2010 review & 2011 outlook

2010 has been a strange year. We've seen two Western economies go bust yet many investments are finishing the year on a high note. What does 2011 hold in store?.

2010 has been a year of very mixed fortunes. We've seen the Greek and Irish economies run out of cash (or, more accurately, the ability to continue borrowing at a reasonable price), requiring expensive bailouts from neighbours. Yet most stockmarkets and commodities have finished the year strongly - albeit with a rough ride along the way.

But in many ways the global outlook is little unchanged from a year ago. Western economies are stagnated and have heavy debts, necessitating tax rises and spending cuts. While emerging economies continue to prosper, with growing domestic demand helping to offset falls in exports to cash-strapped Westerners.

There's little doubt that the gazillions of dollars pumped into the US economy by the Federal Reserve have helped markets, but we mustn't forget this is a last ditch attempt to get the US economy firing on all cylinders again and far from guaranteed to work.

Perhaps the saving grace has been low interest rates. If you've kept your job and have a variable rate mortgage then chances are you're better off than ever, thanks to low mortgage payments.

Anyway, here are my views on what happened in 2010 and what might happen in 2011.

Savings

2010

2011

The Bank of England Base Rate has been rooted at 0.5% all year. Bad news if you have a variable rate savings account - around 1/3rd of which now pay 0.1% or less a year, although 'best buy' variable accounts have remained around 2.5 - 3%. Fixed rates have fallen slightly, with the highest 5 year rates nudging back from about 5% to 4.5%. Rising inflation has been a big problem, leaving most savers worse off in real terms. But a rise in the FSCS safety net from £50,000 to £85,000 is good news.

Our economy remains on the brink of recession, providing a big disincentive for the Bank of England to raise interest rates. I'd therefore expect variable savings rates to stay more or less where they are. Fixed rates might improve if economic prospects pick up, as that increases the likelihood of future Bank of England interest rate rises. Inflation could remain a problem, though it might subside later in the year.

Mortgages

2010

2011

Flat interest rates have meant little change to variable rate mortgages, with standard rates averaging about 4%. But while cheap, banks continued reluctance to lend and an uncertain housing market have meant few new mortgages being taken out. The best rates still require a deposit or equity of 20% - 40% of the property value, with the rates for a 10% deposit being around double - no change on 2008.

Rates are unlikely to change that much, as per savings. Lenders remain very cautious, but provided the economy continues to stabilise and bad debts don’t rise then we may start to see a reduction in the deposit or equity required to get a competitive rate by the end of the year. If you’re paying your lender’s standard variable rate then consider re-mortgaging to a lower rate now!

Stockmarkets

2010

2011

Stockmarkets have been up and down like a yo-yo, generally overreacting to any news, good or bad. They've finished the year strongly, seemingly due to improved global economic optimism and the US announcing a further $1 trillion injection into its economy. Depending on where you invested, the UK stockmarket generally rose about 10-30% and emerging markets 20%+. Dividends also continued to look positive, with more companies ether resuming or increasing their payouts to shareholders.

The rise towards the end of 2010 has surprised me and may not be sustainable unless we see more positive economic news in 2011 - far from certain. Nevertheless, dividends continue to look appealing versus other investments and the longer term prospects for emerging markets remain very convincing. I'd continue to favour well established companies that pay attractive dividends over anything too racy and consider the few 'absolute return' style funds that actually appear to work.

Gilts & Corporate Bonds

2010

2011

With the exception of Greece and Ireland, safer government and corporate bonds have had a fairly subdued year, returning around 5-6% in the UK. Higher yielding bonds have done better at around 12%+ thanks to increased confidence in those companies' financial health. The benefit of low interest rates has been offset by rising inflation, driven mostly by higher oil prices.

Interest rates will likely remain low and provided oil prices don't surge then inflation should fall later in the year. Both are helpful to bonds, especially government and blue-chip corporate. However, if economies struggle then so might companies, which could hurt confidence hence bond prices. I wouldn't be surprised if 2011 returns are similar to 2010, although higher yield bonds could suffer if stockmarkets tumble.

House Prices

2010	2011
Prices rose over the first half of the year due to nice property being in very short supply. This encouraged plenty of others to put their homes on the market, but generally at unrealistic prices which has led to the market stagnating. The rental market has picked up as a result.	House prices will very likely fall, perhaps by 10-20% over the next few years, but it'll be a gradual process. Buyers will want to factor this in to their offers, but as there are few serious sellers willing to oblige house sale volumes could fall further.

Commercial Property

2010	2011
Returns have been reasonable over the year, with prices recovering slightly and rental income stabilising. UK returns have been around 14% (about half income & half growth) and better still in some overseas markets. Industrial property has lagged retail and office, with London still the main driver for the latter.	Rental yields of around 6% continue to look attractive versus other investments, which should keep demand buoyant. However, as commercial property is so dependent on the economy prices and rents could suffer if the UK economy falters. I expect returns to be lower than 2010, but a significant drop is unlikely.

Gold

2010

2011

Started the year at $1,100 per ounce, which seemed high, but continued soaring to over $1,400 before falling back to around $1,350. High prices have been driven by investors seeking a safe haven during turbulent markets.

Despite the high current price I expect it to be fairly stable over 2011 unless stockmarkets and economies perform far better than expected, in which case some investors may sell-off their gold piles. When investor demand does eventually wane prices will probably fall, but I think longer term prospects are still reasonable thanks to growing demand from emerging economies such as India and China where increased prosperity should increase demand for gold jewellery.

Oil

2010	2011
The price per barrel has risen from about $78 at the start of the year to over $90 in December. This suggests demand picked up thanks to improving economic fortunes, but rising costs haven't helped global inflation which has been a thorn in the side of some economies.	The oil price is very sensitive to economic news, making predictions difficult. I think the price will likely remain more or less where it is, with the possibility of a small fall if economic news worsens. However, longer term prices will invariably rise as more of the world's developing population starts driving motor cars.

Tax

2010	2011
The UK Government's colossal deficit meant lots of tax rise announcements. VAT rose from 15% to 17.5% on 1 Jan, a new 50% top rate of income tax was introduced in April and child trust funds scrapped from the end of the year, but the worst rises were deferred until 2011 and beyond.	VAT increases from 17.5% to 20% from 1 January and National Insurance contributions, both employer and employee will rise by 1% from April. The annual allowance for tax relief on pension contributions will fall from £255,000 to £50,000, also from April. Expect more future tax rise announcements if the Government struggles to meet its debt reduction targets.

Have a great festive season and (despite the above) let's hope for as prosperous New Year!

Read this article at http://www.candidmoney.com/articles/article183.aspx

Are coffee and orange juice good investments?

Question
Are orange juice and coffee a safe haven for financial investment? Answer
The price of orange juice and coffee depends, like all commodities, on supply and demand. And, if you're British, the dollar/pound exchange rate too as most commodities are traded in dollars.

Climate has the biggest impact on the short term supply of agricultural produce - bad weather is the main reason prices of crops including coffee, oranges and corn have soared this year.

Longer term supply tends to be influenced by price - if prices are high more farmers will be encouraged to switch crops, if feasible, to make more money.

Demand is largely a product of lifestyle. If coffee drinking becomes more fashionable, as it has done in emerging markets, the you'd expect demand to rise. Although some commodities have also benefitted from growing alternative use demand, e.g. corn being used for biofuels.

Are soft commodities a good long term investment? In general I think yes. Climate change, growing populations and greater affluence in emerging markets should all serve to boost prices over time if supply can't keep up with growing demand.

But are they a safe haven? I don't think so as short term prices can be very volatile, exacerbated by exchange rate movements. If better weather produces a bumper harvest next year then prices will probably fall from their current levels.

Playing the commodity markets short term is a gamble unless you can accurately predict global weather. And because there are a lot of commodity gamblers (sorry, speculators) their views can affect prices which further adds to potential volatility.

For example, if speculators expect bad weather they might buy up orange juice futures expecting the price to rise (futures allow you to buy or sell a commodity at an agreed future price). This in itself will increase demand for the futures and push up prices, but if the weather turns out to be fine the futures price will likely fall again. Given futures are the usual way to invest in agricultural commodities (as it's impractical to buy and store crops yourself) this means higher all round volatility for investors.

Top give you an idea of the volatility: the one month futures price of frozen orange juice concentrate moved from about $1.10 per pound in August 2008 to under 70 cents then back above $1.10 within the space of a year.

Read this Q and A at http://www.candidmoney.com/questions/question341.aspx

Higher savings compensation limit confirmed

The Financial Services Compensation Scheme (FSCS) has confirmed the savings compensation limit will rise from £50,000 to £85,000 per person per institution from 31 December 2010..

FSCS compensation is paid out in the event a bank or building society goes bust and is unable to return some, or all, of savers' money. It covers savings up to a set limit and applies per person per institution.

