Hold or sell Halifax PSBs?

Question
Halifax 9.375% Perpetual Subordinated Bonds - Hold or sell now and cut my losses?

I bought years ago at £1 and I believe the spread now is 80-98p! I'm not in a hurry, but wish to gather as many opinions as possible before making a decision. Your input would be much appreciated.

To find out the prices I have to phone a broker. Web sites that I have been able to find will only provide this information to professionally registered brokers. Do you know any sites where I can access this information?Answer
Your 9.375% Halifax Perpetual Subordinated Bonds (PSBs), stockmarket reference: HALP, are not due to pay a coupon (i.e. income) until early 2012 due to EU law preventing banks receiving state aid from rewarding holders of shares and debt by paying dividend and coupons respectively.

Lloyds Banking Group (which owns Halifax) offered HALP holders the option to switch into EU friendly Enhanced Capital Notes (ECNs), which allow coupon payments, late last year. Nevertheless, as far as I’m aware your PSBs offer cumulative coupon payments, so you should receive the missed coupons when income payments eventually resume (I’d suggest double checking this with Halifax).

Meanwhile, are they worth holding onto? Provided you don't rely on the income payments then It really depends on your views on what’ll happen to the Lloyds Banking Group (which incorporates HBOS). Provided the bank can survive the downturn and eventually alleviate itself from state aid you should see the price of your PSBs rise handsomely, assuming interest rates and inflation remain fairly low.

Is this likely? In this topsy-turvey world of banking and finance we find ourselves in nothing is certain, but I think it’s more likely than not.

PSBs tend to have a wide bid offer spread because there’s rarely many buyers or seller in the market (i.e. it’s illiquid). The financial crisis has only served to widen spreads on struggling banks, which is why you’d lose about 20% straight away if buy the 9.375% Halifax PSB at present.

Because the PSB market can be so illiquid the most reliable way to get an accurate price is to phone a broker. However the Selftrade website lists mid prices for PSBs and PIBS while the Bestinvest website appears to show the spread for your PSBs.

Good luck whatever you decide to do.

Read this Q and A at http://www.candidmoney.com/questions/question147.aspx

Will Equitable ever be sorted?

The Government continues to drag its heels over compensation payments to Equitable Life policyholders. Do they deserve compensation? And will they ever get some? .

Equitable Life is back in the news, or rather, on the political football field. It’s an issue close to my heart, because I was a director of a life company at the time the story kicked off, and so watched the denouement at the House of Lords with a personal interest.

We’ve had a judge and an Ombudsman picking over the bones at great length. The argument is simple: the regulators failed to regulate; policy holders ‘lost out’; and the taxpayer should be called upon to make good their losses.

The Government has dragged its feet, steadfastly refusing to admit that ‘compensation’ is due, but talking about making ‘ex gratia’ payments to the neediest victims. The usual suspects in the media have performed a shrill, self righteous chorus, demanding justice for the victims.

Equitable Life sold direct, and paid their sales people generously. Their customers bought the line about not paying commission to IFAs. They thought they were smart. They weren't. Many of them had far too many of their eggs in this one basket. Many of them should have known that if it looks too good to be true, it is probably too good to be true. Very few of them understood how a With Profits fund worked. Every single one of them had the option to get a second, third and fourth opinion from an independent. They chose to believe the Equitable Life sales person.

The Government – to say that I am not a fan is to demonstrate a heroic degree of understatement – has got this one right.

While the GAR (guaranteed annuity rate) problem was the proximate cause of Equitable Life's demise, the root cause was that Equitable Life, supposedly running a smoothed fund, held very little back with which to do the smoothing, and so managed to declare annual bonuses that topped the bonus tables by a mile every year.

The funds that did hold something back were of course pilloried by the same media singers on the basis that the money (quaintly termed the orphan estate) belonged to the policy holders and should be shared out immediately.

In everyday Law, if a plaintiff claims that he has ‘lost out’ he has to show that the actions of the defendant led directly to and were the cause of his loss.

