University to cost over £100k?

The Government has now set out its plans for reforming university fees and loans. It doesn't make happy reading for students to be..

The new plans will affect students starting higher education in 2012 and mean a university education could end up costing some students over £100,000 by the time their loans are eventually repaid.

Tuition fees

At the moment students must pay up to £3,290 towards tuition fees for the current academic year. From 2012 this will rise to £6,000 a year, with the possibility of some universities charging up to £9,000. So 3 years at university could cost between £18,000 and £27,000 in tuition fees alone.

Will many universities charge above £6,000? Too soon to tell, but logic suggests that if they can while still filling places then they will. To charge above £6,000 universities will have to show they give opportunities to a wide range of students, but this is unlikely to be a string deterrent.

Rather than pay for tuition fees upfront, students can roll these into a loan that's repaid when they start working.

Living costs

Students from families where total annual income is below £25,000 will get an annual £3,250 non-repayable grant, with partial grants being given where income is up to £42,000.

Students can also take a maintenance loan of up to £5,500 a year (depending on family income) to help towards living costs. Full details of these loans have yet to be published, but they'll be added to the student's overall loan.

Student loans

Interest is charged at a rate equal to inflation (measured by the Retail Price Index - RPI) from the day the money is lent, regardless of the student's income. Once a graduate earns above £21,000 a year extra interest will progressively be added, hitting a maximum of RPI plus 3% when they earn £41,000 or more.

Loan repayments are made at 9% of income over £21,000 a year, with any remaining balance written off after 30 years.

Students who wish to repay their loan more quickly could face a penalty for doing so, as the Government is contemplating an early redemption charge, possibly 5% of the extra amount repaid. You'd expect greedy banks to do something like this, but not the Government. It should be encouraging the repayment of debt rather than penalising graduates for doing so.

How much could a university education end up costing?

The decision to go to university will become increasingly debateable for many children, as it could end up costing them a fortune.

The projections below assume average inflation (RPI) of 3%, annual salary increases of 5% and an annual maintenance loan of £5,500 for 3 years:

Graduation Salary	£6,000 Tuition Fees		£9,000 Tuition Fees
	time to repay	total cost	time to repay	total cost
£20,000	30 years (£102,229 written off)	£62,980	30 years (£158,232 written off)	£62,980
£25,000	30 years (£41,881 written off)	£92,787	30 years (£99,583 written off)	£92,787
£30,000	27 years 4 mths	£99,093	30 years (£32,217 written off)	£122,685
£35,000	21 years 11 mths	£78,892	27 years	£120,416
£40,000	18 years 2 mths	£67,786	22 years 5 mths	£100,089

With Government finances as stretched as they are, shifting higher education costs onto a more commercial footing is probably an unfortunate price that has to be paid. But it could leave future generations of graduates saddled with a lot of debt - and that's before they buy a home and/or start a family. I'm starting to feel very fortunate that my university education (which seems a distant memory now) was free...

Read this article at http://www.candidmoney.com/articles/article170.aspx

Searching for higher SIPP returns?

Question
I have money in a SIPP that I need to invest in funds rather than as it is now in cash earning zero (or minus 3% with inflation).

My target is 10% return pa.If I can get the monies earning that level I can draw some monies down without burning the capital.

What would you advise?

First in what asset classes and then more specifically in which funds?

My thinking is that whilst Far East and Emerging markets would seem to hold one of the only hopes for growth over the next 12/24 months are they not overcooked?Are not too many people expecting the same and therefore prices too high?

My own thinking on equities is that good companies will earn 5% on dividends but you can't be sure given current volatility that you won't lose the 5% or even more with market price falls.

So where to go?...,please?

Its a genuine question and I have a real need.Answer
You're certainly not alone in looking for better returns than cash, especially within a SIPP where cash returns are generally appalling at the moment.

The problem is, these are difficult, volatile times. The types of investment that could potentially return 10% a year could quite easily lose 10% or more a year too. So it's really a question of how much risk you're prepared to take and for how long.

I agree that the Far East and emerging markets appear to have more scope for growth than Western economies, but that's not to say their stockmarkets will definitely rise over the next couple of years. Some growth is will already be priced in and if global economies generally slow these stockmarkets could still lose money.

I also agree that good dividends are appealing but that the risk of falling markets could still leave you with losses overall.

