Good equity income fund for depressed markets?

Question
If the stock market falls to a realistic level it might be worth buying for income again. Can you recommend a fund that specialises in stocks with good yields and solid prospects for maintaining dividends?Answer
This is a good question, as equity income fund management styles do vary, with some funds more focussed on maintaining high dividend yields than others (which might look more at the big picture and growth).

Newton Higher Income is a good example of a fund that has very strict income constraints to ensure yields remain high - it only holds stocks with dividend yields 15% above the FTSE All Share average. This naturally steers the fund towards holding large, established companies that generate lots of cash and pay reliable dividends - current largest holdings include Glaxosmithkline, Royal Dutch Shell, HSBC, BP, BAT, Astrazenenca, Tesco and Vodafone.
While this rigid approach tends to underperform in fast rising markets, it may bode well during more difficult times.

Schroder Income Maximiser is interesting because the manager sells away some future potential upside to boost income, via what are called covered call options. This means the fund will probably lag rising markets but perform relatively well during flat periods. It invests in FTSE 100 stocks, currently with a bias towards the financials and healthcare sectors.

Looking at investment trusts, Murray Income might meet your criteria. It's a conservatively run portfolio that focuses on companies able to grow revenue, cash flow and dividends - over two thirds invested in FTSE 100 companies. The fund tends to trade in a narrow discount (to net asset value) band, which helps reduce the volatility that this aspect of investment trust investing can add. The TER is just over 1%.

If you prefer the concept of tracking then perhaps look at the iShares FTSE UK Dividend Plus ETF, which tracks the 50 highest yielding stocks (based on a 1 year forecast) within the FTSE 350 index (excluding investment trusts). The TER is just 0.4%. Because weightings are based on dividend yield rather than market cap there's usually a bias towards medium sized companies - around half the fund is currently invested in financials and utilities companies.

If anyone has other suggestions please post below, good luck making your decision.

Read this Q and A at http://www.candidmoney.com/questions/question551.aspx

Cavendish SIPP charges vs HL?

Question
In the guide to choosing a personal pension you say that with more than £50,000 of trail commission paying funds the Cavendish SIPP is cheaper than HL. How is that amount arrived at?

With a trail rate of 0.5% £50k of funds would incur a fee of £250 whereas the annual fee for the Cavendish product is only £60 in the first year and £10 thereafter. Surely those with much smaller value funds would also find this SIPP cheaper.Answer
The answer is because you'll also pay underlying SIPP provider (i.e. FundsNetwork) charges via Cavendish Online. My calculations are as follows, assuming a fund charging 1.5% a year:

Hargreaves Lansdown Vantage SIPP
No annual SIPP fee (assuming trail commission paying investments). No trail commission rebates, so annual charges total 1.5%.

£40,000 invested, annual charges = £40,000 x 1.5% = £600
£50,000 invested = £750
£60,000 invested = £900

Fidelity FundsNetwork SPP via Cavendish Online
Fidelity charges a £108 SIPP setup fee and £269 annual administration charge.

In addition Cavendish Online charges a £50 initial fee then £10 a year, but rebates 0.5% trail commission, effectively reducing the annual fund charge to 1%.

First Year
£40,000 invested, annual charges = £40,000 x 1% + £108 + £269 + £50 + £10 = £837
£50,000 invested = £50,000 x 1% + £108 + £269 + £50 + £10 = £937
£60,000 invested = £60,000 x 1% + £108 + £269 + £50 + £10 = £1,037

Thereafter
£40,000 invested, annual charges = £40,000 x 1% + £269 + £10 = £529
£50,000 invested = £50,000 x 1% + £269 + £10 = £779
£60,000 invested = £60,000 x 1% + £269 + £10 = £879

Ok, the breakeven in this example is actually nearer £55,000 (after the first year), hence I mentioned c£50,000 in the guide. The exact breakeven will obviously depend on funds held and the associated trail commission rebates.

Hope this makes more sense now.