So if you have a joint account your overall cover will rise from £100,000 to £170,000. But if you have several accounts with the same institution then the £85,000 compensation applies to all those accounts combined, not per account.

Why is it changing?

For once the bureaucrats in Brussels have done us a favour. New EU legislation called the 'European Deposit Guarantee Scheme' has been introduced to harmonise protection for savers across all EU states. The compensation limit is €100,000, which the FSCS has converted to £85,000.

Any other changes?

Yes. If you're entitled to a payout the FSCS will try to make it within 7 days and in any case within the 20 days stipulated by the new rules. Note: this is from the date the bank or building society is declared in default.

And if you also have loans with the same institution they will no longer be deducted from any compensation payable. This doesn't mean you won't still owe the money, but it'll be treated separately.

Who's covered by FSCS compensation?

All private individuals and companies (excluding financial companies and public authorities).

Are foreign banks covered?

It depends. Provided the bank is regulated by the FSA and a member of the FSCS then you'll enjoy the same level of protection as a UK bank account - examples include ICICI and State Bank of India.

If the foreign bank is operating the account under the European Economic Area (EEA) 'Passport' scheme then you're covered by the compensation scheme in the bank's home country. If the foreign cover is lower than the FSCS level then the FSCS will make up the shortfall - although when the new €100,000/£85,000 limit takes affect then compensation limits should be the same across the EU. Examples include Anglo Irish Bank and Triodos Bank.

Otherwise you're simply covered by any compensation that might be available in the bank's home country.

What if 2 or more banks/building societies are owned by the same institution?

If you have accounts with banks or building societies owned by another institution then you're only covered by one lot of compensation for all those accounts combined.

For example, if you have £50,000 with Bank A and the same again with Bank B then you'll be fully covered if the banks are owned independently. But suppose Bank C owns banks A and B then you're only covered up to £50,000 in total (£85,000 from 31 December 2010), leaving £50,000 (£15,000 from 31/12/10) unprotected.

You can view a list of popular banks/building societies that count as one institution on our savings page (click the heading towards the bottom of that page).

Read this article at http://www.candidmoney.com/articles/article182.aspx

How much lump sum if I defer state pension?

Question
If one defers state pension for twelve months, at the present pension, what would be the lump sum prior to tax?

When would one receive the lump sum, at the date one defers or at the end of the twelve month period?

After the initial twelve months can one again defer for a year, and so on?Answer
If you defer your state pension there's the option of receiving a higher ongoing pension or a taxable lump sum.

Choose the higher ongoing pension and you'll receive an extra 0.2% for every week deferred, equal to 10.4% a year - you must defer for at least 5 weeks for this option.

Otherwise if you defer for at least a year you can instead opt for a the lump sum, calculated as the unclaimed pension plus interest at 2% above the Bank of England Base Rate, i.e. 2.5% at current rates. Your state pension will then be paid at the prevailing rate, so there's no extra pension as per above.

Assuming your unclaimed pension is the basic £97.65 per week (rising to £102.15 from 6 April 2011) and the interest paid remains 2.5% then you'd expect to receive around £5,311 if you delay your state pension by a year (calculated as £5,244 of unclaimed payments and about £67 of interest).

The lump sum is only paid once, at the point you start taking your state pension. So if you defer for 5 years then you won't receive the lump sum for 5 years. Unfortunately there's no option to take the lump sum as you go along year by year.

Hope this helps, you might also find this article I wrote about delaying the state pension of interest.

Read this Q and A at http://www.candidmoney.com/questions/question342.aspx

Are foreign currency brokers safe?

Question
Crown Currency, the foreign exchange company, has gone bust seemingly taking customer's money with it thanks to inadequate regulation. Some reports also suggest they were defrauding their customers.

Now there is one company called Baydonhillfx who is listed on the London stock Exchange.They are not FSA regulated but are regulated by the LSE.

Are customers any safer in doing currency transactions with this company?Answer
Based on newspaper reports Crown Currency apparently suffered from the downturn in travel then started offering unprofitable exchange rates simply to attract cash flow and keep the wolves from the door. The business sadly, and somewhat inevitably, collapsed, potentially leaving thousands of customers out of pocket.

What's galling for customers is that the Financial Services Authority (FSA) logo was displayed on Crown Currency's website as it was 'registered' with the FSA. I think it's fair to say that most people would see a FSA logo and assume their money would be safe, with compensation payable if the company went bust. Unfortunately, they couldn't be more wrong.

Under the Payment Services Directive, effective from 1 November 2009, any business providing payment services (which includes foreign exchange brokers) must be authorised by or registered with the FSA.

Companies with payments averaging less than €3 million per month must be registered, otherwise they must be authorised (more complex and expensive than being registered). New brokers must be registered or authorised before they start trading, but those who were proving foreign exchange services on 25 December 2007 have until 25 December 2010 to become registered or 1 May 2011 to become authorised – as appropriate.

Of the two an authorised foreign exchange broker is far preferable, as they must, amongst other things, use safeguarded bank accounts when handling your money (so if they go bankrupt while exchanging your money you should be safe), hold a minimum amount of their capital in the business (reduces the risk of going bust), have a complaints procedure (allowing you to take your complaint to the Financial Ombudsman Scheme if not satisfactorily resolved) and demonstrate they’re fit and proper to run the business.

But, disappointingly, even if you use an FSA authorised firm your money is not covered by the Financial Services Compensation Scheme (FSCS). This is far from satisfactory and leaves customers vulnerable to foreign exchange brokers going bust. When using one I'd stick to authorised firms that have been around for a few years to minimise risk.

As for Baydonhillfx, they're neither registered nor authorised by the FSA as yet, although they do claim to 'follow all FSA guidelines', including the use of a separate client money account. The company is listed on AiM, but the criteria for this are far less rigorous than being listed on the main London Stock Market and pretty irrelevant as far as consumer protection goes. They may well be a reputable company, but I'd feel more comfortable using a broker authorised by the FSA. After all, if Baydonhillfx does follow FSA guidelines I can't see any reason for them not already being authorised...strange.

Read this Q and A at http://www.candidmoney.com/questions/question340.aspx

Will Eurozone property turn sour?

If you own a holiday or investment property in Europe, should you be panicking?.

One of my dearest friends spent some of his retirement capital on a plot of land in Spain. This was to be the site of the dream holiday home, plus a handy source of income from lettings. Ten years on, he has his house, but it has cost him a fortune. He has successfully sued the agent who set up what turned out to be a rather poor deal, but the trustee in bankruptcy still has not managed to secure funds to pay him what the court says he is owed.

He would take a big hit on his capital if he sold the place, always assuming he could find a buyer at any price. That hit could get bigger if the Eurozone falls apart, and Spain devalues to try to get out of the hole it is clearly in right now.

So what are the odds? Those of us who never believed in the currency without a Government, and who got very fed up by the intellectual arrogance of the Europhiles on all political fronts, might be tempted to shout “I told you so” from the rooftops. This would not be a good idea. We in the UK have been profoundly influenced for over 1,000 years by what happens on the mainland of Europe, and it ain’t about to change.

The Eurozone is between a rock and a hard place. No outcome looks great for us. But if you have property in the Eurozone, or if you are spending pounds to buy Euros to live there, I hope you have nerves of steel, because I think you’ll need them.

Pensions - RPI or CPI?

This Government appears to be just as bad as its predecessor when it comes to fiddling about with Pensions policy. It does not seem to be able to decide whether RPI or CPI should govern some, or all, pension increases. Either way, most occupational schemes limit increases to 5%, and inflation is tracking to go past that some time soon.

The answer, according to The Daily Telegraph, is for savers to pile into equities. I am not brave enough to make a big asset allocation bet, and I think it is irresponsible to suggest it. If you’re retired, and you have savings, and you have a strategy, you’re best advised to stick to it until an adviser can convince you that there is a better alternative.

The Treasury's simple dreamers...

Somewhere in HM Treasury is a unit of dreamers. They came up with Stakeholder Pensions. Failed. They came up with CAT marks. Failed. They came up with a new investment vehicle for personal pensions. Didn’t see the light of day so had no chance to fail. They came up with more Stakeholder products and a ‘basic advice’ regime. Failed and failed.

And now they think it would be a good thing if someone produced some simple products, so that untutored people could understand them and thus want to buy them. This is patronising tripe. Some poor people save. Some do not. Their decisions are very personal. No-one has demonstrated that the people who do not save would do so if one of these simple products suddenly appeared.

But daftest of all is the contention in the consultative paper that the industry should produce simple versions of income protection and critical illness insurance. These products are complicated, by definition, since they involve medical judgements. The dreamers do not tell how they think this little difficulty can be overcome.

Read this article at http://www.candidmoney.com/articles/article181.aspx

Outlook for the UK stockmarket

Should you think about investing or run to the hills?.