If the regulators had moved in on Equitable Life early, and told them to stop being imprudent, what would have happened? Well, if the intervention had been made public, lots of people would have wanted out, and no-one would have wanted in. Even if it had been possible to keep the intervention secret, Equitable Life would still have had to trim - perhaps eliminate - annual bonuses while it built up its cushion of assets over liabilities. It may also have been forced to de-risk its assets ie sell equities and buy gilts. The net result might have been that the policy holders would have got more or less what they actually got when the GAR proverbial hit the fan.

The very idea of calculating compensation is barmy. Is there a mystic actuary somewhere who can establish: when the regulator should have intervened; on what basis; and what the consequences of the intervention would have been for the fund? Would the performance have been relatively strong, or weak, and if so by how much?

The Government is right to reserve the option not to rescue wealthy individuals from the consequences of their folly at the taxpayer's expense, and right to concentrate on ex gratia payments for the needy. They should get on with it, though.

The FSA failed to regulate the banks. I have lost a bundle in bank shares. Should the taxpayer compensate me?

Read this article at http://www.candidmoney.com/articles/article66.aspx

Commission rebate on Aviva bond?

Question
Where can I find a list of 'discount brokers'?

I am paying trail commission of 0.50% on a 7 year old Aviva Portfolio Bond worth about £35K, bought through Towry Law, and I understand from a recent edition of BBC2's 'Working Lunch' that you can transfer to a 'discount broker' and receive part of the trail commission back each year?Answer
I’ve been meaning to put together a comprehensive list of discount brokers, including the discounts and services offered, for some time. Your question is a good prompt so I’ll try and get something on the site within the next couple of weeks.

Unless you need ongoing advice (which I’m assuming Towry Law haven’t been giving you) then getting a trail commission rebate would be well worthwhile. If you do want ongoing advice then you could try and find an adviser who’ll be happy to oblige in return for the trail commission.

Your cheapest discount broker option is probably Cavendish Online, who refund all trail commission in exchange for an initial £35 charge and £10 annual fee. Given the annual trail commission on your bond is currently around £175 this seems like a decent deal.

Alternatively Club Finance will rebate 75% of the trail commission without charging you any fees. So you’d expect to receive about £131 of the £175 commission.

If you want to find out more about getting trail commission rebates you’ll hopefully find the ‘action plan’ I’ve just put together helpful.

As an aside you might want to investigate whether the investment bond is worth holding onto. If you’re a basic rate taxpayer there’s no income tax benefit and gains are taxed at source, which is less favourable than conventional investments where gains can be offset against your annual capital gains tax allowance. It would also be worth checking the underlying bond investment fund(s) to see whether it’s any good – if not you may have the option to switch funds within the bond.

Read this Q and A at http://www.candidmoney.com/questions/question148.aspx

Tax paid vs tax credit

Question
What is the difference between 'tax paid' and 'tax credit'. On income from building societies the tax has been deducted and you receive the 'net' amount, but on a dividend received from a VCT it has 'tax credit'.Answer
Tax paid is, as the name suggests, when tax has already been deducted and paid on income. It usually applies to interest payments from bank and building society accounts, although if you’re a non-taxpayer you can arrange for interest to be paid gross by completing HMRC form R85.

Tax credits, which apply to dividends (and shouldn’t be confused in this context with the state benefits of the same name), are not quite so obvious.

Dividends are paid out of a company's profits, which have already been (or will be) taxed. Because of this HMRC attaches a 10% ‘tax credit' to dividends and then taxes basic rate taxpayers at 10% and higher rate (40%) taxpayers at 32.5% on the 'gross' dividend (i.e. the dividend plus the tax credit).

The upshot is that basic rate taxpayers have no extra tax to pay, as the credit cancels out the tax owed and higher rate taxpayers must pay an additional 22.5% on the 'gross' dividend, equal to 25% on the dividend they actually receive.

