Fuss over Cash ISAs

There’s been a lot of fuss in the news today over cash ISAs. Consumer Focus, a (mostly) government-funded consumer body has lodged a ‘super-complaint’ with the Office of Fair Trading (OFT) arguing that 15 million cash ISA holders could be losing out in interest worth up to £3 billion a year because of the way the market operates..

The thrust of the complaint is that average rates of interest on cash ISAs have been falling further than conventional accounts, there have been delays on transfers and some best-buy accounts don’t even accept transfers.

For all the good it will do, remember the OFT lost the fight to investigate ‘unfair’ bank charges, I’m glad Consumer Focus have generated some publicity over these issues.

However, they’re hardly a surprise. Anyone with their eyes half open knows that banks routinely attach temporary bonuses in order to propel accounts into the ‘best buy’ tables without costing them a fortune long term. This wins new customers to try and sell other products to and is usually very profitable, as when the bonus falls away and customers end up earning next to nothing many don’t bother moving elsewhere.

Why do banks appear to be using this practice more eagerly on cash ISAs versus conventional accounts? My guess is simply because it’s more profitable and they can get away with it. The ISA markets have historically been very competitive for new business, so banks have tended to add bigger bonuses or offer higher standard rates to win customers – meaning a bigger thump when the rates fall back down to earth.

Dragging their heels over transfers is inexcusable. HMRC rules, while woolly, suggest ISA transfers should be completed within 30 days. If your transfer takes longer then demand the lost interest and, if that fails, take your complaint to the Financial Ombudsman Service.

If you have a variable rate cash ISA (or savings account for that matter) review the rate at least once a quarter and don’t hesitate to transfer elsewhere. You simply need to complete an ISA transfer form with the new provider then sit back and wait, hopefully for not too long…

P.S. Apologies for fewer than usual updates on the site this week, been busy behind the scenes preparing the site for the new tax year next week – the introduction of a 50% tax band is a pain as lots of the calculators require changes.

Read this article at http://www.candidmoney.com/articles/article86.aspx

Reclaim Lyxor ETF withholding tax?

Question
I have just received a dividend payment on my Lyxor ETF F100 which indicates a withholding tax has been applied.

Can I reclaim this tax ?Answer
Having just done some reading on this subject it’s messy to say the least!

I’ve not managed to find a definitive answer and Lyxor was a little vague when I called them, but my interpretation of the rules is as follows:

The Lyxor FTSE 100 ETF, while listed on the London Stock Exchange, is tax resident in France. Being an investment fund it doesn’t have to pay tax on its profits, but a 25% withholding tax is nevertheless deducted from the gross dividend when paid to non-residents, as would be the case with other French companies.

When a UK tax resident receives foreign dividends they can normally apply the 10% tax credit before paying basic rate tax of 10% or higher rate tax of 32.5%. So, as is the case with UK dividends, basic rate taxpayers have no further tax to pay while higher rate taxpayers effectively pay a further 25% tax on the dividend received.

However, this ignores the 25% French withholding tax and herein lays the confusion and potential problem.

Under the UK-French double taxation convention French withholding tax of up to 15% (of the gross dividend) can be credited against the UK liability. So this means that a basic rate taxpayer will have no further tax to pay on the Lyxor ETF and a higher rate taxpayer can only use up to 15% of the 25% withholding tax to credit against their additional tax bill. In both cases it is theoretically possible to reclaim the additional 10% of French withholding tax by sending the appropriate form to the French tax authorities.

From what I’ve managed to find out the form you need appears to be RF-5GB/5088 and can be obtained from the HMRC Residency Centre in Nottingham (0151 210 2222).

In all honesty, unless the sums involved are large the effort required to get a refund is unlikely to be worth it. Probably a better idea to switch to an ETF based in Ireland where there’s normally no withholding tax on ETFs.

If anyone reading this has tried to reclaim withholding tax in this scenario please let us know the outcome by posting below – thanks.

Read this Q and A at http://www.candidmoney.com/questions/question173.aspx

Which savings account?

Question
We usually reinvest our money each year in a oneyear fixed rate interest bond but at the moment they are just 2.75% gross. We have already put in 3 year fixed rate interest bond for 4.40% but wonder if a 18 month bond @ 3.25% is worth considering. Answer
If you haven’t used your cash ISA allowances I’d consider the Santander Flexible ISA. It’s paying 3.2% which includes a guarantee to pay 2.7% above the Bank of England Base Rate for the first 12 months. Interest will be tax-free and you can contribute up to £3,600 per person (£5,100 if age 50 or over) before 6 April and a further £5,100 afterwards (in the 2010/11 tax year). You’ll almost certainly want to more elsewhere in a year’s time when the guarantee ends, but it should prove a good home meanwhile. Alternatively, Halifax is offering 3.5% on its 2 year fixed rate Cash ISA.

