What investment mix?

Question
What percentage of my investments should i put into shares, other assets and cash?

I want security, growth and income.Answer
Sorry to sound like a killjoy, but If you want total security then stick to cash and limit your holding to no more than £50,000 per institution to ensure you’re covered by the Financial Services Compensation Scheme (FSCS).

If you’re comfortable investing for 5-10 years or more and accept that you could lose money, albeit with the prospect of earning higher returns than cash longer term, then a mix of stockmarket, fixed interest, property and commodities investments would seem sensible.

Even so, I’d suggest keeping at least 20% in cash and more if you’ll need to cover any large upcoming expenditure. If you’re a taxpayer then consider using cash ISAs to ensure interest is paid tax-free.

Commodities don’t tend to be good for income, but I think the 10-20 year growth prospects are decent. I’d be very surprised if demand doesn’t rise faster than supply with the continued growth of emerging markets. Despite increased eco awareness, global demand for energy will almost certainly soar as the vast populations of China and India start to move from peddle power to the motor car. These cultures also like to spend some of their new found wealth on gold jewellery, which should boost demand. So while commodities are volatile and not suited to income, I’d suggest holding around 10% of your portfolio in this area provided you’re happy with the potential timescales and volatility.

Stockmarkets can be well suited to income as dividends tend to rise over time (the recent credit crunch notwithstanding), but volatility can be high. Western stockmarkets tend to be the most reliable for dividends, but probably also have the bleakest outlook. I think emerging markets hold more promise over the next 10+ years, but will likely cause you more sleepless nights along the way.

Overall I’d suggest 25-40% in stockmarkets. Go global as well as UK, but in current climate a bias towards relatively cautious income funds along with absolute return funds would be prudent.

Fixed interest has had a good run, but appears to be running out of steam. While I’d avoid gilts right now, global investment grade bonds are probably still worthwhile. High yield bonds are also worth some exposure, but bear in mind that they tend to be correlated to stockmarkets. I’d suggest 15-20% in fixed interest.

I’d also suggest holding a similar amount in commercial property. After a couple of very difficult years the sector appears to be stabilising and prices have stated to rise in recent months. Commercial property should also be a good source of long term income, provided we don’t see an increase in tenants going bankrupt.

Asset allocation is very subjective and some don’t believe in it altogether – great if you can consistently predict the next years’ top performers, but I’ve yet to meet someone who can – I certainly can’t. The main thing is to avoid being over exposed to any one area, so if it gets hit you won’t lose your shirt.

You could consider a multi asset fund, tries to do the job for you, although if the manager invests in other funds (i.e. fund of funds) you could end up paying total annual charges of 2-3% or more, meaning the manager may have to run just to stand still.

Read this Q and A at http://www.candidmoney.com/questions/question139.aspx

Why is my money frozen?

Question
I trusted a financial adviser and he invested some money for me with Skandia in the Isle of Man for a period of five years. It has lost money consistently. (The five years is up now).

I still have a Collective Investment Fund and the fund has been 'frozen' now for almost a year and a half. It is the Frontier Property Fund. I've lost my home, well, I've lost everything because I can't get this money. How long can they 'freeze' peoples money for? Why should these Companies be allowed to do this?

I'm quite in despair about all this and keep getting sent round in circles. Any advice you could give me would be greatly appreciated.Answer
I’m sorry to hear about your difficult situation.

The financial adviser appears to have sold you an offshore investment bond offered by insurance company Royal Skandia, for which he or she probably pocketed around 6% or more initial commission.

An investment bond is effectively a ‘tax wrapper’ that holds investments, in this case the (rather expensive) Frontier Commercial Property fund.

The five year period you mention is simply the minimum holding period to avoid a surrender penalty – basically a charge levied by Skandia to make up for the commission they’ve paid to the adviser but haven’t had time to deduct via the bond’s charges.

The reason you can’t get hold of your money is that the Frontier Property Fund closed its doors to redemptions on 1 August 2008 (details here) and has yet to re-open them.

Why? Well it invests in a range of commercial property funds, some of which have in turn suspended redemptions until they can sell sufficient property to repay those investors who want out. This is all a result of commercial property markets taking a battering during the credit crunch.

However, commercial property markets have generally been improving in recent months, so I would expect Frontier to open its doors to redemptions sooner than later. I’d suggest keeping in regular contact with Frontier Capital (your adviser should be doing this is they’re still bothering to look after you) to establish which underlying funds remain closed and when trading is likely to re-commence.

