NS&I Index-Linked Certificates Review

The key with any savings is to beat inflation after tax. If you don’t then your money will gradually buy less and less in future compared to today.

However, most savings accounts pay paltry rates of interest and consistently lag inflation. And even if you do the smart thing by keeping your money in ‘best buy’ savings accounts, there’s still a chance of lagging inflation at times, especially if you’re a taxpayer.

So, on the surface, National Savings Index-Linked Certificates sound very appealing as they guarantee to be beat inflation tax-free. And, on the whole, they’re an excellent idea for some savers.

Anyone aged 7 or over can invest between £100 and £15,000 per issue and there are currently two issues, lasting for 3 and 5 years respectively. Over this term the Certificates promise to pay you the rate of inflation, measured by the Retail Price Index, plus an additional amount of interest. The return, which is tax-free, is calculated monthly but only paid at maturity, there’s no income option.

If inflation is negative (i.e. we experience deflation) then you’ll simply receive the additional interest, your money can’t fall in value.

Withdrawing your money before the end of the term is allowed, but you won’t enjoy the full promised return. During the first year you simply get back your initial investment, while in subsequent years you’ll receive a reduced return prior to maturity.

Because National Savings products are backed by the Government then all of your money is secure (well, as secure as the Government). Unlike banks and building there is no £50,000 cap on protection.

Should you consider NS&I Index-Linked Certificates? If you’re a taxpayer who’s happy to tie up savings for either 3 or 5 years and doesn’t require an income, then yes. There is a risk of low, or even negative, inflation over that period and returns may look less attractive relative to conventional savings accounts in times of higher interest rates. But using Index-Linked Certificates for a portion of your savings could be a sensible strategy to hedge against inflation.

Read the full review at http://www.candidmoney.com/candidreviews/review27.aspx

Yorkshire BS Protected Capital Account review

This is a 6 year investment plan that links your returns to the FTSE 100 Index while protecting your original investment. It’s available as a cash individual savings account (ISA) and as a standalone plan in which case any returns are taxed as interest, i.e. you’ll pay income tax if a taxpayer.

The Protected Capital Account Tracked Growth 3 plan is run by Credit Suisse, which pays Yorkshire Building Society a sales commission of 4%, i.e. £400 per £10,000 invested – it’s easy to see why banks and building societies like selling these types of plan – but is this any good?

On the plus side the plan offers a 20% minimum return, regardless of what happens to the FTSE 100 over the plan term. But 20% over 6 years is equivalent to 3.1% gross a year, ok but short of the 5% you can currently earn on a 5 year fixed rate savings account (4.35% for cash ISAs).

Any additional return depends upon FTSE 100 performance and herein lays the potential sting in the tail. The change in the FTSE 100 Index is taken over the 12 half year periods that make up the 6 year term. Over each half year period the maximum gain or loss is limited to +6% and -6%. So if the FTSE 100 rises by at least 6% over each of the 12 half year periods during the plan’s term you’ll receive the maximum possible 72% return, equal to 9.46% gross a year. This is highly unlikely.

In practice you’ll probably be lucky to enjoy the maximum 6% return just half the time, giving you a total return of 36%, equivalent to 5.27% gross a year – little more than cash. Why take the risk?

In my opinion this plan doesn’t cut the mustard as it fails to offer enough to tempt either committed savers or investors. If you’re nervous and/or sceptical about the stockmarket then why would you want to tie up your money for 6 years when there’s a strong chance you’ll struggle to beat cash returns anyway? And if you are positive about stockmarkets then buy a tracker and you’ll enjoy the benefit of dividends (likely worth 3-4% net of basic rate tax each year) along with the potential for higher overall returns. Plus tracker fund gains outside an ISA will be subject to capital gains tax, currently more favourable than the income tax treatment of this plan.

The Yorkshire Building Society will no doubt rely on the headline 72% potential return and customers failing to understand what they’re buying to sell this plan (and pocket their commission). Business as usual in financial services...

The plan is open for business until 13 May and will commence from 7 June 2010, maturing on 7 June 2016. Your original investment is covered by the Financial Services Compensation Scheme (FSCS) up to £50,000 per person.