Thanks to a Gordon Brown 'stealth' tax, non-taxpayers and individual savings account (ISA)/pension/venture capital trust (VCT) investors are unable to reclaim the tax credit, so they're no better off than basic rate taxpayers.
A quick example should make this clear:

Company X pays a dividend of 90p with a 10% tax credit attached. In the hands of an investor this is notionally grossed up to 100p then taxed at 10%, so it’s worth 90p to everyone except higher rate taxpayers.
A higher rate taxpayer must pay 32.5% tax on 100p, reducing the dividend to 67.5p after tax (which is also equal to 90p less 25%).

Had the higher rate taxpayer held the shares in an ISA, pension or VCT they could have avoided paying the extra 22.5p tax. But non-taxpayers and ISA/pension/VCT investors can never reclaim the 10p automatically deducted from the 100p gross dividend.

Read this Q and A at http://www.candidmoney.com/questions/question149.aspx

Implications of Kraft shares in an ISA?

Question
Since the take-over of Cadbury plc by Kraft Foods of America, I now hold some Kraft shares in my ISA portfolio. Please would you explain the implcations of retaining these foreign shares.Answer
Holding foreign shares within an individual savings account (ISA) is much the same as holding shares listed on the London Stock Exchange, with three potential differences: trading fees, currency and withholding tax.

Kraft shares are traded in US dollars on the New York Stock Exchange. This means that movements in the pound/dollar exchange rate will affect the value of your investment – in much the same way when buying foreign currency for holidays, but in reverse. For example, $1,000 of shares would be worth £625 at an exchange rate of $1.60 to £1. If the dollar falls to $2 to £1 the shares would only be worth £500.

Dividends will also be paid in US dollars. You should check whether your stockbroker charges to convert these back to pounds – ideally the conversion should be fee-free and carried out at an institutional exchange rate to ensure you get a good deal.

US dividends will also be paid net of a 30% withholding tax. Under the 2001 US/UK Double Taxation Treaty you should be able to reclaim 15%, so that you pay no more than 15% tax on the dividend (ignoring any UK higher rate liability you might have if the shares are held outside of an ISA). However, this requires your ISA manager to process a US W-8BEN tax form – I don’t think all managers offer this facility so this is something else to check with your stockbroker.

Finally, most stockbrokers charge higher dealing fees for overseas shares versus those on the London Stock Exchange, so you could find yourself paying more to sell the Kraft shares than you would have done to sell Cadbury shares.

Read this Q and A at http://www.candidmoney.com/questions/question145.aspx

Tax return error?

Question
I filled in my self assessment on line and included details of a pension of about £200 a month from Norway which was not taxed at source. HMRC did the calculations but as far as I can see they have not taken account of this income.

Do I have to tell them that I disagree with their calculations, given that I have made full disclosure of the facts?Answer
If you think HMRC has made an error when calculating your self-assessment tax return then yes, you should tell them. If you don’t there’s a risk that you’ll pay too little tax, which could lead to you paying interest and possibly fines in future if the error comes to light.

I’d suggest calling HMRC to double check whether the pension is taxable and, if so, alert them that there may be an error in their calculations.

As an aside, if you’re UK tax resident and domiciled (you’re probably UK domiciled if you were born here) then you usually only have to pay tax on 90% of overseas pension income, not the full amount.

Read this Q and A at http://www.candidmoney.com/questions/question144.aspx

Rock guarantee less solid

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If you have savings with Northern Rock then beware that the current 100% savings guarantee offered by the Government will revert to the less generous Financial Services Compensation Scheme (FSCS) from 24 May 2010.

This means that rather than enjoying unlimited protection should Northern Rock default, savers will only be covered up to £50,000 per person.

If you have a fixed term account then the 100% guarantee will continue to apply for the remainder of the term. But open a new account from today and you’ll simply be covered by the FSCS.

Northern Rock’s interest rates are uncompetitive with the best in the market and in some cases are downright awful. So if you’ve been harbouring money with the ‘Rock’ in a variable rate account to benefit from the Government guarantee there’s little reason to stay after 24 May. I’d suggest you start shopping around for a better deal.