Read this Q and A at http://www.candidmoney.com/questions/question552.aspx

Tax on gift from my late father?

Question
Hello, my father paid off a loan for me 4 years ago a sum of £37,000. He has recently died, will I have to pay income tax on this amount as it's under the 7 year rule? If so, at what % of tax will i have to pay?Answer
I'm sorry to hear about your loss.

When your father repaid the loan this would be treated as a gift for inheritance tax purposes. There's no income tax to pay from your point of view, as gifts aren't taxable, but your father's estate might have to pay inheritance tax on the gift at a rate of 40%.

Gifts are normally deemed to remain in someone's estate for 7 years after being made. If the gift (when added to any other gifts) exceeds the nil rate band (currently £325,000) then it can benefit from 'taper' relief, which progressively reduces the amount of gift subject to inheritance tax before becoming exempt after 7 years.

So, in simple terms, if your father's estate (i.e. house, possessions, other assets and gifts made within the last 7 years) exceeds £325,000 then the amount above that will be subject to 40% inheritance tax. However, if your Mother is still alive your father's assets can be passed across to her free of inheritance tax, along with any unused nil rate band (which can then be added to her nil rate band for use in future).

Read this Q and A at http://www.candidmoney.com/questions/question549.aspx

Fund discounts with monthly saving?

Question
I want to invest a monthly amount into an ISA. I am thinking of the Marlborough Special Situations Fund which has a good performance but 5% initial charges. I have read of discount brokers where this can be avoided altogether. However, I can't see how this can be avoided with a monthly plan. I probably want to invest about £200 per month. If the initial charge can't be avoided through a discount broker or money supermarket with monthly investment I would probably be better going for a lower performing fund that does offer 0% initial charges on monthly contributions.

i am happy to go for a higher risk fund like this one as I am looking long term - I am fairly familiar with investments types but am a little out of touch with what is available in terms of charges etc but I am currently re-mortgaging so need to up my monthly saving for paying off the mortgage.

Many thanks in anticipation!Answer
Discount brokers should be able to reduce or wipe out a fund initial charge and a few will also reduce the annual charge via trail commission rebates. It doesn't normally matter whether the money is invested as a lump sum or monthly unless the broker charges a dealing fee when buying funds (e.g. Alliance Trust).

So a monthly saving into Marlborough Special Situations via discount brokers like Cavendish Online, Club Finance and Hargreaves Lansdown should ensure no initial charge and trail commission rebates - take a look at our Guide to ISA Discount Brokers for more details.

Marlborough Special Situations is a higher risk fund investing in smaller companies, including those listed on AiM. This gives some cause for concern in the current climate, but manager Giles Hargreave has an exceptional track record so provided you're comfortable investing for 5-10 years (and riding out the inevitable storms along the way) it should hopefully prove to be a profitable long term investment. A monthly saving is no bad thing for this type of fund as it can help smooth volatility.

Read this Q and A at http://www.candidmoney.com/questions/question548.aspx

Difference between limit and stop loss orders?

Question
What is a Limit Order and how is it different from a Stop Loss Order?Answer
Stop loss and limit orders are broadly similar in that they instruct your stockbroker to buy or sell shares in a company when they hit a pre-determined 'trigger' price. But there is a fundamental difference in how they work, as follows:

A stop loss order instructs the broker to place a buy or sell order when the shares hit an agreed price. But as the subsequent order will be placed in the market the actual price you buy or sell at might be different to the stop price you specified - especially if the price is rising or falling fast.

For example, you place a stop loss to sell shares you own in company X at 50p. The share price, currently 70p, suddenly plunges and the order is triggered as the price passes through 50p. By the time the trade is placed the share price might have fallen below 50p, so although sold you receive less than 50p per share - the difference is often referred to as 'slippage'.

A limit order is similar but the broker must sell at the limit price (or better) else not all. So in the above example, unless the broker can sell at 50p or more (once the price hits 50p) they won't trade. This means there's no guarantee a deal will be executed, but if it is you won't suffer from slippage.