Unless your timescale is 5-10 years or you're happy to take a lot of risk I'd be very wary of investing in stockmarkets. You might end up making some easy money over the next couple of years, but equally you could lose a lot too - regardless of which market you choose.

One way to try and reduce this risk is to use absolute return funds, which generally try to profit from both rising and falling share prices. Standard Life Global Absolute Return Strategies has had more success (so far) than most, but there's still risk. Success depends on the fund manager correctly guessing where markets are headed and history suggests that no manager gets it right all the time. So while absolute return funds should generally reduce risk versus conventional stockmarket funds, you could still end up losing money. Plus they're usually expensive. Take a look at this article I wrote back in the summer for more info.

Other assets such as commodities and commercial property have been doing well this year, but for how long is anyone's guess. I'm a fan of holding commodities longer term, but think the potential volatility makes them very high risk for a 1-2 year bet. Commercial property should be more steady, but could still suffer if the economy slows down again - and with spending cuts and tax rises there's every chance that could happen.

So I'm afraid there is no magical solution. If your timescale is just a couple of years I'd stick to cash and least sleep peacefully knowing you won't lose money in absolute terms. You could chance absolute return funds, but I'd really take a minimum 5 year bet on these. Otherwise a combination of high dividend stocks/funds along with Far East, emerging markets and commodities (both hard and soft - take a look at our commodities page for more info) exposure should bode well over 10 years, but that's not to say you won't make losses shorter term.

Good luck whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question319.aspx

Will pumping more money into the US economy work?

Can the US finally wake up its economy by injecting another $1 trillion? Or is this more an act of desperation than calculation?.

The US Federal Reserve (which has a similar role to our Bank of England) has announced it will pump $600 billion into the ailing US economy over the next 8 months along with the $250-300 billion it expects to receive from repayments on debt and mortgage-backed securities it owns.

This move, called quantitative easing ('QE2' in this instance), is intended to get the US economy moving again. But it's a bit like pouring petrol onto a smouldering bonfire; while it'll stir up some flames quite quickly, there's a risk they'll die out rather than get the bonfire roaring again.

How bad are things in the US?

Unemployment is sticking at around 9.6% and economic growth remains slow, at an annual rate of 2% for the third quarter. The economy isn't collapsing, but it's not really going anywhere either and this is a big worry for the Fed.

The US housing market is also in crisis, estimates suggest 930,000 homes are currently being foreclosed (i.e. in the process of being repossessed).

How does the Fed pump money into the economy?

It prints money then uses this to buy government bonds, mostly from banks. It then hopes that the banks either invest this money, or lend it to customers who spend it, so that it finds its way into the economy.

Hasn't it already pumped lots of money into the US economy?

Yes. The Fed announced a $600 billion injection in November 2008 that increased to £1.8 trillion 4 months later when it became clear it wasn't enough.

Is the Fed throwing good money after bad?

Maybe. But while the initial quantitative easing hasn't got the US economy firing on all cylinders again, the present situation could be worse still had the injection not happened.

Trouble is, the US economy is in a rut and printing more money is really the Fed's only viable option to try and get things moving again. Cutting interest rates (which encourages spending by making borrowing cheaper) is not an option given US rates have been stuck at just 0.25% since December 2008.

What are the risks?

If banks and consumers decide to save most of the extra money rather than lend/spend it, then it will do little to stimulate the economy and the Fed's plan would fail.

And if the extra dollars are spent then prices could rise (e.g. if my economy has £100 and produces 100 widgets they'd be priced £1 each. If I double the money supply to £200 but still only produce 100 widget their price would likely rise to £2, equal to 100% inflation).

This would be bad as rising inflation is the last thing the Fed needs right now. Because high inflation is generally undesirable (it stifles investment) the Fed would normally raise interest rates to keep it at bay (i.e. discourage spending by increasing the cost of borrowing), but raising interest rates at the moment could be the straw that breaks the camel's back as it will discourage spending at a time when the economy needs it more than ever.

Printing extra money could also weaken US currency as there's more of it in circulation (in the same way the price of food usually falls when there's more available). A weaker dollar helps US exports as they'll be cheaper (although other countries may retaliate and devalue their currencies so the US doesn't gain a competitive advantage), but may be seen as a sign of weakness and reduce foreign investment in the US.

How will US quantitative easing affect stockmarkets and other investments?

