liability is extinguished (read more details on our inheritance tax page).

However, it's common to want to give assets away but retain some control, for example preventing grandchildren from getting their hands on them until they reach a certain age. This is where trusts come in. There are quite a few different types of trust, but fundamentally they all do the same thing: allow you to give something away while retaining some control over what happens to it - although this doesn't mean you can take it back if you subsequently change your mind!

Discounted discretionary trusts are interesting as they offer a way of shifting part of a gift outside of your estate without having to live for seven years afterwards, and receive regular withdrawals (effectively an income) from the trust for the rest of your life.

This works because the part of the gift that is earmarked to pay the withdrawals (called the 'discount') is not treated as a gift for IHT purposes, hence it reduces the size of the your estate. The size of the 'discount' increases the more you withdraw and/or the longer your life expectancy.

You need to careful that the gift (i.e. your £500,000 less the discount) does not exceed the IHT nil rate band (currently £325,000) else it'll be taxed at 20% initially followed by a further 6% tax every 10 years. This isn't a problem if you use a discounted bare trust, although you can't then change the beneficiaries at a future date.

If you die within 7 years HMRC may well investigate to make sure you weren't trying to dodge IHT (by using a discounted trust when you knew your life expectancy was very short) - the insurer offering the trust/bond will also likely request a doctor's report to ensure the discount rate is realistic.

If you're confident you'll live for at least 7 years and would like to receive an income after making the gift, you could consider a flexible reversionary trust. Unlike a discounted gift trust there's no immediate reduction in the size of your estate (you'll have to live for 7+ years), but it's possible to hold unit trusts and other investments which may be more tax efficient than investment bonds.

A big issue to consider with discounted trusts containing investment bonds is what happens when you die. It's likely to be more tax efficient for the bond(s) to be assigned to the beneficiaries (so they own them directly) and then surrendered rather than doing so in the trust in which case the tax due on the gain (which is taxed as income re: investment bonds) would be at the 50% trust income tax rate. And investing in an offshore investment bond is likely to be more tax efficient than an onshore one, as it defers basic rate tax that would otherwise be deducted as you go along.

It's also very important to pay attention to the quality of investment management and the income/capital gains tax tax implications of investments held within a trust. No point in trying to save IHT if poor investment performance and penal tax offsets the savings.

I'm afraid I can't practically cover all your options in my answer, but suffice to say good independent advice would be sensible.

Just try to find a more cost effective adviser than the one you've already spoken to - they sound like the sort of person that's given the financial advice industry such a bad reputation...

Read this Q and A at http://www.candidmoney.com/questions/question282.aspx

€100,000 FSCS limit for savers?

Question
I have heard that the FSCS limit per individual will rise to 100,000 euros instead of the £50,000 in the New Year. Is this correct?Answer
Based on an EU announcement yes, although the FSA has still to confirm the new limit will take effect from 31 December 2010.

On 12 July 2010 the EU Commission issued proposals intended to harmonise protection for savers across all EU states (called the 'European Deposit Guarantee Scheme'). Of these the main proposal is to protect savings (ignoring 'credits' such as loans and mortgages) of up to €100,000 per institution for both individuals and companies (but not financial companies or public authorities).

Other proposals include ensuring account holders are reimbursed within 4-6 weeks (but with a target of 1 week) and making it simpler to claim if the account is held in another country.

It looks like the €100,000 limit will be converted to pounds based on the exchange rate when the new rules are announced, with the limit being revised using the prevailing exchange rate at least once every five years. Based on a rate of £1 = €1.2 at the time of writing, the limit would be around £83,000.

It's very likely the FSA will implement these changes and introduce new rules for the Financial Services Compensation Scheme (FSCS) by 31 December 2010, but there's been no official announcements as yet.

I shudder to think how much time and taxpayer's money has been expended by bureaucrats in Brussels and elsewhere on this, but the least the end result should be a positive result for UK savers.

I'll update the site as soon as there's some concrete news from the FSA/FSCS.

Read this Q and A at http://www.candidmoney.com/questions/question281.aspx

Avoid IHT on savings for granddaughter?

Question
I want to invest £5000 for my 10 year old granddaughter and want it to be in an account designated in her name for IHT puposes.

I have decided to invest in a 2 year fixed account and found the bank Aldermore paid a competitive rate but after waiting about 10 minutes for them to answer my call I was told that these accounts are only available for people over 18 years of age. They said they would transfer me to someone else but after waiting a further 5 minutes I gave up.

Would you kindly advise if there are any banks who will accept investments for children in designated accounts?Answer
Designated accounts and inheritance tax often cause confusion. As designating an account will usually mean you retaining ownership until it's eventually passed to your granddaughter (when she reaches 18) the money will be viewed as yours until then (i.e. it's not an irrevocable gift). This means it will only be treated as a gift when your granddaughter reaches 18 and it'll take a further seven years before the money falls outside of your estate.

To get the money out of your estate (and avoid inheritance tax) you'll either need to gift it outright or gift it into some type of trust of which your granddaughter is the beneficiary - either way the gift will be viewed as a potentially exempt transfer and fall outside of your estate provided you live for at least seven years thereafter.