If you’re non-taxpayers and/or will exceed the ISA allowances the most competitive one year fixed rate is currently the Post Office at 3.30% gross – the account is provided by the Bank of Ireland. Over two years ICICI Bank tops the fixed rate best buys at 4.1% gross. ICICI is an Indian Bank, but covered by the Financial Services Compensation Scheme up to £50,000 per person.

If you’re taxpayers another option that might appeal is 3 year National Savings Index-Linked Certificates. The current issue pays inflation (measured by the Retail Price Index) plus 1% a year for three years, tax-free. They look especially attractive right now as RPI is 3.7%, but inflation could obviously fall over time, with some predicting it may even become negative. During any periods of negative inflation the return will simply be 1%.

My gut feeling is that interest rates will remain low for a while yet. Inflation may recede by year and there’s pressure on the Bank of England not to raise rates as doing so could hinder economic recovery. However, if there’s one thing I’ve learned over the last few years - it’s never say never!

Read this Q and A at http://www.candidmoney.com/questions/question175.aspx

Reduce risk?

Question
I am 57 and just about to reduce my working hours down to 30 a week following a heart attack, I am wondering is it still wise to have a reasonable portfolio of unit trusts in isa's about £24,000 or should I be looking to reduce the risk of investing in the stock market now. I also have an investment bond with friends provident worth about £17,000. would it be better to go for a safer haven now?Answer
I think the answer really hinges on what your future plans might be. And I appreciate these might be unclear right now following your recent health problem.

Nevertheless it would be sensible to ensure that not all your investments are exposed to the stockmarket, whatever the future holds in store - the outlook for stockmarkets is especially uncertain at present and potential volatility high. I’d suggest a broad mix of cash, corporate bonds, commercial property and global stockmarket investments, although the optimal mix will very much depend on your future needs.

If, for example, you plan to retire at 60 and will have a pension that provides enough income for a comfortable retirement, then you might feel happy taking more risk with your investments in the hope of earning higher returns. While market falls will hurt, you can probably afford to stay invested until they recover.

But if you think you might need to draw from the investments sooner than later, perhaps to supplement pension income or to top up earnings following your cut in working hours, then falling markets pose a much greater threat. In this case you might want to take a more cautious approach.

If you think you might need additional income then try to work out how much. If you can produce this from your investments (a 3-5% yield is probably realistic, so £1,200 - £2,000 a year) without having to sell units, then all the better. Otherwise you should factor in withdrawals and take an even more cautious approach to reduce the likelihood of having to sell units after a big fall in value.

If you do decide to switch funds then it should be straightforward to do so within your existing ISAs and investment bond. In the case of the ISA consider moving the holdings onto a fund supermarket such as FundsNetwork, if you haven’t already, as this will make switching and managing the funds far simpler in future. There’s normally no cost to ‘re-register’ funds onto a supermarket platform.

Finally, if trail commission is being paid on the investments and you’re receiving no ongoing advice then consider either finding an adviser who will help in return for this commission or use a discount broker to get it rebated.

Hope this helps and best wishes for a healthy recovery.

Read this Q and A at http://www.candidmoney.com/questions/question174.aspx

Checking pension performance?

Question
How do I compare the performance of my Pension Fund relative to other funds to check I've got my money in the right place?
Answer
I find the past performance data on the Trustnet website very helpful for this kind of comparison.

Firstly, make a list of the fund(s) you hold within your pension – you can find these on a recent statement.

Next find out which pension fund sectors these funds are in, as it makes sense to compare the performance of your funds with others in the same sector to ensure a more relevant comparison. You can do this by first running a search on Trustnet for your pension fund manager. This will show the available funds, click on the funds you own and make a note of the sector as displayed in the information summary page for each fund.

Now go back to the main search page and enter the sector of your first fund. You can review performance over various periods. Returns over 1, 3 and 5 years are useful to give a general feel versus the competition. However, also look at the ‘discrete’ year by year returns as these highlight how consistent the fund has been, e.g. 5 year returns could be the same for two funds, but one might have delivered positive returns in each of the years while the other had one exceptional year followed by four years of losses – which would you prefer to own?

Aside from trying to ensure you own funds that will perform well versus peers, a major factor that will influence returns is asset allocation, i.e. the assets and areas in which your money is invested. For example, owning the best UK stockmarket funds will be of little consolation if the UK market dives and other markets soar. It makes sense to have a good spread of investment across global stockmarkets, fixed interest, property and commodities – the proportions of which should vary depending on how much risk you’re comfortable taking.

If you own a with-profits fund in your pension then performance is far more difficult to compare because with-profits is such an opaque type of investment – you need to factor in potential terminal bonuses and market value adjustments, both of which can be specific to your personal holding. The best source of general with-profits performance I’ve found is Money Management Magazine which publishes periodic reviews of the with-profits market.

Read this Q and A at http://www.candidmoney.com/questions/question168.aspx

FTSE growth a myth?

Question
Is the FTSE growth a myth?