In the very short term stockmarkets will jump for joy in the expectation that some of the money will ultimately be used to buy shares. And they'll also be hoping the money will increase spending and boost company profits. The price of US government bonds (Treasuries) will also probably rise in anticipation of the Fed's spending spree.

But whether the initial excitement lasts is another matter. This will really depend on whether the Fed's plan works.

A weaker dollar is bad news for UK investors with US investments, as it reduces the value when converted back into pounds. But a weak dollar could be good news for gold and other assets priced in dollars, as it reduces the price tag for foreign investors - although this would pile more upward pressure on inflation.

So, will it work?

I do hope so, but I have my doubts. While pumping $950-1,000 billion into the US economy will undoubtedly make some difference, I'm not sure the difference will be big enough. Evidence suggests both banks and customers are becoming increasingly cautious, so the majority of the money may not end up being spent - doing little to boost the economy. And if lots of the money is spent then inflation could rise, discouraging further spending/investment and potentially slowing the economy once more...

Read this article at http://www.candidmoney.com/articles/article169.aspx

Can mum give us her home to avoid inheritance tax?

Question
My sister and I are trying to ascertain how we can avoid paying a large inheritance tax. My father died 5 years ago leaving my mum with business property presently valued at £600,000.00 and a home presently valued at £400,000.00.

We realise that the nil rate tax band is £325,000.00 and we have 65% of my fathers nil rate band left to use.

We have calculated that in the event of my mum's death this will leave us with an inheritance tax bill of £200,000.00.

Mum would be happy to put her home into our names but I believe technically she should then pay us rent.

Is this a viable option? I know the total effect relies on her surviving 7 years but what rent would she have to pay and in reality how would this work please?

Any other ideas?Answer
The key here is whether the business property is exempt from inheritance tax.

Under current inheritance tax rules a business or an interest in a business is usually exempt from inheritance tax, provided the deceased owned it for at least the two years prior to their death.

However, there are exceptions. Businesses that invest in shares or land/property are excluded, as are those whose shares are listed on a stock exchange. Also, assets owned by the business that are not used wholly by the business may not qualify.

In simple terms, if the business is an investment company or rental property it won't qualify. But if it's a bona fide trading business, e.g. manufacturing, professional services etc. then it probably will. You can read more details on the HMRC website.

Given what's at stake I think it would be well worth speaking to an accountant to clarify the position if you think the business property might be exempt.

If the business property is exempt then your mother's inheritance tax nil rate band, coupled with the remaining balance of your father's, should cover her home.

Otherwise, the challenge is to move your mother's assets out of her estate where practical. Provided she lives for at least 7 years after gifting assets they will fall outside of her estate for inheritance tax purposes. However, if she continues to derive any benefit from them (e.g. she continues to live in the home she's gifted to you) then she must pay rent at the prevailing market rate (you should be able to get an appropriate figure from a local estate agent) else HMRC will not recognise the gift.

If she has surplus income or can sell some of the business assets then this could work in her favour, as paying rent will move more assets out of her estate. But it obviously may not be practical.

She could sell the business assets if they don't qualify for business property relief then gift some of the money to you and your sister, but selling may incur capital gains tax so again you'll need to consult an accountant. And if she relys on an income from the business then this will need to be replaced somehow.

If she ends up with a large sum of money in her estate and would like to try and remove some without having to live another 7 years then a discounted gift trust is an option - although as they can pay financial advisers hefty sales commissions she'll need to be wary of mis-selling (and HMRC could disregard it if your mother didn't expect to live for at least 7 years when taking out the trust). Take a look at this earlier answer to find out more.

Given the potential complexities of this situation I think your mother could benefit from professional advice - an accountant would be a starting point. Nevertheless, I hope my answer makes things a bit clearer and points you all the right direction.

Read this Q and A at http://www.candidmoney.com/questions/question317.aspx

Can I set up my own bank?

Question
Is it possible to get better returns for my money by opening my own bank compared to the traditional savings accounts?Answer
The concept of running your own retail bank is simple: lend to your customers at a higher rate than you pay on their savings then bolt-on as many extra fees as you can get away with. But in practice you'll probably need millions of pounds to set up the infrastructure and the ability to jump through lots of regulatory hoops if you're to launch a 'proper' bank.

There are other more accessible options though, which retain some of this concept.