It's that time of year when most companies with a vested interest in stockmarkets punt out their predictions for 2011. From what I've seen so far, the consensus for the UK stockmarket seems to be more positive than negative, on the basis shares look reasonable value (especially versus other types of investment) and companies are running efficiently having shed excess fat (hence rising private sector unemployment in 2009).

I'm not wholly convinced that the outlook is rosy, in fact I've been surprised by the recent surge in share prices given the problems our economy is facing. So I thought I'd start by trying to work out how cheap or expensive shares look right now.

While rudimentary, a company's price to earnings (P/E) ratio is a good measure when comparing the relative price of its shares both over time and to other companies. It shows how many times greater the share price is than annual earnings per share, i.e. if a company's share price is 100p and its earnings are £10,000 with 100,000 shares issued, its P/E would be 10 (1 / 10,000/100,000).

So let's compare current average P/E ratios for the main UK stockmarket (FTSE) sectors with those at the beginning of 2007, before the credit crunch hit.

Sector	Includes	P/E Ratio 3 Jan 2007	Current P/E Ratio	Current Dividend Yield
Basic Materials	mining & chemicals	10.2	11.7	1.2%
Consumer Goods	car makers, drink/food producers & tobacco	14.7	15.0	3.3%
Financials	banks & insurers	13.9	19.2	2.8%
Industrials	construction, engineering & defence	20.7	19.2	2.5%
Oil & Gas	oil/gas producers	10.4	8.8	2.8%
Technology	software & hardware	24.2	23.0	1.2
Telecommunications	fixed line & mobile	22.7	8.4	4.8%
Utilities	electricity, gas & water	18.3	10.2	5.3%
Source: FT (FTSE Actuaries Share Indices UK Series). Current figures as at 14 December 2010.

Some sectors, including consumer services, telecommunications and utilities are noticeably cheaper, while financials are more expensive. But there's not a great difference in the remaining sectors, suggesting a number of companies are valued more or less the same as they were pre-crash.

Now you have to take these figures with a pinch of salt. The earnings used in the above P/E ratios are as reported over the previous year, whereas markets price shares based on expected future earnings. So if you believe earnings will rise then forward looking P/E ratios would be lower than those shown, suggesting there might be some value. But if you think companies will generally struggle to grow earnings then in broad terms the UK stockmarket hardly looks a compelling buy based on P/E ratios.

Another measure of value is dividend yield, i.e. dividends divided by share price. A high yield means high dividends relative to the share price, suggesting the shares might be good value provided the company is sound overall (and remember, dividends are always shown net of basic rate tax). In this low interest rate climate a decent dividend yield holds additional appeal, particularly in sectors that tend not to be excessively volatile - like utilities.

So if you can earn more from dividends (after tax) than cash or gilts and believe the share price will be fairly steady, then maybe certain companies/stockmarket sectors still hold some appeal. But if you're pessimistic about stockmarket prospects then even the lure of attractive dividends is probably not enough to compensate for the risk of losses.

As the for the outlook, I think my views are largely unchanged compared to a year ago - not very optimistic. The economic backdrop is gloomy, with the impact of tax rises and spending cuts yet to bite in earnest, and although companies are generally leaner I don't hold out much hope for meaningful growth over the next year. If you want to invest in UK stockmarkets I'd be inclined to steer towards large, dull, well established companies that pay handsome dividends and tend to be more resilient in a downturn - for example, utility, tobacco and healthcare companies.

Of course, we shouldn't neglect the global nature of the UK stockmarket, around two thirds of earnings come from overseas. But with most Western economies seemingly in a mess I don't think globalisation will be our saviour over the next year or two.

Read this article at http://www.candidmoney.com/articles/article180.aspx

How do I change agency on funds?

Question
Following on from your answer to my last question can you confirm where I would get a letter to change the agent on my investments please - is this something I compose or obtain from somewhere?

Does this mean the investments remain with Fundsnetwork but the trail commsion gets paid to someone else? - I was going to use the Share Centre for my future dealings.Answer
The financial adviser or discount broker that you change the 'agency' to will almost always supply an appropriate letter or form for you to sign. It simply needs to include your details and be addressed to the fund/platform provider, stating that you want to the new adviser/broker to become the agent for the investment, allowing them to request relevant information and receive any commissions payable. The investments are unaffected.

So in your case, moving the agency on your FundsNetwork investments from broker A to broker B means that broker B will receive any ongoing trail commission in future. The investments will remain unchanged with FundsNetwork. The usual reason for changing agency is to either switch to a better financial adviser or use a discount broker who rebates trail commission, saving you money.

If you want to use Share Centre then due to FundsNetwork's unfair practice (covered in your last question) you'll have to sell the investments then repurchase new ones with the proceeds. As an alternative to Share Centre take a look at Alliance Trust Savings (read my review here) who look very competitive if you want to hold both funds and shares as they rebate trail commissions.

If you want to cut costs and are happy to remain with FundsNetwork then consider changing agency to a discount broker like Cavendish Online who rebates all trail commission in exchange for a small admin fee. It's a simple way to cut costs if you don't need the research and guidance provided by Bestinvest.

Read this Q and A at http://www.candidmoney.com/questions/question339.aspx

Do state benefits affect the age-allowance?

Question
If someone over 65 is claiming Attendance Allowance, does this non-taxable income still get included in total income when assessing whether they breach the £22,900 limit for the claiming the full rate of Age Allowance for income tax?Answer
No, thankfully the Attendance Allowance doesn't affect age-related personal income tax allowances. Neither does the winter fuel payment.

There's a useful list showing the tax status of state benefits on the Directgov website, those benefits listed as tax-free do not count towards the age allowance.

Read this Q and A at http://www.candidmoney.com/questions/question338.aspx

Withholding tax on German shares?

Question
Do you know the tax rates for holding German shares?

What would happen to shares bought in Euros (German), if the Germans were to dump the Euro?

What could happen with the international share account if Britain goes bust?

Is it wise to open a Swiss or German bank account?Answer
Dividends paid by German companies are subject to a withholding tax of 26.375%, regardless of whether you're as German or overseas resident.

Under the UK -Germany double taxation agreement a UK resident can offset up to 15% of the tax withheld against their UK tax liability. For a basic rate taxpayer this means that although there's no further UK tax to pay (as the 15% that can be offset more than covers the UK liability) you'll be 11.375% out of pocket unless you can reclaim that part of the withholding tax from the German tax authorities.

Your stockbroker should be able to do this for you and, if not, you can do so yourself from the German Federal Central Tax Office, although I've no idea of the success rate and how long refunds take.

If you're a higher rate taxpayer you can also try and reclaim the overpaid11.375%, but you'll have to pay some extra UK tax regardless.

Let's suppose the German dividend is £900 including the German withholding tax, i.e. you receive £662 (£900 - 26.375%). HMRC will divide this by 0.9 to get £1,000 then calculate your higher rate liability at 32.5%, equal to £325. You can then deduct 15% of the withholding tax, i.e. £900 x 15% = £135 and a 10% UK tax credit of £100 to leave you with a UK tax bill of £90.

In the unlikely event Germany ditches the Euro I imagine the shares would instead be traded in the new currency that Germany would adopt. The exchange rate with British sterling would obviously affect the value of your investment.

Although I think the UK economy is in a potentially perilous state, I really can't see Britain going bust. And, in any case, your German shares are as safe as the company you've bought them in. Your stockbroker share account should be fine provided you either own the certificates or the stockbroker nominee account in which they're held is ring-fenced from their business (it should be!) - as even if the stockbroker goes bust you should still be entitled to the shares.

I think the only reason for holding an overseas bank account is if you think the pound will crash against other currencies. If things really were that bad I guess you argue the Financial Services Compensation Scheme would not have enough money to pay in full if a series of banks went bust, but even I'm not that pessimistic.

Read this Q and A at http://www.candidmoney.com/questions/question335.aspx

Opinion on Cavendish Moore?

Question
I had a cold call from Cavendish Moore. Normally I give cold callers short thrift, especially when they are not regulated, but their pitch was quite convincing. Do you have an opinion about them and their product?Answer
I haven't heard of them before, so can only go by what's on their website. They appear to be property advisers who'll supposedly help you find and buy property/land at knock down prices.

Regardless of their merits, I'd be very wary given they're not authorised or regulated by the Financial Services Authority - if anything untoward happens then you'll be on your own.

A quick look on the Companies House website suggests Cavendish Moore Limited was incorporated on 19 March 2009, so not much scope for a track record as yet. A director called Michael Moore was appointed on 24 June 2009 then terminated within 2 months...odd...but perhaps there's an innocent reason for this.

Anyway, their websites suggests they can help you buy UK properties at 25% - 35% less than a recent RICS (Royal Institute of Chartered Surveyors) valuation and US properties at 70% - 85% off current market valuations. And there are also services to help you buy and develop land. No details of their charges or exactly how they operate.

At face value this all sounds quite attractive, after all, who doesn't want to buy bargain property? However, I suspect it's too good to be true.