Rates paid on Northern Rock variable rate accounts as at 24 February 2010:

Account	Annual Interest (gross)	Notes
E-Saver	1.85%
E-Saver Issue 2	2.50%	Includes 1% bonus for 12 months
30 day Cash ISA	1.80% - 2.15%	Includes 0.7% bonus for 6 months
Instant Access Cash ISA	0.80%	Rate guaranteed to be no less than 2% below BoE Base Rate
Silver Savings Issue 2	1.35%	0.1% interest below £5,000
Silver Savings 30 Issue 2	1.45%	0.1% interest below £5,000
Branch Saver Issue 3	1.90%
Branch Instant Access Issue 2	0.25% - 0.75%
Select 120 Issue 2	1.05% - 1.50%	Includes 0.75% bonus for 6 months
Current Account	0.10%
Save Direct	0.25%	Rate guaranteed to be no less than 1.75% below BoE Base Rate
Save Direct 90	0.40% - 0.45%	Rate guaranteed to be no less than 1.50% below BoE Base Rate

If you hold money in a variable rate account not listed above (i.e. it’s no longer available to new customers) then chances are you’re receiving a paltry rate of interest.

In all cases there are better rates currently available elsewhere, the table below highlights a few examples.

Account	Annual Interest (gross)	Notes
Halifax Web Saver Extra	2.80%	30 days interest penalty on more than 1 withdrawal a year
Coventry BS 1st Class Postal	3.15%	Includes 1.15% bonus for 12 months
Investec High 5 90 day Notice	3.21%	Pays average of the top 5 acounts.
Standard Life Direct Access Cash ISA	2.65%

And if you’re thinking of opening a new savings account with Northern Rock don’t bother – there’s really little point.

Read this article at http://www.candidmoney.com/articles/article65.aspx

Building society windfalls likely?

Question
I just wondered if you had any thoughts on building society windfalls?

I have had a few and still have several accounts with £100 or so. As you know there have been de-mutualisations but no windfall. This might not be your area but any advice is welcome.Answer
Building society windfalls tend to be paid when a society either demutualises, by converting to a bank and listing on a stock exchange, or is taken over.

Demutualisation’s have unsurprisingly been absent in recent times as many building societies struggle to simply keep their heads above water. And those that are sufficiently robust to float won’t be keen to consider such a move while stockmarkets are in the doldrums.

There have been some takeovers over the last couple of years but the only one to pay a windfall was when the Catholic BS was taken over by the Chelsea BS in 2008. By and large the building societies that have been taken over were in poor financial health, so weren’t in a position to negotiate a windfall for members.

Assuming the economy improves over the next few years then we might start to see a few healthier building societies become takeover targets, in which case windfalls might be on the cards once more. But for the time being any takeovers will likely remain distress sales, so the prospects for windfalls remain slim.

If you only have a £100 or so in each account and don’t mind the paperwork then staying put isn't a bad idea and might yield a windfall or two over the next 5 years or more. Just double check that the accounts confer membership status, otherwise it’s unlikely you’ll qualify. Good luck, but don’t hold your breath!

Read this Q and A at http://www.candidmoney.com/questions/question142.aspx

What investment mix?

Question
What percentage of my investments should i put into shares, other assets and cash?

I want security, growth and income.Answer
Sorry to sound like a killjoy, but If you want total security then stick to cash and limit your holding to no more than £50,000 per institution to ensure you’re covered by the Financial Services Compensation Scheme (FSCS).

If you’re comfortable investing for 5-10 years or more and accept that you could lose money, albeit with the prospect of earning higher returns than cash longer term, then a mix of stockmarket, fixed interest, property and commodities investments would seem sensible.

Even so, I’d suggest keeping at least 20% in cash and more if you’ll need to cover any large upcoming expenditure. If you’re a taxpayer then consider using cash ISAs to ensure interest is paid tax-free.