I’m afraid there’s little else you can do unless you feel the adviser mis-sold you the bond. If you explicitly told the adviser you needed access to the money after five years and/or you didn’t want to risk the money, then you might have a case. Otherwise, and I know it’s the last thing you want to hear, you’ll have to carry on waiting.

Read this Q and A at http://www.candidmoney.com/questions/question143.aspx

Pension mis-selling?

Question
I retired last July and my wife will be retiring next August. We have been receiving advice from an IFA but I’m not sure how trustworthy this is.

She advised us to consolidate our AVCs and Stakeholder accounts (total value about £100,000) into a Scottish Widows retirement account. For this she received about 3% (£3000). We had thought that we would continue paying £300/month each into the new account instead of the Stakeholder.

Last September we noticed that we were not making the £300/month payment into our retirement account so we got back in touch and our IFA. She said she would arrange for us to continue making payments. Last week my wife received a supplementary schedule from Scottish Widows via the IFA and noticed a 10% per annum advisor payment charge. I wrote to our IFA to query the charge and she said ‘This is a charge of £30, per month, payable for one year only, and paid to Scottish Widows for the ongoing management of your fund. As part of this cost, Scottish Widows, pay 1% (£3) per month to us for our advice in this transaction.’

My wife phoned Scottish Widows to query the charge and was told that our IFA had been paid £360 commission up front and that we would be charged £30/month to reimburse Scottish Widows.

Should we have been advised to change from our Stakeholder to a retirement account when it meant we couldn’t keep on contributing £300/month without incurring commission charges? We will only be able to make about 10 months payments to the new account before my wife retires and there is no chance of making a profit because of the 10% charge. Our pension pot seems to be shrinking before our eyes. Should we cancel the new payments into the retirement account?Answer
My immediate concern is that you’ve been advised to switch low cost Additional Voluntary Contribution (AVC) and stakeholder pensions into a more expensive self-invested personal pension (Sipp) on the brink of retirement.

If you were at least 10 years away from retirement then the wider investment choice within a Sipp might justify the costs of switching and higher ongoing charges if it results in better performance. But I’m struggling to fathom why your adviser recommended the switch when you were so close to retirement (other than to pocket her £3,000 fee) as it'll almost certainly leave you worse off.

The only justification I can think of is that she thought you would be better off leaving your pension fund invested, drawing an income when required, rather than buying an annuity. This may or may not have been good advice depending on your situation, but I’m inclined to be sceptical.

As for the £30 monthly charge, the only reason for this is to pay the upfront commission paid to your adviser. The level of commission is chosen by the adviser and has nothing to do with Scottish Widows; they’re simply recouping the commission they’ve paid out. Having charged you £3,000 already I‘d have thought the adviser would have waived commission on your £300 contribution, especially given the mistake over continuing payments after the stakeholder pension was transferred.

Now, in fairness to Scottish Widows, the charges on its Retirement Account Sipp, while not the cheapest, are laid out very clearly. There’s a 0.5% annual service charge (on a £100,000-£150,000 fund) along with the underlying fund charges and any commission that the adviser elects to receive.

Let’s assume the underlying funds in your Retirement Account charge 1.5% a year, add in the service charge and around 2% is being deducted from your pension annually – about double what you’d expect from stakeholder and lower cost AVC pensions. Factor in the £3,360 that’s been deducted to pay the adviser’s commission and it’s not hard to see why your pension pot appears to be shrinking.

Based on the information you’ve provided, I think there’s a strong possibility that the advice to transfer your stakeholder and AVC pensions into a Sipp was inappropriate. If so, you’d have a valid mis-selling claim against the adviser.

If you believe this to be the case then send your adviser a letter detailing your grievance. If she doesn’t resolve the issue to your satisfaction (by putting you in the same financial position had the transfer not taken place) then take your case to the Financial Ombudsman Service, it won’t cost you anything and your adviser will have to abide by their decision.

I sincerely hope you can get this sorted out so your retirement income is not jeopardised.

Read this Q and A at http://www.candidmoney.com/questions/question141.aspx

Home sweet nursing home

As life expectancy increases, so does the likelihood you'll eventually need nursing care, either at your home or in a nursing home. But who'll pay? .

