Stick with broker or use tracker?

Question
My wife and I are fortunate enough to have £800k in cautiously managed funds with a discount broker which we aim to pass on to our children, over the next 20 years or so.

These have grown by about 5% p.a over the last7 years, I have been happy enough with this, but my concern is that I am paying 1% management fees to the broker, £8k p.a, so possibly 160k over 20 years and I am concerned that charges will be a significant drag on performance.

Do you have any suggestions. I am cautious and not happy about managing my investments myself, so I would aim to leave the majority of the funds where they are. I am wondering whether to put 100-200k in a UK or global tracker or stick with the present arrangements.
Answer
The first step is to establish exactly what you're paying and the service you're receiving in return.

Discount brokers don't provide advice/management and nor do they generally charge an explicit fee - they instead rebate most sales commission, keeping some for themselves. A few brokers have started to rebate all commission in return for a fixed fee, which is usually the cheapest route and likely to become the norm over the next few years.

If you're paying a 1% management fee to the broker this suggests you're probably using some sort of investment management service, most likely discretionary management. This means the broker (or, more accurately, investment manager) is actively managing the money on your behalf, making all the day to day investment decisions.

The upshot is that you're probably being charged on two levels, the fess on any underlying investment funds in your portfolio plus those of the investment manager.

I would expect the manager to be using institutional versions (or 'units') of funds held, which means no initial charges and annual charges of around 0.75%. Or, if they use versions with commissions built in (called 'retail' units) the commission should be refunded in full to get a similar end result. If this isn't the case you're being taken for a ride and I'd switch broker without hesitation.

Add on the broker's 1% fee and you're probably paying a total of around 1.75% a year, perhaps less if the portfolio has high fixed interest exposure (as these funds tend to be a bit cheaper than stock market funds) or invests directly in shares/fixed interest (which means no underlying fund management fees).

Is this too much? If the broker is doing a good job of managing your money then perhaps not, although given the size of your portfolio it wouldn't be unreasonable to try negotiating the 1% fee down to 0.75% or less. Percentage based fees always risk becoming excessive on large sums, which is why fund managers and advisers like them so much. Unless a few of the larger players make a stand or consumers flex enough muscle to force a fairer deal I can't (unfortunately) see things changing.

You could consider re-directing some of the money into low cost tracker funds, but it's important to reflect how this will affect overall risk. Plus your broker will need to take this into account when selecting investments in the remainder of the portfolio they're managing.

A big issue you need to consider (I'm sure you are already) is tax; primarily capital gains and inheritance tax.

Assuming the investments aren't held in ISAs or pensions, it's important your wife and yourself both realise gains within the portfolio to fully use your annual capital gains tax allowances (currently £10,600 each), else you'll just store up an increasingly large tax bill when you pass the money (or investments) across to your children. Your broker should already be doing this, but double check.

When you gift the money/investments to your children you'll need to live for at least seven further years for the assets to fall fully out of your estate. If you pass away while it's in your estate they'll be subject to inheritance tax (assuming your £325,000 nil rate band is already eaten up by your home/other assets). It's possible to use trusts if you're in a position to give away money now but want to retain control, although this opens up a whole new set of pros and cons. I won't cover in detail here but take a look at our inheritance tax page if you're interested in reading more.

Read this Q and A at http://www.candidmoney.com/questions/question633.aspx

Are stockbrokers safe?

Question
I have stockmarket investments exceeding £50,000 with one broker, and my understanding is that the FSCS scheme only provides protection up to £50,000 should the broker go bust. How significant is the risk that I could lose everything above the £50,000 protection ceiling? I'm concerned that my money could be lost in the same way that client money was lost when MF Global went bust.


Answer
The answer depends on how you hold the shares. If you hold them via a certificate or Crest Personal Account then you are the registered owner, which is about as safe as you can get. Your holding would be unaffected if the broker goes bust (although you'd obviously need to use a another broker) and there's minimal scope for them to swipe your holdings via fraud.