Commodities don’t tend to be good for income, but I think the 10-20 year growth prospects are decent. I’d be very surprised if demand doesn’t rise faster than supply with the continued growth of emerging markets. Despite increased eco awareness, global demand for energy will almost certainly soar as the vast populations of China and India start to move from peddle power to the motor car. These cultures also like to spend some of their new found wealth on gold jewellery, which should boost demand. So while commodities are volatile and not suited to income, I’d suggest holding around 10% of your portfolio in this area provided you’re happy with the potential timescales and volatility.

Stockmarkets can be well suited to income as dividends tend to rise over time (the recent credit crunch notwithstanding), but volatility can be high. Western stockmarkets tend to be the most reliable for dividends, but probably also have the bleakest outlook. I think emerging markets hold more promise over the next 10+ years, but will likely cause you more sleepless nights along the way.

Overall I’d suggest 25-40% in stockmarkets. Go global as well as UK, but in current climate a bias towards relatively cautious income funds along with absolute return funds would be prudent.

Fixed interest has had a good run, but appears to be running out of steam. While I’d avoid gilts right now, global investment grade bonds are probably still worthwhile. High yield bonds are also worth some exposure, but bear in mind that they tend to be correlated to stockmarkets. I’d suggest 15-20% in fixed interest.

I’d also suggest holding a similar amount in commercial property. After a couple of very difficult years the sector appears to be stabilising and prices have stated to rise in recent months. Commercial property should also be a good source of long term income, provided we don’t see an increase in tenants going bankrupt.

Asset allocation is very subjective and some don’t believe in it altogether – great if you can consistently predict the next years’ top performers, but I’ve yet to meet someone who can – I certainly can’t. The main thing is to avoid being over exposed to any one area, so if it gets hit you won’t lose your shirt.

You could consider a multi asset fund, tries to do the job for you, although if the manager invests in other funds (i.e. fund of funds) you could end up paying total annual charges of 2-3% or more, meaning the manager may have to run just to stand still.

Read this Q and A at http://www.candidmoney.com/questions/question139.aspx

Why is my money frozen?

Question
I trusted a financial adviser and he invested some money for me with Skandia in the Isle of Man for a period of five years. It has lost money consistently. (The five years is up now).

I still have a Collective Investment Fund and the fund has been 'frozen' now for almost a year and a half. It is the Frontier Property Fund. I've lost my home, well, I've lost everything because I can't get this money. How long can they 'freeze' peoples money for? Why should these Companies be allowed to do this?

I'm quite in despair about all this and keep getting sent round in circles. Any advice you could give me would be greatly appreciated.Answer
I’m sorry to hear about your difficult situation.

The financial adviser appears to have sold you an offshore investment bond offered by insurance company Royal Skandia, for which he or she probably pocketed around 6% or more initial commission.

An investment bond is effectively a ‘tax wrapper’ that holds investments, in this case the (rather expensive) Frontier Commercial Property fund.

The five year period you mention is simply the minimum holding period to avoid a surrender penalty – basically a charge levied by Skandia to make up for the commission they’ve paid to the adviser but haven’t had time to deduct via the bond’s charges.

The reason you can’t get hold of your money is that the Frontier Property Fund closed its doors to redemptions on 1 August 2008 (details here) and has yet to re-open them.

Why? Well it invests in a range of commercial property funds, some of which have in turn suspended redemptions until they can sell sufficient property to repay those investors who want out. This is all a result of commercial property markets taking a battering during the credit crunch.

However, commercial property markets have generally been improving in recent months, so I would expect Frontier to open its doors to redemptions sooner than later. I’d suggest keeping in regular contact with Frontier Capital (your adviser should be doing this is they’re still bothering to look after you) to establish which underlying funds remain closed and when trading is likely to re-commence.

I’m afraid there’s little else you can do unless you feel the adviser mis-sold you the bond. If you explicitly told the adviser you needed access to the money after five years and/or you didn’t want to risk the money, then you might have a case. Otherwise, and I know it’s the last thing you want to hear, you’ll have to carry on waiting.

Read this Q and A at http://www.candidmoney.com/questions/question143.aspx

Pension mis-selling?

Question
I retired last July and my wife will be retiring next August. We have been receiving advice from an IFA but I’m not sure how trustworthy this is.