Bare trusts are a straightforward type of trust often used for this purpose. Once the money is gifted into a bare trust your can no longer take it back (i.e. it's irrevocable), but you can become a trustee and retain legal control (i.e. decide where it's saved/invested) until the money automatically passes to your granddaughter when she reaches age 18.

The trouble is, most banks and building societies don't allow their personal accounts to be held in bare trusts - as you've found out.

I've looked at a few of the major banks and building societies and haven't managed to find a competitive (adult) savings account that can be held in trust [If any readers know of one them please post details below].

You'll probably have more joy looking at children's savings accounts as these are more likely to be available within a bare trust. Northern Rock currently offers a 'Little Rock Fixed Rate Bond Issue 2' paying 4% until 1 October 2013 and appears to be available within a bare trust.

I have to say I've always found the whole notion of designated accounts and bare trusts incredibly vague and generally misunderstood, so it's likely lots of innocent mistakes go unnoticed by HMRC. However, it's always a good idea to try and do the right thing, so if HMRC ever does come knocking your books will be in order.

Read this Q and A at http://www.candidmoney.com/questions/question280.aspx

Multi asset funds

Are multi asset funds the perfect one-stop shop for your investing needs? Or is entrusting all your eggs to one fund manager a bad idea?.

I’ve never been a fan of multi asset funds. If an investor has £100,000 of free capital he or she can, in theory, put it into a multi asset fund that matches his or her risk profile. Classically, the aggressive funds have more equities than the defensive funds. In the bad old days the cash might have found its way into With Profits, just another multi asset proposition, but this time wrapped in knitted smoke. Either way, putting it all with one house is a dumb idea.

I think it helps for people to know what asset classes they are in, why, and when it might be appropriate to change the mix. If the £100,000 was split between four or five multi asset funds, the investor would have some difficulty tracking the aggregate asset allocation, let alone adjusting it.

For many investors, the picture is also complicated by their ISA portfolios. For higher rate taxpayers especially, using the annual ISA allowance is a must. If the investor is holding a mix of bonds and equities, it makes most sense to hold the bonds in the ISA and the equities outside, so a multi asset fund doesn’t ring the right tax bells either.

I can see why the providers like them: they are a way to compete for a bigger share of the individual investor’s pot. But they can make life even more complicated, which is the last thing that most investors need or want.

Read this article at http://www.candidmoney.com/articles/article149.aspx

CGT on switching funds?

Question
I read your answer to a previous question about capital gains tax when selling funds. But what about CGT on switching funds?

What happens when you switch within the same fund supermaket (i.e. no sale just switch ), is there potential for CGT?

I'm fairly sure the answer is no (ref : I've just done a large switch to trackers whilst keeping a about a third active in more specialist areas re. recent articles about bonus charges in active funds). Please can you confirm?Answer
In this context a switch is the same as a sale/purchase - if you switch from fund A into fund B then it involves selling units in fund A and using the money to purchase units in fund B. This might be seemlessly handled by the fund supermarket, but it does nevertheless mean that any gains on the fund(s) you've switched out of (i.e. sold) are subject to capital gains tax (unless the funds are held within a tax wrapper such as an ISA, pension or investment bond).

You can obviously offset your annual capital gains tax allowance (£10,100 for 2010/11) against the gains, but I'm afraid any gains in excess of this will be taxed at either 18% or 28% depending on whether the gains, when added to your income, fall into the basic or higher rate tax bands.

The only exception to this is switching between income and accumulation units within the same fund, in which case HMRC does not view the switch as a sale.

Sorry this is not the answer you were looking for.

Read this Q and A at http://www.candidmoney.com/questions/question278.aspx

Tax when offshore funds seek reporting status?

Question
Recently the tax implications of ETF have been commented and explained by various advisers.I have an ishares ETF Australia which is seeking the Reporting Status.Am I correct in saying that if I were to sell the holding at a profit income tax will be payable on the gain rather capital gains?

And if I wait until the reporting status is granted what will be the tax implication considering that the investment was bought during the 'seeking period' and sold during reporting period?Income tax or capital gains?Answer
[Note: the US domiciled version of this fund was launched in March 1996, I’ve assumed you hold the Dublin version but the answer below applies to both]

I’ve just thumbed through the HMRC offshore funds manual and the position for investors in your shoes seems to be covered by ‘Regulation 48’.

When a non-reporting fund becomes a reporting fund UK investors may make a ‘deemed disposal’ at the time of conversion. This means you can treat your tax position as if you sold and repurchased the fund on the conversion date. You’ll be liable to income tax on any gains up to the point of conversion, but gains thereafter will be subject to capital gains tax.

You’ll need to detail this via your tax return covering the tax year in which the conversion takes place. There’s no special section on the return for deemed disposals, so you should report the offshore income gain as you would normally and show your calculations in the relevant notes section.

By the same token, if you sell the fund before reporting status is granted then any gains will be subject to income tax.

For the benefit of other readers (this isn’t relevant to your ETF), where a fund qualified for ‘distributor’ status under the old offshore rules (pre 1 December 2009) then provided it successfully applies for reporting status gains will continue to be subject to capital gains tax and not income tax.

Read this Q and A at http://www.candidmoney.com/questions/question275.aspx