Perhaps the simplest way to think of the difference is that a limit trade must be placed at the stated price or better else not at all, while a stop loss will be placed at the stated price or worse guaranteed.

For popular shares in large companies a stop loss order should work fine unless volatility is especially high.

Read this Q and A at http://www.candidmoney.com/questions/question546.aspx

Fund platform changes could help customers

The Financial Services Authority (FSA) has published more details regarding its plans for fund platforms/supermarkets as part of its overall Retail Distribution Review (RDR). Good news for customers?.

For the uninitiated, RDR is the FSA's attempt at cleaning up financial services and reduce the likelihood that customers get taken for a ride by financial advisers and the industry in general. The main proposal is that commission payments to financial advisers will be banned and the rules are due to affect from 31 December 2012. You can read more details in my http://www.candidmoney.com/articles/article84.aspx previous article.

The recent announcement concerns fund platforms (also referred to as fund 'supermarkets'), such as Cofunds, FundsNetwork, Skandia and Hargreaves Lansdown. On the whole platforms are a good thing, they provide plenty of investment choice (especially useful for ISAs and SIPPs) and simplify paperwork and administration.

However, there are a few potential issues the FSA is keen to address. They've been highlighted before, but the latest FSA update puts more flesh on the bones.

Payments by fund providers to fund platforms

Fund providers pay platforms to include their funds. The charge, thought to be around 0.25% or more a year, is normally paid out a fund's annual management charge, so customers indirectly pay the platform fees.

The problem with this is that it's not transparent, customers don't know how much a platform is getting paid so there's little incentive for platforms to complete on price. Plus those platforms who promote funds via 'best buy' type lists might be biased towards the funds that pay them the most money - customers have no way of knowing as things currently stand.

The FSA has said it wants to ban these payments, which I hope means funds will be priced at institutional rates for all investors then we'll be free to shop around for the best platform deal that suits our needs. However, the wheels of our financial regulator turn slowly and we're told any changes won't be implemented by the time RDR is initially introduced. Meanwhile it seems platforms will have to disclose how much they receive from fund pro0viders from 31 December 2012 - a positive start.

This won't please many fund platforms - Hargreaves Lansdown's share price fell over 12% today in response. But it should be a result for customers. (incidentally, Citigroup reckons Hargreaves Lansdown's average margin for Vantage clients is currently 0.68%).

Payments by fund platforms to customers

Fund platforms can pay cash rebates to customers, potentially helping to offset charges for financial advice (i.e. the customer might pay for some/all of the advice via product charges even after commissions are banned). The FSA doesn't like this as it muddies the waters on how much a customer is actually paying for advice and smells too much like commission in disguise. It plans to ban them, but again a final decision has been deferred until after 31 December 2012 - not very helpful...

Re-registering investments between platforms

As previously announced, fund platforms will have to allow customers to re-register their investments (i.e. transfer 'as is') between all platforms and nominee accounts by 31 December 2012. Good news, but why some platforms still refuse to offer this already is beyond me (must be protectionism...).

Advice and independence

Advisers will not be able to use one platform exclusively and call themselves independent. In practice they might have a preferred platform for the majority of the customers, but they'll need to consider and use other options when it's in their customer's best interests. Sound's sensible to me.

Conclusion

The FSA seems to be inching towards introducing some long overdue rule changes. I hate to think how much time and money they've taken to conclude something that would take the rest of us 10 minutes, but at least they're getting there...

And if all this sounds a bit boring and tedious, I sympathise , it's not a riveting read. But take it from me, this is important stuff that could potentially make a big difference over years to come.

Read this article at http://www.candidmoney.com/articles/article240.aspx

Choosing funds and financial planning?

Question
Your website is very informative and I really do get a lot out of it so first off thank you for setting it up.

I'm a qualified accountant and work in financial services, but even myself at times I get very confused with a lot of the jargon and investment rules out there.