You could lend out money to individuals, which should earn you a better rate of interest than you'll get on your savings via a bank. The drawback with this approach is if you lend to someone and they don't pay you back you'll lose your savings - potentially high risk.

Web based services such as Zopa try to match up lenders and borrowers and help reduce risk by spreading your money across lots of borrowers, reducing the impact of bad debts. It's still not without risk and the interest you receive is taxable, but it's an interesting idea that can work for some - read our full review for more info.

If you don't mind a lot more work then you could consider setting up a credit union. These are local co-operatives owned and run by their members, which focus on savings and loans. There are already a number of these dotted around the UK, providing services to an estimated three quarters of a million people. Launching one is no walk in the park, as you'll need to be regulated by the Financial Services Authority and it could take a year or more to set up. But if you know a group of like minded people in your local community it can work well. You can read more on the Association of British Credit Unions website.

Setting up a bank is a nice idea though. Let's face it, most of us could probably do a better job than those bank bosses who've pocketed millions over the last few years while running their businesses into the ground.

Read this Q and A at http://www.candidmoney.com/questions/question316.aspx

Precious metal?

The price of silver has soared about 40% this year. Is precious metal a solid investment opportunity? Or are the price rises an unsustainable bubble that will burst?.

When it comes to investing in precious metals, gold is by far the most well known and popular (you can read my recent article re: gold here). But there are other precious metals open to investors - let's take a quick look along with the factors affecting price.

Silver

What is it?

A brilliant white soft metal that is largely mined in South America and China and is an excellent electrical conductor. It has always been viewed as a poor relation to gold, because it's far more plentiful in supply

Supply

Last year around 22,000 tonnes of silver was mined out of the ground, compared to just 2,500 tonnes of gold. Silver supply was further boosted by 5,160 tonnes of scrap silver being recycled.

Demand

In 2009 about 40% of the overall silver supply was used in industry, where its electrical conduction properties make it a popular raw material (e.g. in electrical components and batteries). The next biggest area of demand was jewellery, accounting for around 18% of supply, followed by investment at about 15%. Photographic use accounted for just over 9%, but is on the decline as the use of digital camera technology grows.

Price

At the time of writing silver is trading at just under $25 per oz, compared to $18 at the beginning of the year and $11 at the beginning of 2009. So why the meteoric rise? The simple answer seems to be soaring investment demand.

Industrial demand fell 20% last year and, while recovering, is still below 2008 levels (when the silver price averaged $15), so this clearly doesn't account for the bulk of the price rise. Neither does jewellery or photographic use, where the trend is downwards.

On the other hand investment demand (aided by a weaker US dollar = cheaper for non-US investors) has gone through the roof, rising from 1,500 tonnes in 2008 to over 4,200 in 2009 and reports (as well as the silver price) suggest it continues to rise.

Outlook

The trouble with investment demand is that its fickle. Whereas industrial demand tends to be reasonably steady, investment demand can sometimes vanish as quickly as it came. The driver behind the growth in investment demand seems to be safe haven investing due to uncertainty over the global economy, much like gold. So if the economic outlook deteriorates further perhaps the silver price will go higher still, but as and when the global outlook stabilises the price of silver could come crashing back down, although growth in industrial demand may soften the blow.

Investing short term is definitely a gamble and I'm not sure there's sufficient fundamental demand to support the price at these levels longer term. Supply is plentiful and gold tends to profit more from growing emerging markets jewellery demand than silver.

Platinum

What is it?

A grey-white metal that is one of the rarest elements on Earth and very resistant to corrosion and wear.

Supply

184 tonnes of platinum was mined in 2009, slightly lower than average and less than one tenth of the gold dug out of the ground. Three quarters of this came from South Africa, while recycled scrap platinum added 44 tonnes to overall supply.

Demand

In recent times the greatest demand for platinum had come from the auto industry, as it's used in the manufacture of catalytic converters. However, declining vehicle sales and a greater use of palladium has hurt platinum demand from this sector, falling from 129 tonnes in 2007 to 69 last year.

Meanwhile platinum jewellery demand has been growing, from 66 to 94 tonnes over the same period. And, while still low in absolute terms, investment demand has grown four-fold over the period, from 5 to 20 tonnes.

Price

The price, at the time of writing, is about $1,710 per oz. This compares to $1,500 at the beginning of this year and $900-£$1,000 in early 2008.