The way the Yorkshire Building Society Protected Capital Account plan links returns to the FTSE 100 makes it especially unattractive. This plan is best avoided by savers and investors alike.

Read the full review at http://www.candidmoney.com/candidreviews/review26.aspx

Delay buying an annuity?

Question
I've got three modest pension plans that are due to mature at the end of June. As my husband is still working and hopes to do so for another three years, my dilemma is whether to transfer the matured pensions into my SIPP (into which I intend to continue paying anyway) and hope that they'll carry on growing for a few years more, or to take an annuity income now and invest that. Even the best rates currently on offer don't seem to pay much more for someone aged 70 than they do for someone aged 65, suggesting that there's not a lot of point delaying the annuity - unless of course the funds are worth substantially more by the time I take the pension.

My inclination is to take the 25% tax-free lump sum and then purchase the best available annuity with the rest. I suppose it all depends on what happens to annuity rates over the next few years and on which way the stock markets head. I know you don't have a crystal ball so can't predict such movements, but what would you do?

And are there any other factors I should take into account?Answer
This is a great question as it’s a dilemma encountered by a lot of people. And you’re right, there is no simple answer, your decision will need to be based on a guesstimate of what will happen in future.

The bottom line is whether a higher pension fund value and/or annuity rate at the delayed retirement date will more than compensate for the pension income you could have received meanwhile. I’ll ignore your tax position in my answer, but bear in mind that if you’re still working and a taxpayer then you may wish to defer taking pension income if you’ll fall into a lower tax band when you retire.

Annuity rates are lower than they have been for some years – they’ve typically fallen by around 10% over the last two years. This is due to relatively low gilt yields and, to a lesser extent, increased life expectancy.

Insurers buy gilts to provide annuity income, so when gilt yields (i.e. gilt income / gilt price) fall annuity rates tend to follow. Gilt yields, in turn, are mainly influenced by interest rates and inflation. Rising interest rates and/or inflation usually mean higher gilt yields (hence better annuity rates) and vice versa.

Interest rates are currently low and likely to stay that way for a while yet. Inflation has recently started to rise and economists are divided on whether it will remain around current levels or fall back again. My guess is that inflation will fall later this year and then remain low next year, along with interest rates. If I’m right then annuity rates are unlikely to change much over the next couple of years, although I think it’s likely we’ll see them rise within the next five years.

You’d expect annuity rates to rise in any case as you get older because your life expectancy is shorter, but they may not rise by as much as you’d expect due to ‘mortality drag’ – you can read more about this on our annuities page.

If you remain invested then how will your pension fund perform? If you plan to buy an annuity within the next five years then it makes sense to adopt a very cautious investment strategy (particularly given the current climate), i.e. reduce stockmarket exposure in favour of less volatile assets. This will naturally limit upside (and downside too!) so you probably can’t rely on investment returns to make a significant difference to your future pension income.

Before making your decision I suggest trying out a few scenarios on our Retirement Delay Calculator to get a feel for how different annuity rates and investment returns might affect your overall retirement income.

I ran a few examples for a female assuming a 6% annual investment return and using current annuity rates to find the approximate breakeven point (i.e. when the total pension benefits received are equal) when delaying annuity purchase versus taking it at age 65, as follows:

Age pension taken	Estimated breakeven age versus taking pension at 65
67	81
70	82
75	85

If annuity rates improve and your fund grows by more than 6% a year then expect the breakeven age to reduce and vice versa.

Taking all this into account, I would personally be inclined to buy an annuitiy this year after taking the tax-free lump sum. But bear in mind that I’m quite cautious about markets and the economy at present; if you’re more optimistic (and the markets/economy do well) then delaying could leave you better off overall thanks to investment performance and rising annuity rates.

If you do delay then check whether transferring the pensions into your Sipp is cost effective. If the existing pensions offer suitable funds at a lower cost than the Sipp then staying put might be worthwhile.

Whenever you do decide to buy an annuity, remember to shop around for the best rate and buy through a discount broker to enjoy commission rebates (usually worth up to 1% of the annuity purchase price).