We are continually told that equities outperform other investments in the longer term and various indexes such as the FTSE100 are quoted to back up the claim. But the make up of the FTSE100 is constantly changing with poorly performing shares dropping out and better performing shares coming in so it is hardly surprising that the index rises in the long term. What would be the value today of a proportionate basket of shares bought in Jan 1984? Quite a few of the constituent companies have gone bust and others have lost almost all of their share value so I find it hard to believe that the basket would have increased in value. In order to have made money one would have had to sell the weak shares and buy replacements so it comes down to stock picking (aka gambling) rather than investing in a medium that can be expected to do well in the long term.Answer
Had you bought the 100 companies that comprised the FTSE 100 Index in January 1984 and made no changes since then, I agree that some of those companies have probably since plunged and others will have soared. I’m afraid I don’t have access to the figures to know what the total return will have been.

You’re right that the FTSE 100 does review its constituents and weightings (quarterly), so it will obviously change over time. Is this the same as stock picking? Well I suppose it is, on the basis there’s a formula that determines which stocks are held and it what proportion. But the reason investors like to use the FTSE 100 as a benchmark (and for tracking) is that the investment selection is consistent, being formula-based.

However, the key point in all this is that the FTSE 100 Index is weighted. This means that if a large stock declines and eventually falls out of the Index it will have a big impact on the Index value. An extreme example: if a stock that accounts for 10% of the Index went of business tomorrow then the Index would fall by 10%. Weighting also means that the smaller stocks that enter or leave the Index each quarter tend to have minimal impact on the Index level.

Bearing all this in mind I’m not sure your argument holds. Shares dropping out of the FTSE 100 Index will, to varying degrees, have dragged the Index down while those entering might have a positive impact depending on their future share price performance.

It’s clear the FTSE 100 has grown longer term, especially when dividends are taken into account. And given many active fund managers find it difficult to consistently beat the Index; funds that track the FTSE 100 (or the FTSE All Share Index) are popular.

I think the gamble of index investing is that weighted indices tend to dominated by a handful of sectors. In the case of the FTSE 100, financial and oil/gas companies which account for 40% of the Index. This is an issue often overlooked by tracker investors.

Read this Q and A at http://www.candidmoney.com/questions/question169.aspx

Fair Commission Charge?

Question
I've been getting some advice from an IFA and his proposals are to take out the following:

A Sterling investment bond - £170k ( this would be used to fund the following 2 items via draw down).
A Zurich whole life insurance to cover any possible IHT - value £90K.
Two Aviva stakeholder pensions paying in £2880 per pension per year (stakeholder pensions for my grandsons).

For this he says he will receive:

Sterling investment bond - 3% upfront commission plus 0.5% trail.
Zurich whole life insurance - £2k.
Two Aviva stakeholder pensions - an unspecified amount as yet.

I have asked him to quote me quote me for fee based work but he seems reluctant to do so.

The commission amounts to £7100 plus the stakeholder amount. Is this a fair commission charge?Answer
The simplest way to answer the question is ask yourself whether you’d be happy to write out a cheque for £7,100 for the advice the IFA has given you plus a further cheque for around £850 a year for ongoing advice you may or may not receive. You’ll end up paying for the commission over time out of product charges, so this is a fair way to think about it.

Alternatively, we could assume the adviser spends 12 hours working on the advice – longer than required in my opinion, but let’s be generous. This equates to an hourly rate of around £600...daylight robbery.

I don’t know your situation so it’s difficult to comment on whether the advice is appropriate. However, my gut feeling is that you should steer clear – commission or no commission.

Investment bonds are rarely very tax efficient for most people, especially when compared to investments that can use your capital gains tax allowance. And in the situations where they are worthwhile it’s usually better to use an offshore bond where gains and income are not automatically taxed at basic rate. As far as I’m aware Sterling only offers onshore bonds, so this is likely to be a bad choice regardless of whether an investment bond is suitable for you.

As for whole of life insurance I’m really not a fan. There is an argument for using it to cover potential inheritance tax liabilities in future, but do you really want to pay premiums until you die? Plus, if investment performance is poor you could see steep hikes in future premiums. If concerns over inheritance tax are the reason for wanting whole of life insurance then I’d suggest considering other ways to mitigate the potential liability before deciding on what’s best for you. Take a look at our inheritance tax page to get a feel for the options.

The Aviva stakeholder pension is a reasonable choice with 34 funds to choose from. My only reservation is that your grandsons won’t be able to get their hands on the money until at least age 55, possibly later still if the minimum retirement age continues to increase – although this may be no bad thing depending on what you’re looking to achieve.

If I were in your shoes I’d speak to at least two other fee-based independent advisers, maybe more, until you find one that offers a fair deal and you can trust. Yes, it’s hassle, but the advice will likely affect you over the rest of your life so it’s important to get it right. You can find independent advisers in your area using www.unbiased.co.uk - there’s no guarantee they’ll be any good, but you can search based on qualifications and how they paid.

I’m reticent to suggest how much the advice should cost as it’ll depend on your situation and requirements, but as a ballpark I think any more than £2,000 for the initial advice is probably too much.

Read this Q and A at http://www.candidmoney.com/questions/question172.aspx