The rises appear to primarily be driven by rising jewellery demand (especially from China) and, to a lesser extent, investment - despite falling demand from car makers.

Outlook

While the investment effect has played its part in rising prices, the fundamentals for platinum look more solid than silver. Supply is very low and is typically a little less than demand. And auto industry demand should increase over time as car sales in emerging markets such as China and India grow (especially if catalytic converters become compulsory in these markets). However, expect greater demand to be partially offset by more and more recycling, as an increasing number of cars with catalytic converters are scrapped in the West.

Jewellery demand should also continue to grow, especially from emerging markets, provided global economic growth doesn't slow down too severely.

In many ways investing in platinum is a bet on emerging markets, hence it's one I like longer term. But I still fear speculative investors will cause some price volatility shorter term.

Palladium

What is it?

A silvery white metal that is similar to platinum, but lighter (i.e. less dense).

Supply

2009 mined supply was 221 tonnes, with Russia being the largest supplier followed by South Africa. Recycled scrap palladium added 45 tonnes to this figure. Mined supply fell by 17% between 2007 and 2009, partly due to falling prices (as less incentive to mine).

Demand

Like platinum, palladium is used in the manufacture of vehicle catalytic converters and, at 126 tonnes in 2009 (over half of all palladium demand), this is by far the biggest source of demand. Unlike platinum, auto industry demand only fell slightly during 2009 and appears to be increasing a little this year.

Other sources of demand are varied, but jewellery weighed in at 25 tonnes last year (17% down on 2008) while investment more than doubled to 19.5 tonnes in 2009 versus 2007. Nevertheless, there's still been an excess supply in recent years.

Price

At the time of writing the palladium price is about $640 per oz, versus $420 at the start of this year. It did reach over $500 in 2008 but fell back to just $185 at the start of 2009.

For a metal that has been in excess supply the last few years such price rises seem strange. Higher expected demand from the auto industry (as the industry recovers and substitutes palladium for platinum to save money) might account for some of the recent price rise, but much higher demand from investors this year looks like the main culprit.

Outlook

While long term auto industry growth bodes well for palladium, I worry that the recent investment-driven price rise will be unsustainable if/when those investors decide to put their money elsewhere. The difference between demand and supply is not as tight as platinum, in fact an excess supply of palladium has been the norm in recent years.

Speculative investors might continue to push up the price shorter term, but I'd hold off investing until the price falls back down to earth then maybe buy if growing demand from car makers appears sustainable longer term.

Quick summary

Precious metals can make a good long term investment (short term too if you're lucky!). But it's vital to understand what drives supply and demand for each metal then take a view on where this might head in future.

There seems little doubt that investment demand has driven up prices this year, possibly to unsustainable levels, so please think very carefully before jumping on the bandwagon. Yes, returns this year look very sexy and might continue if fears over global economies grow, but if investor demand softens there's quite a long way for prices to fall.

Sources: Silver data - The Silver Institute. Platinum & Palladium data - Johnson Matthey

Read this article at http://www.candidmoney.com/articles/article168.aspx

Will I lose extra state pension?

Question
Can you please help. I have read about the proposed increased state pension at 65 . I am currently 57, 58 in January 2011. I was relying on my state pension at 65 to be £199.27 per week, as I paid high rates of tax and N.I. whilst working for 37 years. Will this still be the case or will it be reduced under the proposed new rules?Answer
I'm afraid it's too early to tell as at present there are no firm proposals, other than the Government vaguely saying it would like to introduce a flat £140 weekly state pension by 2015.

If plans for a flat state pension do go ahead I think there's a reasonable chance existing SERPs/S2P benefits that take the total state pension over £140 per week (or whatever it ends up being) will be preserved, if for no other reason than it would cause immense anger amongst those affected - of which the majority may well be potential Tory voters.

As soon as there is any concrete news I'll put an update on the site (although you can bet it'll be all over TV and the newspapers).

At least you'll just escape the planned increase in state pension retirement from 65 to 66. The age will gradually increase to 66 between December 2018 and April 2020, affecting men born after 5 December 1953 and women born after 5 April 1953 (the reason for the difference is that the retirement age for men and women will harmonised at 65 by November 2018).

Read this Q and A at http://www.candidmoney.com/questions/question315.aspx