Who gets a personal tax allowance?

Question
Can you please advise if the personal tax allowance is still granted to ALL individuals including persons of non working age. This is in connection to interest earned on capital sums in investment accounts.Answer
All UK residents enjoy a personal income tax allowance regardless of age. So they can receive taxable income up to that amount during the tax year without having to pay any income tax.

Everyone, including children, currently enjoys a £6,475 personal allowance up to age 65. This rises to £9,490 for those between 65-74 and £9,640 for those aged 75 and over. However, these higher age allowances are reduced by £1 for every £2 of income exceeding £22,900, subject to not falling below the standard £6,475 allowance.

High earners will also see their standard allowance reduced by £1 for every £2 of income above £100,000.

If you're eligible for the higher age allowance but worried you'll lose out due to your income exceeding £22,900 then holding savings and investments within Individual Savings Accounts (ISAs) might help as income from these does not count towards the £22,900 figure.

At the other end of the age scale personal allowances mean very few children end up paying income tax on savings or investments. However, parents should beware that if the annual interest/income on money they give their child exceeds £100 a year per parent, then the parent is liable to tax on that income, not the child.

This rule is intended to stop a tax loophole whereby parents hold money in their child's name to avoid tax. However, it doesn't apply to gifts from anyone else, e.g. grandparents.

Tax on investments gains is simpler. All UK residents currently enjoy a £10,100 allowance with gains in excess of this taxed at either 18% or 28%.

Read this Q and A at http://www.candidmoney.com/questions/question351.aspx

Local Government Pension AVCs worthwhile?

Question
I work in Local Government and I pay into an Occupational Pension. I am 56 years of age and I was wondering if I should join the AVC scheme run by my pension provider, which is provided by the Prudential. I have been working with same employer for 37 years and I have paid into the pension for the same period. Please advise me.Answer
An Additional Voluntary Contribution scheme (AVC) is one of several ways to top up your pension. It usually involves paying contributions into a pension fund which is then invested. When you retire the money is used to buy an income for life via an annuity.

On the plus side you'll enjoy tax relief on the contributions: pay in £80 and the taxman will make this up to £100, plus you can reclaim a further £20 if a higher rate taxpayer. However, when you eventually receive the pension income it's taxable and it might not be very much if investment performance and/or annuity rates are poor.

You should also have the option to buy extra annual pension within the Local Government Pension Scheme, either via ongoing monthly contributions, called Additional Regular Contributions (ARCs), or a lump sum. The cost varies between schemes and depends on your age, sex, time until retirement and whether a dependant's pension will be paid on your death.

Your scheme administrator can provide a quote, but as a guide I'd expect the cost (before tax relief) to be around £50 per month, or about £3,200 if a lump sum, per extra £250 of annual pension at retirement for a male aged 56 retiring at 65. 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.

The Prudential AVC scheme offers an ok range of funds with annual charges of around 0.65% - 0.75%, which is very competitive. But, as mentioned earlier, the amount of extra pension you'll receive depends on investment performance and future annuity rates - which means risk.

If you're comfortable taking some investment risk but want a wider choice of investment funds than offered by the AVC then a stakeholder or self-invested personal pension might fit the bill. However, both will likely be more expensive than the AVC, with Stakeholder annual charges typically around 1% a year and the cheapest SIPPs charging around 1.5% a year for most mainstream funds.

Of course, you don't need to use a pension to save towards retirement. For example, Individual Savings Accounts (ISAs) offer access to similar investment funds but with more flexibility, as you can access the money whenever you want. There's also no tax on income, which could be useful during retirement, although unlike pensions there's no initial tax relief on contributions.

Or, if you have a mortgage or other outstanding debts, then maybe you'll want to clear those as the interest charges are likely more than you could otherwise safely earn on the money.

Hopefully this gives you some food for thought. Your decision should really depend on how much risk you're comfortable taking and whether flexibility is important to you. And, if you feel you have sufficient pension provision already, then maybe you'll want to use your spare income for something other than boosting your pension.

Read this Q and A at http://www.candidmoney.com/questions/question350.aspx

How to invest in the German stockmarket?

Question
Is there any way of investing in the German stock market?

I dont mind whether its an active or passively managed vehicle although I prefer Investment Trusts to Unit trusts, but this is not critical. I have not been able to find anything that invests purely in the German stock market and I have read that their stock market has performed well, and I think it will cotinue to, whereas I feel the rest of Europe is too risky at present.

On another matter I would like to say that I really appreciate the advice you have provided and that I think your web site is a great idea.Answer
Glad you're finding the site helpful!