I currently have a portfolio comprising of a property, some shares, some NSI index linked certs and also wanted to diversify by looking into commodities fund and also some other funds to invest in such as (invesco high income, small companies UK). I'm also keen to start investing into the BRIC countries, particuarly Brazil and China.

I have a execution only account with TD waterhouse, but im trying to understand how I can start investing in these funds and how to avoid the layers and layers of management fees (which ultimately erode any investment money I put through).

Finally and most importantly Im keen on finding out how to setup my will having recently got married and expecting my first child. im 31 and keen on getting all my financial affairs sorted but everytime I contact an IFA (paid or unpaid) im getting sold lots of waste of time insurances and assurances.

Any tips on decent reading I can perform other than on your website?Answer
Glad you like the site.

Let's start with fund charges. Fund providers normally build sales commissions (typically 3% initially and 0.5% annually) into fund costs, so if you buy directly from a fund group or via a commission based financial adviser then you'll likely pay fund charges of up to 5% initially and about 1.5% annually.

If you buy via a discount broker, you can get some, or all, of these commissions rebated, potentially cutting costs to zero initial charge and about 1% annually (note: if all sales commissions rebated expect to pay a small admin charge).

So using a discount broker can be significantly cheaper, the main drawback being they won't provide advice.

Whether or not you need advice is down to you - it can be worthwhile, but equally, it's not that hard to pick some sensible funds (either actively managed or tracker). If you opt for advice then bear in mind the majority of IFAs are not investment specialists, so choose carefully.

Rather than cover discounts in detail here, take a look at our Guide to Discount Brokers for a comprehensive list of brokers and levels of discount/service offered.

When choosing funds your first decision is whether to opt for active or passive management, i.e. whether to buy a tracker. Tracker funds are usually cheap (they seldom pay much, if any sales commission - annual management charges typically 0.5% or less), and generally fare well versus active in certain areas (notably the UK and US stock markets). The downside is that they're not practical in certain areas (e.g. physical commercial property) and the very best active managers generally (but not always) outperform longer term.

If you want to invest in tracker funds you could consider buying exchange traded funds (ETFs) via your existing TD Waterhouse account.

As for researching actively managed funds, there are a number of good websites with detailed performance and holdings information - see my answer to this previous question for a list. My answer to this question discusses the factors to consider when analysing past performance.

You could also take a look at the fund research published by discount brokers like Bestinvest, Hargreaves Lansdown and Chelsea Financial. Bear in mind they also sell the product, so might have a vested interest to sell certain funds - but from experience they seem to be fairly impartial.

As for a will, the main priority is that it's straightforward and ensures your assets and possessions are handled according to your wishes in the very unlikely event the worst happens before your child becomes financial dependent.

Assuming your situation is straightforward then a low cost DIY or online option will probably suffice (there are plenty to choose from via quick search on the web). Just remember that both you and your husband will need one.

If you and your husband's combined assets exceed £650,000 (i.e. 2 x £325,000 nil rate bands) then you might want to consider some inheritance tax planning, although for the vast majority early thirties is probably too young to be worrying about such things.

When starting a family it's usual to review insurances, although whether you want any is obviously a personal choice.

If you don't have any life insurance (e.g. via your employer) and want some, then take a look at low cost term assurance policies. They're very straightforward and generally cheap. Buying through a discount broker will cut costs - see our Guide to Buying Life Insurance for more details.

You can buy income protection policies to protect against long term illness, but they're expensive and generally unaffordable for many.

Other than the above, I'd review your pension provision (i.e. check what you have and how it's invested) as well as your savings to ensure you're getting a good deal.

As for more reading, hopefully the above links will help re: fund research. You might find magazines like Money Observer and Moneywise helpful for more general personal financial guidance, while Investors Chronicle is usually a good read for specialist investment content.

Hope your pregnancy goes well.

Read this Q and A at http://www.candidmoney.com/questions/question544.aspx