My view is that an asset is only ever worth whatever someone will pay for it. That is, you might be able to buy a property for £75,000 that's theoretically valued at £100,000, but it's only worth £100,000 if someone will pay you that much for it - and in the current climate I suspect you'll struggle. After all, if someone's happy to pay £100,000 then why would the seller accept £75,000? Ok, I accept distressed sellers might take a lower price for a quick sale, but that type of investment only tends to make sense in buoyant property markets when you can be confident of selling on at a profit - in the current market I'd be nervous.

The same is even more true of US property. Prices have tanked because there are way more sellers than buyers. So don't be fooled into thinking you're getting a 70%+ discount. Whatever you end up paying is arguably the current market price for the property, so any other valuations are probably pie in the sky.

Buying land with a view to developing can be very profitable, if you can get planning permission and build something that someone wants to buy. But it's not easy. Most landowners who think they can get planning permission without too much hassle will do so, as the price of their land will soar, so finding untapped opportunities is difficult. And with the economic outlook still uncertain I'd avoid property development if you're hoping to make a short term profit.

If you can drive a hard bargain and sit tight for 5-10 years then buying property over the next year or two may turn out to be a decent investment. But it's by no means a sure thing.

Even if you disagree with my above views, ask yourself why any company, including Cavendish Moore, would spend a lot of time cold-calling to drum up investors if they really do have a hot investment proposition? Surely they'd be more interested in borrowing money to invest themselves and make a fortune?

Read this Q and A at http://www.candidmoney.com/questions/question334.aspx

When best to take tax-free cash from my pension?

Question
I need an income now. My SIPP pension has a value of approx. £500k. Is it a good option to take the 25% tax free over a period of time to be used as an income and draw a pension when the 25% lump sum has been cashed in? Or would it be a better option to start drawing a pension now and keep the 25% tax free option as a reserve for the future?Answer
When you take the tax-free cash lump sum from a pension it must be taken as a single one-off payment when you start taking benefits - i.e. when you buy an annuity or start drawing an income from your fund (often called 'income drawdown').

It is possible to stagger the payments over time if your pension is split up into many identical policies (called 'segmentation'). As each policy is effectively treated as a separate pension you can take benefits, hence the tax-free cash, from each policy at different times.

For example, suppose your pension fund is £100,000. You could take £25,000 tax-free cash and use the remaining £75,000 to buy an annuity or leave it invested and draw an income. If the pension were instead split into 100 identical policies you could take benefits from individual £1,000 segments (i.e. £250 tax-free cash with the balance used to buy an annuity) as you wish.

However, while flexible, segmentation is not very helpful if you need most or all of the income now, as you'll end up taking benefits (hence tax-free cash) from most/all of the segments straight away.

Given you need income now, then you'll have to take the tax-free cash now. I think your bigger decision is whether to buy an annuity with the balance or leave the fund invested and draw an income.

I won't cover all the pros and cons of each here (take a look at our annuities page for more info) but it's basically a gamble on whether future investment performance will leave you better off versus buying an income for life at a prevailing rate now.

Read this Q and A at http://www.candidmoney.com/questions/question333.aspx

Changes to pension rules at 75

From next April you'll have greater freedom over what to do with your pension at age 75 if you haven't already bought an annuity. Should you be bothered?.

Today's draft 2011 Finance Bill lays out some of the changes we can expect to financial rules and regulations from April next year. On the whole it's a pretty dull affair, but there are proposed changes to pensions that might affect some of you.

The main change concerns not having to buy an annuity with your pension fund at age 75.

Don't existing rules allow you to avoid buying an annuity with your pension at 75?

Yes they do, via what's called an Alternatively Secured Pension (ASP). Instead of buying an annuity at age 75 you can instead draw an income from your pension fund, provided it's between 55% - 90% of an equivalent annuity (well, approximate annuity value based on a Government calculation).

In the unlikely event there's still money left in your pension pot when you die it can be used to provide income for financial dependents, or passed as a lump sum to beneficiaries (although taxes of 82% could apply to the latter - a 70% pension 'charge' followed by 40% inheritance tax).

So how are the new rules different?

While broadly similar, they provide a bit more flexibility. There'll no longer be a minimum withdrawal limit from 75. And no maximum limit either provided you receive at least £20,000 annual income for life (via state and other pensions), else withdrawals will be limited to an equivalent annuity (to reduce the risk of your pension fund running dry before you die).

If you pass any remaining pension fund as a lump sum to beneficiaries on your death inheritance tax will no longer apply and the 70% pension charge will be reduced to 55%. While 55% tax is obviously better than 82%, it's still a hefty disincentive to pass your pension onto future generations.

What if I start taking my pension before 75?

Then it's business as usual. You can either buy an annuity or draw an income of between 0-120% of an equivalent annuity. If you're drawing income then the new rules will kick in when you reach 75.

The only change is that if you die before 75 having drawn an income then any lump-sum passed to beneficiaries will be taxed 55% and not the current 35%.

To what extent will these changes affect me?

Unless you're rather wealthy then probably not much - most of us will not be able to afford the luxury of passing a pension fund onto beneficiaries rather than living off it throughout retirement. However, if you prefer the idea of leaving your pension invested and drawing an income instead of swapping the fund for an income for life (by buying an annuity) then these new rules will provide a bit more flexibility from age 75.

Any other changes of note?

Just re-confirmation that the annual allowance for tax relief on pension contributions will fall from £255,000 to £50,000 from 6 April 2011 and that the pension lifetime allowance will fall from £1.8 million to £1.5 million from 6 April 2012.

Oh...and the taxman will get more clout when requesting data from third parties - worrying given the public sector track record on data security and if you're evading tax.

Read this article at http://www.candidmoney.com/articles/article179.aspx

Cutting the cost of Christmas shopping

If you've still to do some Christmas shopping these tips could help you save money. And if you've already done your shopping, well, maybe they'll help you save money in future. .

Ok, not my usual subject matter, but as an avid bargain hunter I thought you might find some of the following tips I've picked up over the years helpful. And, even better, maybe you have some tips of your own to share.

Of course, the simplest way to cut the cost of Christmas shopping is not to do any...but that would make for a very short article, so let's assume you're not a bah humbug and look at some ideas for saving money.

Use deal websites

The Internet makes it very easy to share news of a bargain and many websites have sprung up to facilitate this. I find www.hotukdeals.com the quickest and simplest to use - if you're not careful you'll end up making lots of impulse buys, but it's a good source of bargains, both online and on the high street.

Use discount vouchers

The humble discount voucher has moved into the 21st century with lots of websites now offering free vouchers and codes to use on both the high street and online. They're often aimed towards higher margin items such as clothes and meals out, but if you can find a voucher for your purchase it'll cut your bill. Hotukdeals has a reasonable discount code section, while www.vouchercodes.co.uk and www.save.co.uk both offer a good selection of online and printable discount vouchers.

How do these sites make money? They usually receive a commission from the retailer if you shop online via their sites or use one of their printed vouchers, which brings me nicely onto my next tip.

Use cashback websites

If you click on a link to an online store there's a good chance it's a paid 'affiliate link' (note: I don't include any such links on this site). This means the website providing the link will receive some commission from the retailer if you buy. Wouldn't it be good if you could pocket the commission yourself? Well, thanks to 'cashback' websites you can.

Lots of cashback websites have sprung up, two that I've used for some time now which appear to be reliable are www.quidco.com and www.topcashback.com. Quidco takes a £5 annual admin fee while Topcashback is free - commission rates sometimes vary between sites so it's often worth checking more than one. You basically visit the retailer via a link on their site then make your purchase as normal. Provided the transaction 'tracks' ok you should normally receive the cashback in your bank account within a month or two.

The cashback system seems to work well (I've received about £600 over the last 3 years), but as it's never guaranteed treat cashback as a bonus rather than the reason for buying something.

Use shopping comparison sites

These websites use automated web surfing to compare the price of items on a number of different websites and make their money via affiliated links, as mentioned above. While they can be useful in helping find the cheapest place to buy an item, they'll claim the commission if you buy via them.

But there's nothing stopping you from using these sites to find a cheap retailer, then visiting that retailer via a cashback website to ensure you pocket the commission.

Of the many shopping price comparison sites I find www.google.co.uk/products the quickest to use.

Cut out the middle man and import directly

Much of what we buy these days comes from China, so why not buy direct? It might not be practical or safe for larger items, but if you like small gadgets you'll have a field day at sites like http://www.dealextreme.com/ and http://www.priceangels.com/. Prices are low and include delivery, although this usually takes 2-3 weeks or more - so probably too late for this Christmas.

90% of what they sell is cheap disposable tat and this irks me somewhat, as it's not good for our planet. But search and you'll unearth some genuinely useful, well-made, bargain items.