Assuming you don't want to buy shares in individual German companies (which you can do cheaply via online stockbrokers including TD Waterhouse, iWeb and iDealing) then your options are limited.

The only unit trust I know of that invests solely in German companies is Baring German Growth. Performance versus the index has been promising since manager Robert Smith took over the reins at the end of 2008. Like you, I can't find an equivalent investment trust.

Your other option would be to use an exchange traded fund (ETF) that tracks a German stockmarket index - I've found a couple:

db x-trackers DAX ETF - tracks the German DAX 30 Index for an annual charge of just 0.15%. It has distributor/reporting status so gains are subject to capital gains tax and not income tax (see this previous question to understand why this is important). It's traded on the Frankfurt, Swiss and Swedish stock exchanges.

ETFX DAX 2 x Long Fund - aims to provide double the rise (or fall) of the DAX 30 Index on a daily basis. Could make you a lot of money if the DAX soars, but the two times leveraging and daily compounding make the risks high. You also won't benefit from any dividends. It's traded on the London Stock Exchange.

So not much choice I'm afraid, but you can hopefully achieve your aims using one or more of the above options.

Read this Q and A at http://www.candidmoney.com/questions/question349.aspx

Protect my investments from inflation?

Question
My Stocks and Shares Isa includes holdings of Corporate Bond,Strategic and Gilt Funds representing 25% of total portfolio.

I fear the effect of inflation on these investments. I am considering, index linked and/or Equity Income Funds as an alternative.

I am 72 years old. Please comment.Answer
Very sensible to be concerned about the impact of inflation - it's something too many savers and investors ignore.

Whether it's worthwhile adjusting your investments with a view to protecting them from high inflation obviously depends on where inflation goes in future - and this is currently very difficult to predict.

The biggest contributors to higher costs of living over the last 12 months have been transport (i.e. fuel prices) and food, with supply of the latter suffering from bad weather affecting crops. Fuel prices depend on global demand and while there's little doubt this will rise longer term, prices can be erratic shorter term as they're often driven by investors betting on where they think the price will be in future.

The other key factor that tends to drive rising prices across the board is when we all spend more. On the one hand low interest rates and governments pumping vast amounts of money into economies could lead to greater spending, but on the other higher tax and spending cuts might cause us to spend less.

Index-linked gilts benefit from both income and the redemption value increasing by inflation (measured by RPI). However, the price at which you buy them is affected by the market's inflationary expectations (unless buying at initial issue), so if the market's right your overall return will probably be similar to a conventional gilt.

What's important is to look at the breakeven average inflation rate where the return from an index-linked gilt to redemption equals that of a similar conventional gilt. For example, at the time of writing 2024 2.5% index-linked gilts have a breakeven inflation rate of 3.3%. If the market starts to believe that average inflation will be higher than this then the gilt's price will probably rise (by more than the standard inflationary link) and vice-versa if inflationary expectations shift downwards.

So consider index-linked gilts by all means, just be aware that if inflation ends up being lower than expected you might lose out.

Dividends generally have a good track record of rising faster than inflation, so equity income funds could make sense. The obvious risk is that if stockmarkets dive you'll probably lose money regardless of dividends - and losing money isn't a very helpful hedge against inflation.

Given it's nigh on impossible to successfully predict all these factors then hedging your bets makes sense and tweaking around a quarter of your portfolio doesn't sound unreasonable. Just beware that not all equity income funds are alike. If you're worried about possible stockmarket falls I'd be inclined to lean towards funds that focus on sectors like utilities, healthcare and tobacco - as these usually fare better during difficult times.

Read this Q and A at http://www.candidmoney.com/questions/question347.aspx

Hunting for income

With savings accouns struggling to beat inflation, is the grass any greener in the investment world? .

The Bank of England Base Rate has been at 0.5% since 5 March 2008, generally spelling bad news for savers, especially those who rely on the income.

Aside from shopping around for a better savings account deal, there's no magical way of earning more interest - a higher income means taking risk. And if you can't afford to lose money then taking risk is probably a bad idea. But if you can afford to risk some money, or already have a portfolio of investments, then how are the main sources of income stacking up at present versus cash?

Let's take a look:

Investment	Typical Income Yield (before tax)	Good Inflation Protection?
Cash	2% - 3%	No
Gilts	1% - 4.5%	Yes, if index-linked
Corporate Bonds (safer)	3% - 6%	No
Corporate Bonds (riskier)	6%+	No
Commercial Property	5% - 7%	Reasonable
Residential Property	4% - 6%	Possibly
Shares	3% - 6%*	Reasonable
*net of basic rate tax.