She advised us to consolidate our AVCs and Stakeholder accounts (total value about £100,000) into a Scottish Widows retirement account. For this she received about 3% (£3000). We had thought that we would continue paying £300/month each into the new account instead of the Stakeholder.

Last September we noticed that we were not making the £300/month payment into our retirement account so we got back in touch and our IFA. She said she would arrange for us to continue making payments. Last week my wife received a supplementary schedule from Scottish Widows via the IFA and noticed a 10% per annum advisor payment charge. I wrote to our IFA to query the charge and she said ‘This is a charge of £30, per month, payable for one year only, and paid to Scottish Widows for the ongoing management of your fund. As part of this cost, Scottish Widows, pay 1% (£3) per month to us for our advice in this transaction.’

My wife phoned Scottish Widows to query the charge and was told that our IFA had been paid £360 commission up front and that we would be charged £30/month to reimburse Scottish Widows.

Should we have been advised to change from our Stakeholder to a retirement account when it meant we couldn’t keep on contributing £300/month without incurring commission charges? We will only be able to make about 10 months payments to the new account before my wife retires and there is no chance of making a profit because of the 10% charge. Our pension pot seems to be shrinking before our eyes. Should we cancel the new payments into the retirement account?Answer
My immediate concern is that you’ve been advised to switch low cost Additional Voluntary Contribution (AVC) and stakeholder pensions into a more expensive self-invested personal pension (Sipp) on the brink of retirement.

If you were at least 10 years away from retirement then the wider investment choice within a Sipp might justify the costs of switching and higher ongoing charges if it results in better performance. But I’m struggling to fathom why your adviser recommended the switch when you were so close to retirement (other than to pocket her £3,000 fee) as it'll almost certainly leave you worse off.

The only justification I can think of is that she thought you would be better off leaving your pension fund invested, drawing an income when required, rather than buying an annuity. This may or may not have been good advice depending on your situation, but I’m inclined to be sceptical.

As for the £30 monthly charge, the only reason for this is to pay the upfront commission paid to your adviser. The level of commission is chosen by the adviser and has nothing to do with Scottish Widows; they’re simply recouping the commission they’ve paid out. Having charged you £3,000 already I‘d have thought the adviser would have waived commission on your £300 contribution, especially given the mistake over continuing payments after the stakeholder pension was transferred.

Now, in fairness to Scottish Widows, the charges on its Retirement Account Sipp, while not the cheapest, are laid out very clearly. There’s a 0.5% annual service charge (on a £100,000-£150,000 fund) along with the underlying fund charges and any commission that the adviser elects to receive.

Let’s assume the underlying funds in your Retirement Account charge 1.5% a year, add in the service charge and around 2% is being deducted from your pension annually – about double what you’d expect from stakeholder and lower cost AVC pensions. Factor in the £3,360 that’s been deducted to pay the adviser’s commission and it’s not hard to see why your pension pot appears to be shrinking.

Based on the information you’ve provided, I think there’s a strong possibility that the advice to transfer your stakeholder and AVC pensions into a Sipp was inappropriate. If so, you’d have a valid mis-selling claim against the adviser.

If you believe this to be the case then send your adviser a letter detailing your grievance. If she doesn’t resolve the issue to your satisfaction (by putting you in the same financial position had the transfer not taken place) then take your case to the Financial Ombudsman Service, it won’t cost you anything and your adviser will have to abide by their decision.

I sincerely hope you can get this sorted out so your retirement income is not jeopardised.

Read this Q and A at http://www.candidmoney.com/questions/question141.aspx

Home sweet nursing home

As life expectancy increases, so does the likelihood you'll eventually need nursing care, either at your home or in a nursing home. But who'll pay? .

I was fascinated to learn that the three principal political parties (with apologies to the nationalists) had even contemplated getting together to discuss the obvious problem: a lot of us live longer, but with physical and mental capacities so diminished that we require help at home, which is expensive to provide, or residential care, which is even more expensive, or full time nursing care, which is prohibitively expensive.