Ebay outlets

A recent trend among big retailers such as Tesco and Argos is to open an ebay outlet store - which they use to shift surplus stock and returns at discount prices. More often than not the prices are still a bit on the high side, but there are sometimes bargains up for grabs, so worth a look. You can view a list of outlets here deals.ebay.co.uk/outlet/.

However, while you should be ok with large retailers, bear in mind ebay's appalling terms and conditions for faulty/incorrect items that state buyers are responsible for return postage (see my article < ahref="">here).

Warehouse clubs

Aside from grocery shopping, one of the few times I venture into a store and put up with crowds and queues is a trip to Costco - a members warehouse. It's not hard to be seduced, there's a very wide range of high quality items (from electrical goods to homeware and clothes) and food at very competitive prices. The membership criteria is so wide ranging almost anyone can join, subject to an annual fee (about £25 from memory). Makro is also be quite good, although less accessible as they only accept trade members.

Haggle!

Maybe it's a dying art form, but don't be afraid to haggle - even if it's just using a price match policy in stores like John Lewis (i.e. enjoy the price charged by a shabby shop down the road with John Lewis service and backup). It really is as simple as asking. OK, you probably won't get money off your weekly supermarket shop, but when buying larger items or in bulk always ask for some money off - you'll be surprised how often it works.

Don't pile up expensive debt

It's stating the obvious, but little point hunting down bargains if you'll buy with borrowed money that ends up costing you a fortune. If you can't avoid borrowing at least try to get a zero percent credit card or repay the money as quickly as you can in the New Year.

Right, I think that's all for now. Happy shopping and please post any tips of your own below...

Read this article at http://www.candidmoney.com/articles/article178.aspx

Capital gains tax on overseas shares?

Question
I should be grateful if you could comment on CGT liability on foreign shares.

If I buy foreign shares using a UK broker, and later sell making a gain, do I pay Capital Gains tax in the countries in which the shares are based? Or does my liability rest solely in the UK? I am thinking of the US and Jersey.Answer
If you are a UK resident then you are liable to UK capital gains tax on your worldwide assets. The only exception is if you're a non-UK domicile (possible if, for example, you were born overseas) in which case you can choose to only be taxed on overseas gains you bring into the UK - but you'll have to pay an annual £30,000 tax charge for the privilege (introduced by the Government to discourage tax avoidance/evasion).

Given you'll be taxed in the UK, the key is to avoid paying additional tax on gains in those countries where you hold investments.

Fortunately, most overseas countries don't hit UK resident investors with capital gains tax thanks to reciprocal tax agreements. So this is seldom a problem for most investors.

In your case the US doesn't deduct any gains tax for UK resident investors and there's no capital gains tax system in Jersey.

However, if you did end up being taxed on gains by an overseas country then you should be able to offset this against any UK capital gains tax owed. For example, suppose you make a £20,000 gain overseas on which £2,000 of tax has been deducted. You can offsetany unused UK annual gains allowance (currently £10,100), which in this example means a UK tax bill of £1,782 if you're a basic rate taxpayer (20,000 - 10,100 x 18%) and £2,772 if you're a higher rate taxpayer (28% CGT rate).

If a basic rate taxpayer you'll have no further UK tax to pay, although you can't reclaim the extra £218 overseas tax paid (in the UK at least). If a higher rate taxpayer you'll have a further £772 of UK tax to pay.

Read this Q and A at http://www.candidmoney.com/questions/question332.aspx

Which SIPP should I choose?

Question
I have c. £90,000 to transfer into a modern, low cost pension arrangement. I have been in touch with an adviser, who has suggested using a platform solution, such as Skandia or Transact. Alternatively, I have been looking at setting up a low cost SIPP, such as Hargreaves Lansdown Vantage or Fidelity FundsNetwork (through Cavendish Online), both featured on this website. Platforms seem to be adviser accessed - if this is this the main difference between the two, then presumably they are more expensive?

Whereas SIPP costs are unbundled and transparent, as far as I can make out platform costs are bundled, so how do I compare the two? Also, reading the 2012 Retail Distibution Review summary, it seems that the rules for Platforms are being tidied up at present, with concern about IFAs holding shares and the ability to transfer away, so my hunch would be to go down the SIPP route at the moment. Would you agree?

On the choice of SIPP product, suitability seems to depend on predominance of investment type ie funds or shares etc, with Hargreaves Lansdown/Fidelity being best for funds and Sippdeal etc for shares. While at the moment my investment will be fund based, I intend to diversify in the future. Are there any SIPP products that are good value for funds and shares?Answer
I wouldn't worry too much about the distinction between 'platforms' and SIPPs, as these days they're often much the same thing. But you are right to focus on charges - the investment choice available on the various offerings tends to be similar, so how much you'll end up paying is a key differentiator.

I think your first decision should be whether you need or want advice. Obviously this comes at a cost, which will usually be reflected by higher platform/SIPP charges (to pay the adviser commission or fees) unless the adviser charges their fees independently. Any adviser should clearly disclose how much their fees will be, so you can ascertain how much the advice will cost, even if it's 'hidden' via higher platform/SIPP charges.

For example: the Skandia Collective Retirement Account charges £52.32 a year as a platform charge. Financial advisers can take up to 4.5% initial commission, which is effectively a direct charge to you and taken from your investment (i.e. up to £3,825 on £90,000) as well ongoing annual 'trail' commission of up to 1.5%. About 0.5% trail commission is usually built into the cost of the underlying funds, if the adviser takes more this will again be a further direct charge to you.

If you use an adviser or discount broker who takes no commission then you'll just pay Skandia's £52.32 annual fee and standard fund charges (less any trail commission, which should be rebated to you), along with any fees paid directly to the adviser/discount broker.

I've yet to see a 'perfect' SIPP for investors wanting to hold funds and shares, but the Alliance Trust Savings Select SIPP is well worth considering. Because it's offered via their i.nvest platform (you can read my review here) there's generally no initial fund charges and you enjoy discounts on annual fund charges, typically reducing the cost of a fund charging 1.5% a year to 0.75% - 1%. Despite an annual SIPP charge of £75 plus VAT and online dealing fees of £12.50 per trade (funds and shares), this is probably the cheapest option currently if you wish to hold both funds and shares and don't plan to make small regular contributions (in which case the £12.50 dealing fee could be prohibitive). Just bear in mind that Alliance Trust doesn't presently offer as wide a fund choice as most rivals - this may not be a problem but I'd definitely check whether your preferred funds are available if considering this route.

Hope this helps and that you find a solution you're happy with.

Read this Q and A at http://www.candidmoney.com/questions/question330.aspx

Tax situation on non-reporting fund losses?

Question
You recently replied to someone's question concerning UK tax on disposal of an offshore etf which does not have reporting/distributing status, saying that any loss could be written off against any other capital gains (eg stock gains). Is this correct?

I thought that since gains/losses on selling offshore etfs are treated as income, any loss could not be offset against capital gains and, even worse, the loss cannot be offset against income from selling another offshore etf.

If you could agree or disagree I'd appreciate it, thanks for help.Answer
If an offshore fund does not have reporting/distributor status then gains are taxed as income. Losses cannot be offset against income tax, but can be offset against capital gains you may have made elsewhere for the purposes of capital gains tax.

I know this sounds illogical, but it is correct. It's confirmed on page 82 of the HMRC Offshore Funds Manual (see 'losses' paragraph). There's also a good summary of offshore fund taxation in this Grant Thornton factsheet (losses are covered at the bottom of the left hand column on the first page).

I suppose the reason HMRC doesn't allow losses to be offset against income tax is that it could be open to abuse and assist income tax avoidance. Offering no relief for losses would be unfair, so it's given via capital gains tax as a token gesture.

Read this Q and A at http://www.candidmoney.com/questions/question331.aspx

Are RBS Exchange Traded Bonds worthwhile?

Question
Justin, do you think the RBS Exchange Traded Bonds being advertised at the moment are attractive compared with fixed interest savings products?

I am looking after the savings of a 97 year old lady, and constantly moving money from one bank to another to get reasonable rates is becoming troublesome.Answer
On the surface they look attractive compared to savings accounts, with interest rates of 3.9% a year being quoted and the potential to rise with either interest rates or inflation in future.

However, there is a fundamental difference, RBS Exchange Traded Bonds are effectively corporate bonds issued by RBS with a 12 year term. This means 3 major differences to a conventional savings account:

1. Whether you receive the interest payments and your money back at maturity depends on whether RBS can afford to pay you (you'll be behind savings account holders in the queue).

2. If RBS can't afford to pay you and you lose money you won't be covered by the Financial Services Compensation Scheme (FSCS).

3. If you sell the bonds on the open market at any point before maturity you may get back more or less than your initial investment, depending on their price.

The bonds themselves are interesting in that the rate of interest is not fixed. There are 2 variations: the Floating Rate Bond promises to pay the higher of 3.9% and the 3 month LIBOR rate (usually similar to the Bank of England Base Rate) a year, while the Index-Linked Bond pays the higher of 3.9% and inflation measured by the Retail Price Index (RPI).