Note: yield means income divided by the cost of the investment. So for example, if you receive £6 annual income on a £100 investment your yield would be 6%, had the investment cost £200 the yield would be 3% etc. The yield shown for gilts/bonds also includes any profit/loss if held until redemption.

Cash

Best buy savings accounts are currently paying up to 3% on variable rates, or around 4.5% if you tie-up money on a 5 year fixed rate. Rates will no doubt rise at some point, but I think it may be another year or two before we see a meaningful change. Meanwhile inflation remains a killer, leaving most savers worse off in real terms (i.e. their money, including interest, will buy less in future than today), although this could subside later in the year if the oil price settles down. The big advantage of savings accounts in this uncertain climate is safety, provided your money is fully covered by the Financial Services Compensation Scheme (FSCS) - up to £85,000 per person per institution.

Cash unit trusts (called 'money market' funds) and guaranteed income bonds (GIBs) have been competitive alternatives to savings accounts in the past. But money market funds are generally struggling to yield above 0.5% a year at present while the market for GIBs has all but dried up.

Gilts

Loaning money to the Government is still fairly safe in the scheme of things, so yields (to redemption) look little better, or in some cases worse, than fixed rate savings accounts. High inflation is still a threat unless you buy index-linked gilts (where both income and the redemption price rise by inflation). The break even (relative to conventional gilts) rate of inflation (RPI) on 6 year index-linked gilts is about 2.7%, so if you believe inflation will average more than this over the next 6 years they could be worthwhile - although returns may still lag the best fixed rate savings accounts.

Corporate Bonds

Lending money to companies is more risky. And the riskier the company the higher you can expect the rewards, i.e. income, to be.

For example, the redemption yield on a Unilever bond redeeming in December 2014 is currently about 2.4% - it's seen as being almost as safe as the government. A Lloyds Bank bond redeeming in March 2015 is yielding around 6.1% - suggesting investors are less confident. While Enterprise Inns (a pub chain) bonds redeeming in December 2018 are yielding 8.73% - not a great vote of confidence.

If you sell a bond before redemption you might make a profit or loss depending on its price, which tends to be affected by interest rates, inflation and the company's financial position. High inflation and interest rates are bad news, because a bond's income is fixed, and vice-versa.

The golden rule when investing in bonds is try to understand how much risk you're taking. While high yields look tempting, they're high for a reason...

Commercial property

Commercial property investments, such as offices, factories and shops, tend to have a good track record of paying a decent rental income. And, barring recessions, rents also tend to rise longer term, making commercial property a good antidote to inflation. However, property values can fall, as we saw clearly during the credit crunch, so you could lose money if the economy turns sour.

With rental income yields currently around 5-7%, commercial property looks fairly attractive provided you're not pessimistic about our economic outlook. Bear in mind the only practical way to invest smaller sums is via a fund - and the fund manager will often take their 1.5-2% annual charges from income, plus you'll indirectly pay around 4% in stamp duty when buying the fund (as the fund must pay this when buying UK property).

Residential property

Rental yields on residential property are averaging around 4-6%. But house prices can fluctuate quite widely and easily dwarf rental returns for better or worse, so you need to be careful. Given the negative outlook for house prices and mortgages still being in short supply, rental demand is currently high - so you shouldn't struggle to rent a good property at a worthwhile rate. But as prices are expected to fall you'll need to drive a hard bargain when buying to reduce the likelihood of sitting on a loss in a year or two.

Longer term you'll probably be fine provided you project the rental income will turn a profit after all initial and ongoing costs. But I'd avoid buying to let using a mortgage - any future interest rate increases could crucify your profits.

Shares

Some dividend yields look very tempting at present, for example the Severn Trent shares dividend yield is 4.9% and its 5.2% for AstraZeneca shares - after basic rate tax! (which can't be reclaimed). Plus companies tend to increase their dividends over time unless they're in bad shape, reducing the threat from inflation. However, share prices can be volatile, even for fairly pedestrian companies like these, so a sharp downturn in share prices could leave you sitting on a loss despite potentially attractive dividends. And there's no guarantee dividends will be as high as expected or even paid at all if a company hits hot water.

If you already own shares or stockmarket funds then taking a bias towards cash-rich high dividend companies makes sense to me in what could be a turbulent year for markets. But if you like the comfort of savings accounts I'd be very wary of jumping into stockmarkets, despite the appealing dividends on offer.