However, it's far more common for shares to be held in a nominee account, especially if you trade online. This means the shares are owned by a nominee company, run by the broker, for your benefit. Assuming everything is above board the shares would be safe should the broker go bust, as the nominee company is separate from the broker company. However, if the broker committed fraud and dipped their fingers into the nominee company you could lose money. It's this possibility that's covered by the FSCS for up to £50,000 per person per institution. So yes, if the broker is fraudulent you could lose everything above £50,000 - albeit the risk is very small if you use an established company.

You can read more info in my nominee account article.

Read this Q and A at http://www.candidmoney.com/questions/question631.aspx

Can teacher also have a personal pension?

Question
My daughter opened a private pension with Aegon 4 years ago when a student. She pays £2880 per annum with the Government paying £720. She has now joined the Teacher`s Pension scheme in England - has a full time permanent teaching job.
My question :

Can she continue contributing to the Aegon pension and still receive the £720 from the Govt as well as be a member of the Teachers scheme?.Answer
Yes, she can. She's allowed to contribute into a personal pension (such as the Aegon pension she has) as well as an occupational pension and enjoy contribution tax relief on both.

The only proviso is that tax relief will only be given on contributions (including those made by an employer) up to her earnings or £50,000 a year, whichever is lower.

As an alternative to paying more money into the Aegon pension she could consider buying extra teacher's pension instead as this avoids investment risk (which effectively falls on taxpayers who ultimately pay for the scheme), but then there's no guarantee teacher's pension benefits/rules won't change in future or that she'll send up better off versus the Aegon pension.

Read this Q and A at http://www.candidmoney.com/questions/question630.aspx

Surrender endowment policy?

Question
We have a Friends Provident Joint Life Endowment with profits policy.

It’s got 2 years to run, and has a current surrender value of £40,734, however the policy only has a guaranteed minimum payout of £39,340.

We are paying £126 per month.

We have paid our mortgage off, and we don’t need the life cover.If I cash this policy now will we have to pay and tax on the£40,734?
I pay the higher rate tax, my wife pays basic rate tax but is close the the upper limit.

Or should we continue on with the payments (total over 2 years would be £3024)?Answer
Let's start with the simple answer - tax. Your endowment is technically called a 'qualifying' policy and provided you don't surrender during the first three quarters of its term then it's deemed to have qualified which means no tax to pay on surrender. Whether you have a 10/20/25 year policy, with just 2 years left to run it will have qualified by now.

These types of policy are taxed internally at basic rate anyway so no tax benefit for basic rate taxpayers. But for higher rate payers like yourself you at least avoid paying extra higher rate tax.

Whether to surrender now or hold until maturity is more difficult to answer. On the one hand, the surrender value looks appealing versus the guaranteed minimum payout (especially taking ongoing contributions into account), but what really matters is the size of 'final' bonus, if any, Friends Provident (now called Friends Life) will pay at maturity. Your endowment very likely invests in a with-profits fund, which holds back some profits in reserve to help smooth over bad years. Any reserves left in the pot at maturity are paid as a final bonus - more details on our life investments page.

Unfortunately, final (or 'terminal') bonuses can be unpredictable, so hard to second guess whether you should stay put or surrender. I'd ask Friends Life whether they'll estimate your final bonus, tell you how much has accrued to date or provide an example of how much it was on a recently matured endowment of the same duration as yours. This might at least give you a steer on how much you might get.

Read this Q and A at http://www.candidmoney.com/questions/question629.aspx

Tax if I surrender my Pru Bond?

Question
I have an prudential investment bond which I am going to cash in the full amount of the policy soon.

I paid in £14,500 and the surrender valuation is at the moment £18,200. As I am a higher tax payer what tax would I be liable for in surrendering this policy and would I be better off doing a partial surrender to pay less tax?

I have had this policy since October 2000 and have not made any withdrawals from the policy to date.Answer
The tax calculation process on surrender of an investment bond is called 'top-slicing'. You can read more about it on our life investments page, but a quick overview below.

We start by calculating a top-slice, effectively any profit you've made on the bond divided by the number of years you've owned it. This is added to your income and the proportion of top slice falling into your basic/higher rate tax bands dictates the tax owed on the overall gain.

Investment bonds held onshore, as yours very likely is, are effectively taxed at basic rate within the fund, so basic rate tax is already deemed to have been paid. But any top-slice falling into the higher rate tax band will be subject to the difference between basic and higher rate, i.e. 20% tax, multiplied by the number of complete years you've owned the bond.