I was fascinated to learn that the three principal political parties (with apologies to the nationalists) had even contemplated getting together to discuss the obvious problem: a lot of us live longer, but with physical and mental capacities so diminished that we require help at home, which is expensive to provide, or residential care, which is even more expensive, or full time nursing care, which is prohibitively expensive.

The solutions are means tested, which means, as ever, that there problems associated with drawing the lines that determine who gets what. Different rules apply in Scotland, funded in part by the generosity of English, Welsh and Northern Irish taxpayers, and within England there are different interpretations of the rules from one local authority to another. This is a mess.

The mess is compounded by the fact that our politicians believe that old folks resent the fact that the value of their home, which their close relatives have already defined as an expectation of inheritance, may be lost to the care providers. And so begins the febrile search for some way to raise the money.

Private insurance doesn’t seem to have worked, probably because the chances of going into a home and making a claim are so high that the price of the policy is perceived to be ruinous. The same sort of problem arises with private health insurance as you get older. In my case, when I calculated that two years worth of premiums were equal one new knee, I decided to assume the risk myself. That was some time ago, so by now I've saved enough for a hip as well.

The Tories say Gordon plans a death tax. Alastair says Gordon plans no such thing. How much do they need to raise? Six billion quid per annum according to some estimates. All sorts of daft ideas will be floated as our politicians try to avoid confronting reality, or to be precise, two realities.

The first is that the cost of looking after those who cannot look after themselves will have to be met from general taxation. Those people, as now, will have their pension diverted to the care provider, leaving them with the indignity of pocket money. Those people, as now, may not be able to choose when they go into care, or where they go.

The second reality is that taxes can’t go very much higher without throttling the economy. Thus, if spending on the care of the elderly is to increase, spending on something else will have to be cut.

In the circumstances, the chances of me, you, or anyone else being allowed to ring fence our assets as we are carried into the care home and the bosom of the taxpayer are precisely, ineluctably, nil.

Read this article at http://www.candidmoney.com/articles/article64.aspx

Higher inflation higher interest rates?

Inflation continues to rise, will this lead to higher interest rates?.

Inflation continues to rise, with the Retail Price Index (RPI) rising 3.7% over the year to the end of January. This is not much of a surprise, as it reflects the 1 January VAT rise from 15% up to 17.5%. Plus higher oil rices also continue to impact.

Will this prompt the Bank of England to increase interest rates? Well I'm sure there'll be the usual headlines predicting it will, but I'm less convinced. While higher interest rates are the usual medicine for curbing inflation, these are quite exceptional times.

Hiking interest rates tends to cool inflation when prices have been pushed up by us all spending money like it's going out of fashion. But the main inflation drivers have been the VAT increase and higher oil prices, not consumer spending, so raising interest rates would have little, if any impact. Plus any interest rate rise would probably plunge us straight back into recession (if we don't anyway).

The way things stand I'll be surprised if we see a base rate rise this year, so I won't personally be rushing to lock in my mortgage to a fixed rate. I will however look to shift some of my savings to three year National Savings Index-Linked Savings Certificates.

For more details on protecting your savings from rising inflation please see my earlier article.

Read this article at http://www.candidmoney.com/articles/article63.aspx

The politics of pensions

When politicians play with pension proposals it's rare they'll ever make much difference, even if they do see the light of day. Will the Tories' latest announcements be any different? .

I’m sure I’m not the only one to view the next three months’ electioneering with grim foreboding, bordering on distaste, crossing over to impotent rage during the BBC News. My money is on a hung parliament, but if Cameron does manage to get into No 10, he’s committed to a couple of quite significant pensions changes.

First, he would index the State Pension to National Average Earnings (NAE). I’m sure that the focus group that came up with this one thought it would be welcomed by the silver surfer generation. After all, wage inflation has always run ahead of price inflation, and it always will, won’t it? (ironically, it was Margaret Thatcher who removed the link in the first place back in 1980!).

Perhaps, and then again, perhaps not. Unemployment is likely to continue to rise, and there is going to be some sort of pay pause in the public sector. These factors, coupled with all the problems in the financial services sector, might well pull NAE down below inflation.

Theresa May is the shadow minister, and she hasn’t thought this one through.

She has also fallen victim to a very capable lobby and announced that the Tories will end compulsory annuity purchase at age 75. This is a long story, but the deal has always been that in return for tax breaks associated with saving for old age, with the tax free cash break at retirement thrown in, the pension saver would use the money to provide a retirement income. Otherwise, Cyril and Doris, both aged 65, would blow their accumulated pension savings on a world cruise and come home to means tested benefits.