A link to interest rates or inflation is appealing as it removes one of the big influences on bond prices, which should help reduce risk. But whether you choose the floating rate or index-linked bond, you'll still be vulnerable to higher inflation and interest rates respectively. Plus RBS's financial position, which remains volatile, is likely to have a heavy influence on bond prices between now and maturity.

I'll try and take a closer look at these bonds later this week and write a full review. But to answer your question regarding their suitability as a savings account alternative for a 97 year old, I'd say no, not very suitable.

If she needs to access the money in an emergency she might end up having to sell at a loss if the price at that time is lower than the one she paid. And should she pass away before maturity then the shares may have to be sold, again, possibly at a loss depending on prices at that time.

I know rates paid on savings accounts generally look rather unappealing in this low interest rate climate, but they're probably the most appropriate home for a 97 year old's money as it's not the time in life to be taking any risk. To avoid the hassle of having to periodically move money between banks to ensure a competitive rate you could consider a 4 or 5 year fixed rate account, where rates of around 4 - 4.5% a year are currently on offer. There may be penalties for withdrawals before maturity, but these wouldn't normally apply in the event of death - it's worth checking the relevant terms and conditions re: both before opening an account.

Hope this helps.

Read this Q and A at http://www.candidmoney.com/questions/question329.aspx

Which type of corporate bond fund to buy?

Question
I have several Bond Funds in my ISA. They have done well this year.

Which type of Bond fund should I be invested in now interest rates are recovering and inflation pending?Answer
If you believe both interest rates and inflation will rise moving forwards then I'd be inclined to generally steer clear of corporate bonds as in such circumstances they'll likely fall in price.

However, it's not quite that simple. Even assuming a sustained rise in interest rates and inflation (I'm not convinced that either will rise by much, if at all, over the next year or two) then not all bonds will react to the same extent. Low yielding bonds (i.e. those paying a low income) and those with many years until redemption are likely to be more affected than higher yielding bonds and those nearing redemption.

The price of higher yielding bonds is usually more influenced by the financial strength of the company issuing them, which in practice means performance tends to more correlated to stockmarkets than interest rate and inflationary movements.

So if interest rates/inflation do rise then high yield bonds with shorter redemption dates would appear to make more sense - but you'd need to be fairly confident about economic/stockmarket prospects, which are very debateable at the moment.

And even if interest rates/inflation rise there's still a chance the price of the 'safest' government bonds could rise if investors seek a safe haven due to turmoil in economies and stockmarklets.

To complicate matters further some corporate bond fund managers also look to make money from currency movements and/or use various types of financial instruments (e.g. 'credit default swaps') that allow them to reduce credit risk (i.e. the risk of company not paying interest or capital at redemption) or the impact of interest rate/inflationary movements.

So, to answer your question. If you're convinced interest rates/inflation will rise then consider higher yielding bonds unless you're also worried about the economy and stockmarket.

If you're less sure what will happen then maybe look at a 'strategic bond' type fund where the manager can freely alter exposure between different types of bonds and also use financial instruments like those mentioned above. Just bear in mind that you're then relying on the fund manager's predictions of what will happen in future and they're not always right! So maybe spread the money across several funds to reduce risk.

Read this Q and A at http://www.candidmoney.com/questions/question327.aspx

The outlook for corporate bonds

With the Bank of England base interest rate still stuck at 0.5% and looking like it'll remain there for some time yet, do corporate bonds hold some appeal?.

To get a feel for where bonds might head in future it helps to understand the main factors that affect bond prices.

What affects bond prices?

Gilts and corporate bonds are basically IOUs issued by governments and companies that promise to pay regular interest at a fixed rate before paying back the sum borrowed at a future date (called 'redemption'). So the following factors are likely to have the biggest impact on a bond's price:

Financial strength

When you lend someone money your key concern should be whether they'll pay you back. It's no different with bonds. When a government or company gets into financial difficulties there's a greater chance they're fail to pay interest and/or your money at redemption, so the price of their bonds will usually fall to reflect the increased risk. This is what's happened recently to bonds issued by the Irish Government.

Interest rates

Because bonds pay a fixed rate of interest their price is sensitive to interest rate movements elsewhere. For example, if interest rates rise and you can earn more interest via a savings account, you'd want to pay a lower price for bonds as their fixed rate will look relatively less attractive than before.

Inflation

The higher inflation, the less future interest payments and return of money at redemption will buy compared to today. So if inflation is expected to rise then bond prices are likely to fall, as they become less attractive.

Confidence in other investments

Bonds issued by robust governments are generally seen as being pretty safe in the scheme of things. This means they're often in demand when stockmarkets are other investment types are looking shaky - and rising demand usually means higher prices.

You'll generally find that bonds issued by riskier companies (often called 'high yield' or 'junk' bonds) are most influenced by changes in perceived financial strength while those issued by safer governments and companies (called 'investment grade') are more sensitive to anticipated interest rate and inflationary movements. Also bonds with shorter periods to redemption tend to be less sensitive to interest and inflation rate movements than those with longer redemption dates.

Currency movements will also obviously affect bonds not issued in pounds sterling.

How much income are bonds paying at the moment?

Income is fixed but a bond's price isn't, so the income you'll receive is best measured by a 'yield' calculation. 'Running yield' is the annual income divided by the bond's price and 'redemption yield' also takes into account any gain or loss you'll make at redemption if the price you pay for the bond is different to the redemption price.

For example, BT has a bond paying 8.5p annual income redeeming at 100p in December 2016. Its current price is 122p, so the running yield is 6.9% (8.5/122), but this doesn't take into account the 22p loss you'll make at redemption. The redemption yield, which builds this in, is about 4.3%.

Here are a few redemption yields (before deduction of tax) at the time of writing to give a flavour for how they vary depending on the financial strength of the issuer and the period until redemption:

Issuer	Redemption Date	Redemption Yield
UK Government	7 Dec 2011	0.6%
UK Government	7 Sept 2020	3.4%
Marks & Spencer	7 Nov 2011	2.3%
Halifax	17 Jan 2014	5.1%
Tesco	13 Dec 2019	4.3%
Provident Financial	14 April 2020	6.8%
Source: bondscape 20/11/10.

How's recent performance been?

Let's take a look at the main IMA unit trust bond sectors:

Sector	1 year return	3 year return
UK Gilt	2.9%	18.7%
£ Corporate Bond	6.2%	11.0%
£ High Yield Bond	13.1%	19.5%
Global Bonds	5.1%	31.5%
Source: Trustnet 20/11/10. Returns shown bid to bid with net income reinvested.

So, compared to cash, quite reasonable overall.

What's the outlook?

That really depends on your views for interest rates, inflation and the economy in general.

I'm fairly negative on the prospects for the UK economy and believe that interest rates will continue to remain low for at least another couple of years. High oil prices have been the main inflationary driver this year and provided its price doesn't surge again then inflation should start to fall next year, despite the imminent VAT rise. Some argue that governments printing more money (called 'quantitative easing') will push up inflation, but I'm less convinced as I'm not sure much of this money will actually end up being spent.

This would seem to be reasonably good news for corporate bonds shorter term.

However, if economies do struggle then companies and governments will probably find the going tougher, increasing concerns over their financial strength hence pushing down bond prices (although the very safest government bonds might benefit as more investors flock to perceived safety).

As for the next 5-10 years it's hard not to believe that interest rates won't increase, which could push down bond prices longer term, although the possibility of a more rosy economic outlook and lower inflation could help offset the impact.

So overall I'm quite indifferent. I don't see bonds delivering exciting returns but I doubt higher quality bonds will crash either.

Is it worth buying corporate bonds at the moment?

I think it's generally worth holding some in portfolios to hedge other investment types, but as per above I find it hard to get excited by prospects for the next few years.

And with the fixed rate on some savings accounts currently higher than the redemption yield on gilts and higher quality corporate bonds over 5 years, there's a disincentive to buy shorter-dated bonds unless you think their price will rise so you can sell at a profit before redemption.

There is more to bond investing than I can realistically cover in an article, but hopefully this gives you a clear idea of the main principals and what to consider when making bond investment decisions.

Read this article at http://www.candidmoney.com/articles/article177.aspx

Most helpful bank

When your bank starts sending a few forest's worth of paperwork are they being helpful or simply wasting a lot of money and time?.

I’ve been sent a personal annual statement by NatWest. Twelve pages plus a four page cover. I didn’t ask for it, and for the life of me I don’t know what it is for. It would be helpful if they could send me a tax voucher every April. They don’t. It would be helpful if they reminded me from time what rate was being paid on my savings account, which information is not to be found in this book. It is not helpful to learn that the fifth biggest area of debit card spend was Trenance Chocolate (holiday in Cornwall), and I did not wish to be reminded how much I spend on wine. The list of Direct Debits and Standing Orders is a useful check, but I already have my own list anyway.