In your case the profit is £18,200 less £14,500, i.e. £3,700. As there are no withdrawals to worry about we divide this by the 11 complete years you've owned the bond to give a top-slice of £336.

Given you're a higher rate taxpayer the slice will obviously fall entirely in your higher rate band, so you're liable for extra tax on the full top-slice (or, in other words, the full £3,700 profit).

So the £336 top-slice is taxed at 20% to give £67.20 and this is multiplied by 11 years to give a £739 tax bill.

If your income falls back into the basic rate tax band in future, surrendering the bond then could avoid some/all of this extra tax. Otherwise there's little reason to partial surrender unless you'd prefer to spread the tax bill over time or believe the higher rate of income tax will fall.

Read this Q and A at http://www.candidmoney.com/questions/question616.aspx

Can husband reduce CGT bill?

Question
My husband has quite a few shares in one company and wishes to cash then in,what is the limit he can cash in to avoid paying capital gains tax and will he have to pay income tax on them.He took early retirement just over 2yrs ago and recieves a works pension which he pays income tax on.Answer
The annual capital gains tax allowance is currently £10,600 (2012/13 tax year), so your husband can realise gains up to this amount without having to pay any tax. Gains in excess of this will be added to his income with those gains falling into his basic rate band taxed at 18% and any gains falling into his higher rate band taxed at 28%.

However, there's scope to use your allowance too. Your husband can transfer shares across to you, without selling them, allowing you to realise gains too. The shares will be treated as if you'd bought them at the original price your husband paid. So it's very easy to split the gain and use both your allowances. Your husband just needs to ask his stockbroker for a stock transfer form.

If there's still a lot of taxable gain after using both your allowances your husband could hold back on selling some shares (if viable) until the next tax year, i.e. after 5 April 2013 - when you'll both have fresh capital gains tax allowances to use.

You can read more and use a CGT calculator on our capital gains tax page.

Read this Q and A at http://www.candidmoney.com/questions/question614.aspx

Fidelity Wealth SIPP any good?

Question
Have you looked at the Fidelity Wealth Sipp offering for value etc?Answer
I've looked at it in passing and it didn't interest me that much, but let's take a closer look here.

Fidelity Wealth targets investors with at least £100,000, the main carrot being a typical annual fund charge rebate of 0.15% (although a few funds pay 0.25%).

The Fidelity Wealth SIPP (called the Fidelity Personal Pension) is administered by Standard Life and quite straightforward. There are no setup or annual SIPP charges, the aforementioned annual fund charge rebates and Fidelity pays between £50 - £1,000 cash back if you transfer in from another pension provider between 1 August and 30 September 2012.

However, there's no option to hold shares, including exchange traded funds and investment trusts. While this won't bother everyone, it's a big potential drawback for some investors.

If you're happy being restricted to funds then the lack of SIPP charges and modest annual rebates makes this pension a reasonable deal. But there are better offers out there for £100,000+ pension funds.

The likes of Alliance Trust Savings and Interactive investor give much higher annual rebates (typically 0.5%+) and offer share dealing. Unlike Fidelity there are Annual SIPP charges and dealing fees on funds, but you'll almost certainly still end up much better off if your pension fund exceeds the £100,000 Fidelity Wealth threshold.

If you only want to invest in funds you'll also likely save money versus Fidelity by using the Skandia Collective Retirement Account purchased via discount broker Club Finance - who rebate 75% of fund trail commission which typically equates to around 0.375%. The extra rebate should more than compensate for Skandia's £68.50 annual fee on a £100,000 pension fund.

Or, if you already have a SIPP, you could use a service like Massow's Paymemy which rebates all commissions on existing policies in exchange for a one-off £95 fee, the only caveat being high additional admin fees if commission can't be rebated back into the SIPP (most SIPP providers should facilitate this).

All in all, the Fidelity Wealth SIPP offers a fair deal. But there are cheaper alternatives and the lack of share dealing will be a problem for some investors. So no great reason to avoid it, but equally no great reason to use it either, hence my disinterest.

Read this Q and A at http://www.candidmoney.com/questions/question726.aspx