Read this Q and A at http://www.candidmoney.com/questions/question185.aspx

Complaints handled badly

It used to be said that an employer got the Trade Unions it deserved, and it occurs to me, following similar logic, that financial services companies have got the regulators they deserve..

The old Life companies never quite embraced the idea that the customer deserved special consideration just because, and only because, he or she was a customer. They were awful at handling complaints, and lots of people complained about the way their complaints were handled.

Enter the regulator. Now there has to be a complaints procedure. Complaints have to be answered in a standard time. Everything has to be counted, and open to inspection by the Treating Customers Fairly police. Guess what: whereas before you got treated with thinly disguised contempt, today the financial services company may well dispense with the thin disguise.

You write to complain. You get a letter to acknowledge your complaint. This a quote from a letter from AXA: "I would expect the investigation to take a minimum of 20 working days, following which you will receive our final decision. Should the investigation take longer than 20 working days then you will receive an update on the situation." Eh? I think this means that I shouldn’t expect to hear anything for at least a month, and the most likely thing to arrive next is another letter telling me that I’ll have to wait even longer for an answer.

In this case it took ten weeks, not 20 days, to get another letter that still didn’t answer the question that had been put in the first place. The final straw, which I’ve also had from Aviva, was the imperious "I am able to provide you with our final decision". Excuse me, honeybunch: you supplier, me customer, me is king and king decides when complaint is settled.

A manager with one ounce of sense and two of authority could settle most complaints with a quick ‘phone call. But common sense isn’t in the regulator’s book. And financial services companies serve their new master – the regulator – even if it means treating their customers just as badly, sometimes even worse, than they treated them before.

And that, dear reader, is called progress.

Read this article at http://www.candidmoney.com/articles/article95.aspx

Compulsory purchase annuities at age 75?

Question
Thanks for your interesting site. In your manifestos article you mention that the Conservatives will 'scrap effective compulsory annuity purchase at 75'.

Would you explain this? I am 73 receiving a State Pension how does one purchase this?Answer
Compulsory purchase annuities only apply to personal pensions and money purchase occupational pensions, not state pensions, so any changes unlikely to affect you.

When you build up a pension fund over your working life the rules currently state that you must buy an annuity (i.e. swap your pension fund for an income for life) by age 75. There is an alternative, called an ‘alternatively secured pension’ which lets you leave the fund invested and instead draw an income of between 55% and 90% of the approximate annuity you would otherwise receive (called a GAD pension). So under the alternative rules you could draw less income compared to an annuity but cannot avoid taking an income from your pension altogether.

This is unpopular with the minority that have large pensions they don’t necessarily need to use to provide income throughout retirement.

Scrapping these rules would mean you can leave your pension invested for as long as you wish, perhaps with the intention to pass on to another family member.

However, passing a pension fund to another family member in this way is currently subject to income tax of up to 70% and inheritance tax on the balance (basically, the Government doesn’t want to allow it) and it’s unclear whether and how this would change under either the Tories or LibDems.

Read this Q and A at http://www.candidmoney.com/questions/question184.aspx

CGT under LibDems

Question
Your article on the various parties Manifestos was very interesting. Am I right though that the Lib Dems are also planning to reduce the Capital Gains threshold from £10,100 to £2,000 per person? They say it's to hit the rich but we have a small investment which we are planning to sell to help pay our credit cards so I don't count ourselves as "rich".Answer
You’re quite right. While not mentioned in their manifesto, LibDem tax plans do include cutting the current capital gains tax annual allowance from £10,100 to just £2,000 (I've amended the article).

I share your view that this would be a cut too far, especially as their proposals also include taxing gains at the same rate as income tax. While investors can obviously avoid capital gains tax by holding their investments in pensions and individual savings account (ISAs), for those who choose not to this effective tax rise would be penal.

On a wider note I fear this move could discourage investment, which would be bad news all round.

If you plan to sell then it’s probably a good idea to do so, from a tax point of view at least, before the election.