The aforementioned lobby does not like annuities. They use words like ‘rip off’ to describe an insurance company that accepts £100,000 in return for a promise to pay an annuity of £5,000 for life, and keeps the capital when the unfortunate annuitant pops his clogs six months later. Their intellectual stance appears to be that an annuity is only a good idea if you can guarantee that you will live a long time. The flip side of that argument is that there is no point insuring your life unless you plan to die in the very near future.

Theresa hasn’t thought this one through either. Some citizens already select against the tax payer by declining to save anything for their old age, preferring to spend the cash as they go along, safe in the knowledge that whoever is in power when the time comes will sting the prudent to feed the feckless as well as the genuinely needy.

The Tories in power will have to modify their policy. They will have to be sure that Cyril and Doris don’t go on that cruise until they have bought an annuity large enough to keep the pair of them off means tested benefits. That suggests that they will have to be forced to buy an annuity of around £10,000 per annum, which needs a fund in the region of £200,000.

Read this article at http://www.candidmoney.com/articles/article61.aspx

Retail Distribution Review?

Question
Could you say what improvement you expect the FSA's "Retail Distribution Review" of the regulation of financial advisers, due for 2013, will bring for investors?Answer
Proposals resulting from the Financial Services Authority’s (FSA’s) Retail Distribution Review have yet to all be set in stone. But from what the FSA has said so far it’s clear they’re intent on pushing financial providers and advisers to treat customers more openly and fairly.

In practice I think the proposal likely to make the biggest impact is scrapping commissions in favour of ‘customer agreed remuneration’. This means that financial products will no longer be able to build commission into their charges, with financial advisers instead having to get their customers’ agreement if their fees are to be taken from the product(s) sold.

For example, at the moment a unit trust typically charges 3% initially and 1.5% a year, from which 3% initial commission and 0.5% annual commission is paid to financial advisers. Under the FSA’s proposals the charges would become 0% initially and 1% a year. If the adviser wants to charge 3% initially and 0.5% a year the customer would have to agree and this would be deducted from the fund (or, as seems more likely, a cash account linked to the fund).

On the whole I think this is very positive as it removes the possibility of commission bias, which has plagued the financial advice industry for as long as I can remember – i.e. an adviser would not have a financial incentive to sell one product over another. It should also boost interest in exchange traded funds (ETFs) and investment trusts, both of which are currently shunned by many advisers as they pay no commission.

The only downside and some will argue it’s a big one, is that evidence suggests the majority of the public are not prepared to pay a fee for financial advice. For all its sins, commission does make financial advice very accessible (although given the poor quality of some of the resulting advice you could counter argue this is not necessarily a good thing).

Other proposals include raising the level of qualifications an adviser must achieve to be call themselves independent and tweaks to how advice is categorised.

All in all I think the RDR is a very positive thing for consumers. It will, no doubt, lead to a shake-up in financial adviser circles, as many will have to make fundamental changes to how they run their business. There will be casualties and some advisers will probably decide to hang up their boots, but such a shake-up is long overdue.

One area which I don’t think the FSA has yet issued a proposal on is the issue of so-called ‘independent’ advisers selling their own product. Where an adviser company recommends more than a nominal level (e.g. 20%) of their clients’ portfolios be held in their own fund(s) I think it’s misleading for them to call themselves independent – especially if their advisers have a financial incentive to sell their own funds other others. I’d like to see the RDR address this issue before it gets out of hand.

It’ll probably take a year or two for the dust to settle post RDR, but I think IFAs will start to be seen in a more professional light and the public will slowly become less grudging at paying an hourly fee, as they would an accountant or solicitor. However, IFA’s services will probably be biased towards the more wealthy, leaving the majority of the population to seek advice from the banks and insurer sales forces – who will probably continue doing a fair to mediocre job.

I also expect more people to take matters into their own hands and advise themselves on more basic matters. Post RDR they should then be able to buy direct at a lower price than using an adviser, without needing to buy via a discount broker. While discount brokers will still have a place in the market, they’ll have to work far harder and offer more value added services to entice customers away from going direct – which should offer the cheapest deal – a sea change from where we are now.

Of course, there’s still plenty of time for the FSA to change its mind, that’s if it even still exists come 2012/13. But I hope whatever happens the RDR gives the industry the kick it so badly needs.

Read this Q and A at http://www.candidmoney.com/questions/question137.aspx