This exercise must be costing the bank a fortune. I doubt it will be a selling point for new customers, and I can’t see that it would stop existing customers from defecting, if that is what they had made up their minds to do. The service I get from NatWest is great. The Direct Debits pay the bills. The ATM disgorges tenners to order . I ‘phone the branch once in a blue moon, and they are always as helpful as they are polite. I have no complaints whatsoever.

Except that someone somewhere seems to want to ram down my throat his or her belief that they are the most helpful bank. I can’t know, because I don’t have accounts with all the others. Methinks they doth protest too much.

Read this article at http://www.candidmoney.com/articles/article176.aspx

Are Irish ETFs safe?

Question
Everyone writes how efficient, cheap and sensible ETFs are but no one ever seems to write about how safe and secure they are. Probably the most popular, iShares run by Blackrock, are domiciled in Dublin. I assume they are not covered by the FSA Compensation Scheme. Are they at risk if the Irish economy continues to melt down? ( I don't just mean ones tracking the Irish economy!)Answer
You're right, iShares exchange traded funds (ETFs) are not covered by the Financial Services Compensation Scheme (FSCS) due to them being domiciled in Ireland rather than the UK. This means that in the very unlikely event your money vanishes (for a reason other than poor investment performance) you won't be entitled to any compensation.

So what are the risks?

Well, the most obvious is that someone runs off with your money. Fortunately investment funds, including ETFs, must place fund assets with a third party, called a 'custodian'. Custodians, usually large banks, must ring fence the money/assets to ensure they're held for the benefit of investors in the fund and no-one else. This means that iShares, for example, can't take money from its funds (other than agreed charges) for its own use. If the custodian goes bust your money should still be safe as its held in a separate 'segregated' account, independent of the bank's own money - although there's no guarantee.

A potentially bigger risk is where an ETF uses an investment bank to provide the index tracking - so-called 'counterparty' risk.

When an ETF tracks an index it will generally either buy all the shares that comprise the Index (e.g. iShares FTSE 100 ETF) or agree a deal with a third party who'll provide the tracking, called a 'swap-based' or 'synthetic' ETF (e.g. ETFS Energy DJ-UBSCI). In the case of the former the fund owns the underlying shares so should be safe in the scheme of things. In the latter case the fund is relying on a third party ('counterparty') to provide the returns, if the counterparty goes bust the fund could lose money (this happened when Lehman Brothers, a popular counterparty, bit the dust).

However, there are some provisos re: counterparty risk. Under fund (UCITS III) rules counterparty risk can be no more than 10% of the fund value. So if the worst happens it will hurt, but shouldn't be a disaster. Secondly, some ETFs hold extra assets (called 'collateral') to compensate for counter-party risk, reducing the likelihood of losing money if a counter party defaults.

You should find details of the custodian, counterparties and collateral levels (if relevant) in an ETF's prospectus, so take a look before investing to ensure you're comfortable.

Does the dire state of Irish finances pose additional risk to ETFs domiciled in Dublin?

I suppose it could if the custodian or counterparty is an Irish Bank, as if the bank goes bust there is a risk you could lose money. iShares uses 'The Governor and Company of the Bank or Ireland' as custodian on its Dublin ETFs, which gives some cause for concern. However, as the chances of the EU allowing an Irish Bank to go bust seem pretty much zilch, I wouldn't lose sleep over it.

Read this Q and A at http://www.candidmoney.com/questions/question325.aspx

Switch my Skandia pension?

Question
I have a personal pension (PP2) of about £42,000 with Skandia taken out in 1994 with a single premium. Skandia makes an admin charge of .75% per year over and above the underlying annual fund management charge. However, Skandia also attributes a loyalty bonus of 1% for every 5 years the contributions are held. So, the Skandia admin charge is effectively lowered by 0.2% a year to 0.55%. It also makes a maintenance charge of £45 per year.

I will probably draw the pension in about 10 years time and am considering transferring the pension to Skandia's investment solutions collective retirement account (CRA) for the duration. This has a similar maintenance charge (c.£52 a year), but no administrative charge, thus saving 0.55% p.a.. There are no penalties for the internal transfer and I would also keep any loyalty bonus accumulated. So, at first sight, it seems an attractive option, especially given that it has a greater choice of funds.

However, when I look at the list of funds for each product, the annual charge on the individual funds is frequently lower for the PP2 than for the CRA, e.g. Perpetual High Income 1.3% vs 1.5%. Aberdeen Emerging Markets 1.3% vs 1.75%. In addition, the PP2 fund management charge is shown as a TER, whereas the CRA shows an AMC. So, although I can't make an exact comparison, it seems that the charges may, in some instances, be lower with my current PP2.

Then again, if I look at the 3 year performance of the Perpetual fund, the CRA has returned 38.42% vs the PP2's 36.32%; and the 3 year performance on the Aberdeen Emerging Markets is virtually identical. Given that these figures are before the 0.55% admin charge on the PP2, then the CRA is looking cheaper again.

Is there any way to sort out whether it is best to stick with the PP2 or move to the CRA?

PS I have only recently discovered your website and find it comprehensive, clear and full of good advice. Thank you!Answer
The comparison you've made is sensible and as your examples show it looks like six of one and half a dozen of the other.

Perhaps start by gauging whether you're more likely to buy an annuity with the pension fund in 10 years time or instead leave the fund invested and draw an income. If the latter then fund choice could be more important as the money is likely to remain invested well beyond 10 years. Plus, even a small cost saving via the Collective Retirement Account (CRA) would start to make a difference longer term.

You're right that you need to compare total expense ratios (TERs) to ensure an accurate comparison. The Skandia CRA fund list I've just looked at ( here) shows an 'Add Fund Expenses' column, simply add these to the annual management charge to get the TER. You can then more accurately compare the funds you're considering.

As for the variation in performance data for the same fund held in each pension plan there doesn't seem to be much rhyme or reason as to why, assuming both sets of figures exclude initial charges. Annual fund charges (the TER) should obviously account for the difference, but this doesn't seem to add up based on your examples. Nevertheless, as the CRA appears to fare better, even before the 0.55% admin charge is deducted from the personal pension (PP2), it would seem to have the upper hand.

If you're not using a financial adviser then another factor in the CRA's favour is the possibility of getting a trail commission rebate via a discount broker. Most funds on the platform pay annual trail commission, typically 0.5%. Discount broker Club Finance charges 0.1% a year in return for re-investing all trail commissions, which could potentially save you around 0.4% a year.

And even if you don't use a discount broker CRA has the potential advantage of including some low cost tracker funds (especially those managed by Blackrock).

But while cost is important, the bigger decision is how to successfully invest your pension fund. If you plan to buy an annuity in 10 years time then try to progressively reduce risk as retirement approaches - you don't want any market crashes to impair your retirement prospects. Drawing an income from your pension should give you greater investment freedom (because you'll be invested for longer), but it's still important to bear in mind how much risk you're comfortable taking and the level of income you'll eventually need to draw, then choose funds accordingly.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question324.aspx

Bricks and policies

Why with-profits investments should be consigned to the dustbin of history..

I’ve been off air for a while, largely due to yet more building works. Building and financial services have much in common. Both have their own language which means nothing at all to anyone who is not a member of the relevant priesthood. Both are heavily regulated, and most of the problems occur well after the sale. The difference is that with financial services, if you really have been done down there’s a chance of redress.

Anyway, the porch extension is more or less finished and very pretty it is too. When people are in and out of your house for a couple of months, you get talking. Builder Harry (not his real name) duly discovered that I was of the financial services persuasion. Next thing I know he is handing me a mortgage endowment plan update. It didn’t mean a fat lot to him, but he really did not like the red ink. A couple of quick sums (Justin’s calculators are a boon) suggested that in real terms he is likely to get back what he put in. He will not be unhappy if that is indeed the outcome, but he is 20 years into the plan and to this day he has no idea what has been happening to his cash.

When will the Government bite the bullet, rewrite the Insurance Companies Acts, and consign with profits to the dustbin of history?

Changing the subject. Last month I wrote that inflation would be bad news for those of us who had saved, and that it was probably on its way. Sure enough, Obama is printing dollars and the Euro politicians are trying to figure out how to hold the Euro together. The answer, of course, is to inflate away the debts (put another way, steal from savers) which is what our Government is going to do. Methinks however that the Germans may not go along with the plan. Good for them. Awkward for lots of others.

Read this article at http://www.candidmoney.com/articles/article174.aspx

The outlook for house prices

Will house prices crash? Fall a bit? Stand still? Or even rise?.

I thought I'd write about house prices because it seems, to me, that we're heading towards something of a Mexican standoff between buyers and sellers.