Read this Q and A at http://www.candidmoney.com/questions/question183.aspx

How the manifestos could hit your poocket

I’ve just spent a couple of hours ploughing through the Labour, Conservative and Liberal Democrat election manifestos (perhaps I should get out more). Take a look at our summary to see how they might hit your pocket..

I find it hard to take the manifestos too seriously as it’s the norm to make vote seeking pledges now and neglect to implement them if elected. Nevertheless, there is quite a lot of specific detail that could affect your pocket, so I thought I’d compare each party’s pledge on a variety of money issues.

I’ve ignored areas such as education, health and defence as they all offer the usual pledges to improve standards and efficiency etc – although replacing Trident like for like is a moot point (Tories and Labour want to, LibDems don’t).

I’ve also ignored proposed spending cuts, as there’s currently so little tangible information trying to predict what will really happen is a waste of time. All you need to know is that there’ll be lots of them and the Tories would probably wield the axe faster than Labour.

And all three parties want to reduce our economy’s reliance on financial services and make us all greener.

Now to the money stuff, I’ve compared a number of key areas below (some of the Labour pledges have previously been announced and/or implemented):

Area	Labour	Conservatives	Liberal Democrats
Income Tax	Will not raise 20%, 40% and 50% tax rates during next parliament (although no mention of personal allowances or new bands!).	-	Increase personal allowance to £10k, saving 20% taxpayer under 65 £705 and 40% taxpayer £1,410.
National Insurance	1% increase already due April 2011	Scrap the 1% increase.	Reverse the rise when affordable.
Inheritance Tax	Frozen nil rate band until 2014/15.	Raise nil rate band to £1m.	-
Capital Gains Tax	-	-	Tax at same rate as income.
Stamp Duty	No stamp duty for first time buyers up to £250k for 2 years. 5% rate for £1m+ properties from April 2011.	No stamp duty for first time buyers up to £250k forever.	-
VAT	Won't extend to food, kids clothes, books, papers and public transport fares.	-	-
Council Tax	No revaluation during next parliament.	Freeze for 2 years and no revaluation.	Higher tax on 2nd homes and replace with local income tax in future.
Property Tax	-	-	Annual 'mansion' tax of 1% on properties worth £2m+.
Tax Credits	No cuts and 'toddler credit' increasing child tax credit by £4 week for children aged 1 and 2.	Stop paying tax credits where annual family income exceeds £50k.	Restrict and target those that need them most.
State Pension Age	Raise from 65 to 68 by 2046.	Bring forward increase to 66.	-
State Pension Rises	Restore link to earnings from 2012 (also includes pension credit)	Restore link to earnings.	Immediately link to the higher of earnings and 2.5%.
Personal Pensions	-	Scrap effective compulsory annuity purchase at 75.	Scrap effective compulsory annuity purchase at 75. More flexibility to access money pre-retirement.
Pension Contributions	Cut tax relief to basic rate on income above £150k.	-	Only give basic rate tax relief.
Dividend Tax Credit	-	Allow pensions to reclaim when affordable.	-
Public Sector Pensions	Cuts, but no details.	Cap above £50k.	Review (likely cap or cuts).
Public Sector Pay	1% cap on basic pay rises 2011-13.	-	Cap pay rises at £400 for 2 years initially.
Corporation Tax	-	Cut main rate from 28% to 25% and small co rate 21% to 20%. Simplify reliefs and allowances.	-
Unsecured Debt	Clamp down on interest and fees charged by doorstep lenders.	Ensure no-one is forced to sell their home to pay unsecured debts below £25k	Limit maximum interest rates on credit cards.
Charity Donations	-	-	Increase gift aid to 23% and stop higher rate tax relief.
Child Trust Funds	Protect and extra £100 for disabled children.	Scrap government contribution for all but poorest families.	Scrap government contributions.
Privatisation	£20 billion of asset sales planned by 2020.	-	-

Of course, some of these pledges may never happen if the party is elected and others will likely turn out to be quite different. But I hope this gives you a flavour of what to expect and that it might help you when deciding to vote for – that’s if you haven’t already given up on politics altogether...if you have I can’t blame you.

Read this article at http://www.candidmoney.com/articles/article92.aspx