Conclusion

The world of investment never gives you something for nothing. If you want to beat the income from cash you'll need to risk losing money - and in the current climate markets are exceedingly difficult to predict, so the gamble is very real. While nothing to get excited about, the best savings account rates look ok given your money should be safe. If you decide to venture further afield I'd really try and take a 5-10+ year bet and ensure you're unlikely to need the money before then. While the income might be steady, it's very unlikely your capital will be.

Read this article at http://www.candidmoney.com/articles/article184.aspx

Most common financial adviser scams?

Question
Your mission statement advises us that ‘having worked in financial services for over 12 years, mostly as an Independent Financial Adviser (IFA), it never ceased to amaze me the extent that some providers and advisers would try to hoodwink their customers in pursuit of a fat profit’. So what are the most common scams we all should be aware of?Answer
I think using the word 'scam' might be a bit harsh, as it's quite rare for financial advisers to run off with their clients' money. But do some financial advisers give advice that's more in their best interests than their clients'? - almost certainly yes.

The catalyst for dishonest financial advice is invariably greed. Commission-based financial advisers can usually make more money shorter term from giving dishonest advice than they can good advice. Why? sales commissions tend to be higher on unappealing products for the simple reason they wouldn't otherwise get sold.

So the number one thing to watch out for is how much commission the financial adviser will be pocketing. And whether it's paid in full upfront or a combination of upfront and ongoing.

If the adviser recommends products that pay above average commissions (3% initial and 0.5% annual is about average for investments) there's a high chance commission is influencing their advice - examples include investment bonds and some pensions. And the more commission that's paid upfront the less likely the adviser will bother looking after you in future.

You should also be wary if your adviser:

• Receives a commission or fee when recommending you switch your existing investments or pension - will the switch leave you better off or is the adviser 'churning' your investments to make themselves a quick buck?
• Recommends investing money in their own investment funds - probably means a bigger margin for the adviser and will their funds really be the best in the market?
• Charges 'fees' that are little more than commissions in disguise - for example, are their fees similar to the commission they would otherwise have received?
• Recommends products that tie you into long term regular payments, e.g. endowments and whole of life insurance. They'll probably make most, or all, of their money upfront while you're shackled to a poor product for maybe 10 years or more.
• Recommends a product that isn't regulated by the Financial Services Authority (FSA), you'll have less protection if something goes wrong.

Of course, if an adviser does one of the above it doesn't necessarily mean they're dishonest or bad, but it is reason to be extra vigilant that their advice is appropriate and cost effective.

Finally, remember that investments which look too good to be true almost always are!

Read this Q and A at http://www.candidmoney.com/questions/question345.aspx

Can IFAs recommend investment trusts?

Question
I notice in an article about investment trusts you said:
"Investment trusts don't normally pay sales commissions, making them unpopular with commission-based financial advisers."

However on another site I see an IFA insisting that commission has nothing to do with it with the only reason being that most IFAs are unauthorised to recommend ITs and so prevented from recommending them by the FSA. The same IFA tends also to be very dismissive of low-cost index tracker funds.

Could you clarify please? If IFAs are prevented from recommending ITs (and possibly ETFs) even if they thought them appropriate, it rather limits the value of their advice.Answer
The Financial Services Authority (FSA) allows independent financial advisers (IFAs) to recommend investment trusts provided they're authorised to do so. In practice this means an adviser ensuring they're qualified and competent to advise on investment trusts, as well as carrying out/buying research on the investment trust marketplace.

Unfortunately, most IFAs don't bother as it involves hassle and expense. Especially as investment trusts don't normally pay sales commissions.

But while IFAs might moan the FSA doesn't let them recommend investment trusts, it's ultimately their choice. If they really want to recommend investment trusts then ticking the FSA's boxes that allow them to do so is not usually that difficult.

Call me cynical, but it seems pretty obvious to me that the only reason most IFAs don't put themselves in a position to recommend investment trusts is the lack of commission. The same is also true of exchange traded funds (ETFs).

I do have some sympathy for IFAs insofar as the FSA is making their life rather difficult and expensive these days, but as a consumer I would much rather use an adviser who's allowed to include investment trusts in their recommendations than not. And I'd make sure that adviser really knows their stuff as good research is especially important when putting money in investment trusts - there's greater scope for losing money (due to share price volatility and/or gearing) compared to unit trusts.

Assuming the FSA's Retail Distribution Review plans go ahead then from 2013 an adviser will only be able to call themselves independent if they can advise on the whole range of products suitable for you - which should finally force them to consider investment trusts and ETFs when making recommendations.

Read this Q and A at http://www.candidmoney.com/questions/question344.aspx