Why house prices should fall

In the current climate there are a number of factors that make falling house prices seem almost inevitable:

Taxes & unemployment both look set to rise

If you lose your job you're unlikely to go out and buy a home, plus the threat of unemployment will probably deter many from buying their first home or upgrading their existing until the prospects for our economy look a bit rosier, which could take a while. Both factors will reduce demand for housing, putting downward pressure on prices.

A tough economic climate will also, sadly, see a rise in repossessions. If this happens on a large enough scale it will likely push down property prices due to increased supply and desperate sellers - as has already happened in the US.

Prices have become over-inflated

The average house price is currently about six times higher than average earnings - double the mid 1990s level. Cheap borrowing has fuelled a self-perpetuating bubble, with many only too happy to borrow excessively and jump on the rising house price bandwagon. At some point more expensive borrowing will firmly burst the bubble, but for now interest rates look set to remain low so I think the more important point is the barrier to entry that high prices present for first time buyers.

It generally tough to borrow more than three times earnings at the moment, so average earners will struggle to buy average homes unless they've saved up a massive deposit. And without the prospect of soaring prices and future profits tempting them to buy, this end of the market could continue to dry up. Again, resulting in lower demand.

People expect them to

If you expect the price of something to fall then you'll either wait and buy when the price has fallen or offer a lower price now. Either way, this puts downward pressure on house prices.

Why they might not, by much anyway

Sellers are reticent to drop their price

Having seen their home soar in value, many sellers are reluctant to reduce their asking price to realistic levels. Or, if they've made little gain (or a loss) and have a large mortgage they probably can't afford to. As their home is unlikely to sell, it reduces the supply of housing that realistically could, helping to keep prices firm.

Interest rates look set to stay low

Despite grim economic prospects, if interest rates remain low then the majority of homeowners will continue comfortably affording their mortgage - reducing the risk of financial pressures forcing them to sell. It also means that those with sufficient earnings/deposits can afford to pay the current high prices - although they obviously might choose not to.

Resurgence in buy to lets

Low interest rates, decent rental yields and an uncertain investment outlook have sparked a resurgence in buy to let investing. With rental yields currently around 5% and high demand due to more people postponing a house purchase, some investors are favouring buy to let investments over stockmarkets and cash in the bank. This is boosting demand for suitable properties at the low to mid end of the market, which could mean prices being more robust than expected.

High cost to move

In the past it's been common to move house in order to trade up or down the housing ladder, either realising a juicy profit or hoping to make one. Such profits have outweighed the hefty costs of moving, which can run into tens of thousands of pounds after paying stamp duty, estate agent and conveyancing fees. But without the lure of rising prices many will simply stay put, unless they really need to relocate or downsize. This will reduce both supply and demand, but fewer properties coming to market should provide some support for prices.

What I think will probably happen

I have little doubt that house prices will generally fall by at least 10-20% over the next couple of years and maybe even more beyond (especially if interest rates rise). But I expect this will be gradual rather than a crash for the simple reason there will be so few serious sellers in the housing market.

House prices can only fall if they're actually sold and therein lies the problem. After prices fell during 2008/09 many potential sellers simply didn't bother, thwarting the supply of decent properties. Buyers wanting to buy a nice home suddenly found they were in competition with each other as there wasn't enough good stuff to go around, which pushed up prices. This led to a mini resurgence in prices earlier this year, prompting those potential sellers who'd been sitting on the fence to put their properties on the market, often at unrealistically high prices. The resulting over supply has since pulled back sale prices and we now seem to be hitting an impasse.

A quick surf on 'rightmove' (if you like rightmove, try out www.property-bee.com) suggests there are plenty of properties for sale, but few nice ones at sensible prices (if you believe prices are more likely to fall than rise). There are also few serious buyers, because they either can't get a mortgage, are holding off until prices fall or can't sell their existing home.

So I think we'll see a few exceptionally nice homes still sell fairly quickly at high(ish) prices to the few buyers who really want them. Some decent properties that would have sold quickly in the past will probably sell, in time, provided the sellers are happy to accept low offers that reflect an anticipated price drop (these types of sale will drive down the main house price indices). But volumes will be low by historical standards. And the vast majority of properties, either unpleasant or where sellers are stubborn on price, will simply remain unsold.

I think a crash would only occur if we see a massive spike in forced sellers (i.e. repossessions). While this has occurred in parts of the US, the UK has a far better social security safety net so I can't see the same happening here.

As a parting thought - I doubt prices will fall significantly long term as we're stuck in a generation that's obsessed with their home being an investment and if the population grows then so will demand. So we might start to see a fundamental shift towards renting rather than trying to jump on the property ladder, as is the norm in Continental Europe.

Oh, and if you're about to buy a home then bargain very hard!

Read this article at http://www.candidmoney.com/articles/article173.aspx

Discretionary trust tax calculations?

Question
I am a new Trustee of a Nil Rate Discretionary and Acccumulation Trust of which the Settlor has only set up one trust. I wish to pay the interest income of this Trust to Beneficieries however I wish to retain sufficient of the income in the trust to deal with the tax liability.

Having calculated the 20% which is due on the first £1,000.00 and setting this aside with the 50% tax on the rest of the interest income,this produces a figure of the likely tax due. If then using the tax pool calculater I put in the total income and presumably this figure, includes the tax deducted at source, realised during the tax year and then insert the possible payment of the remaining income after tax I am left with a tax shortfall.

My question is, is this extra tax which has to be paid above the above calculated amount of tax due or is this shortfall included in the above tax figure. In the case of the former I can only pay the remaining income after further deduction of this amount of tax whereas in the latter case I can safely pay out all the remaining income in a particular tax year?Answer
For the benefit of other readers, a 'tax pool' is the name HMRC gives to the record of how much income tax a discretionary trust has paid versus the 50% tax assumed to have been paid by the trust (called a 'tax credit') on any income it distributes to beneficiaries (e.g. children/grandchildren).

Because non, basic and higher rate taxpaying beneficiaries can reclaim some or all of the 50% tax already (deemed to have been) deducted, the tax pool prevents more tax being reclaimed by a beneficiary than was actually paid by the trust (i.e. it stops the taxman from losing money).

When there's a tax pool shortfall, i.e. the trust has paid less tax than the 50% tax credits attached to beneficiary income payments, this is normally due to one or both of the following reasons:

1. As you've said, a discretionary trust must pay 20% tax on the first £1,000 of income it receives then 50% on the remainder, so this is the tax that enters the tax pool. However, because all income paid to beneficiaries is deemed to have been taxed at 50%, the tax pool may have up to 30% shortfall on the first £1,000 of income.

Example: the trust receives £3,000 of interest (I've assumed it's paid gross), which it pays to beneficiaries as £1,500 with an attached £1,500 tax credit (50% tax). The trust pays income tax of £1,200 on the £3,000 received (20% x £1,000 plus 50% x £2,000). However, because the £1,500 paid to beneficiaries is assumed to have had £1,500 (50% tax) deducted, a £300 tax pool shortfall must be paid by the trust.

2. When a discretionary trust receives dividends they're taxed at 42.5% of the gross dividend (divide the dividend received by 0.9), of which 10% is non-refundable, so only 32.5% enters the tax pool. And if this falls within the first £1,000 of income then the trust doesn't pay tax, so no tax enters the tax pool.

Example: the trust receives £3,000 of dividends (equal to £3,333 of gross dividend) which it pays to beneficiaries as £3,000 with an attached £1,500 tax credit (50% tax). The trust pays income tax of £758 on the £3,000 received (32.5% x £3,333, no tax on first £1,000 of gross dividend). However, because the £1,500 paid to beneficiaries is assumed to have had £1,500 (50% tax) deducted, a £742 tax pool shortfall that must be paid by the trust.

I know the calculations can get a bit messy, but I hope this makes sense. The key is to remember that the trust must have paid 50% tax (or the equivalent of, if dividends) on all income distributed to beneficiaries. So when the HMRC tax pool calculator shows a tax pool shortfall it must be paid in addition to the usual tax paid by the trust, or the income distribution to beneficiariesshould be reduced until the shortfall is wiped out if the trust doesn't want to pay extra tax.

As an aside, ensure you're offsetting all allowable expenses against trust income - you can deduct certain 'trust management' expenses incurred by trustees in carrying out their duties, most commonly the costs of accounting for the trust's income. Take a look at a useful HMRC guide here.

Also, beneficiaries should make sure they reclaim tax on the income received, where appropriate. They should receive a completed form R185 from the trustees every tax year detailing the income the trust has paid along with the tax credit. They can use these figures to apply for the appropriate tax refund via a self-assessment tax return or HMRC R40 claim form.

To work out their potential tax refund they simply need to calculate how much income tax they would personally pay on the income received (adding back the tax deducted by the trust to get a gross income for this purpose) then subtract from the tax already deducted by the trust (i.e. the tax credit). The balance is the amount reclaimable.

Read this Q and A at http://www.candidmoney.com/questions/question323.aspx