The solutions are means tested, which means, as ever, that there problems associated with drawing the lines that determine who gets what. Different rules apply in Scotland, funded in part by the generosity of English, Welsh and Northern Irish taxpayers, and within England there are different interpretations of the rules from one local authority to another. This is a mess.

The mess is compounded by the fact that our politicians believe that old folks resent the fact that the value of their home, which their close relatives have already defined as an expectation of inheritance, may be lost to the care providers. And so begins the febrile search for some way to raise the money.

Private insurance doesn’t seem to have worked, probably because the chances of going into a home and making a claim are so high that the price of the policy is perceived to be ruinous. The same sort of problem arises with private health insurance as you get older. In my case, when I calculated that two years worth of premiums were equal one new knee, I decided to assume the risk myself. That was some time ago, so by now I've saved enough for a hip as well.

The Tories say Gordon plans a death tax. Alastair says Gordon plans no such thing. How much do they need to raise? Six billion quid per annum according to some estimates. All sorts of daft ideas will be floated as our politicians try to avoid confronting reality, or to be precise, two realities.

The first is that the cost of looking after those who cannot look after themselves will have to be met from general taxation. Those people, as now, will have their pension diverted to the care provider, leaving them with the indignity of pocket money. Those people, as now, may not be able to choose when they go into care, or where they go.

The second reality is that taxes can’t go very much higher without throttling the economy. Thus, if spending on the care of the elderly is to increase, spending on something else will have to be cut.

In the circumstances, the chances of me, you, or anyone else being allowed to ring fence our assets as we are carried into the care home and the bosom of the taxpayer are precisely, ineluctably, nil.

Read this article at http://www.candidmoney.com/articles/article64.aspx

Higher inflation higher interest rates?

Inflation continues to rise, will this lead to higher interest rates?.

Inflation continues to rise, with the Retail Price Index (RPI) rising 3.7% over the year to the end of January. This is not much of a surprise, as it reflects the 1 January VAT rise from 15% up to 17.5%. Plus higher oil rices also continue to impact.

Will this prompt the Bank of England to increase interest rates? Well I'm sure there'll be the usual headlines predicting it will, but I'm less convinced. While higher interest rates are the usual medicine for curbing inflation, these are quite exceptional times.

Hiking interest rates tends to cool inflation when prices have been pushed up by us all spending money like it's going out of fashion. But the main inflation drivers have been the VAT increase and higher oil prices, not consumer spending, so raising interest rates would have little, if any impact. Plus any interest rate rise would probably plunge us straight back into recession (if we don't anyway).

The way things stand I'll be surprised if we see a base rate rise this year, so I won't personally be rushing to lock in my mortgage to a fixed rate. I will however look to shift some of my savings to three year National Savings Index-Linked Savings Certificates.

For more details on protecting your savings from rising inflation please see my earlier article.

Read this article at http://www.candidmoney.com/articles/article63.aspx

The politics of pensions

When politicians play with pension proposals it's rare they'll ever make much difference, even if they do see the light of day. Will the Tories' latest announcements be any different? .

I’m sure I’m not the only one to view the next three months’ electioneering with grim foreboding, bordering on distaste, crossing over to impotent rage during the BBC News. My money is on a hung parliament, but if Cameron does manage to get into No 10, he’s committed to a couple of quite significant pensions changes.

First, he would index the State Pension to National Average Earnings (NAE). I’m sure that the focus group that came up with this one thought it would be welcomed by the silver surfer generation. After all, wage inflation has always run ahead of price inflation, and it always will, won’t it? (ironically, it was Margaret Thatcher who removed the link in the first place back in 1980!).

Perhaps, and then again, perhaps not. Unemployment is likely to continue to rise, and there is going to be some sort of pay pause in the public sector. These factors, coupled with all the problems in the financial services sector, might well pull NAE down below inflation.

Theresa May is the shadow minister, and she hasn’t thought this one through.

She has also fallen victim to a very capable lobby and announced that the Tories will end compulsory annuity purchase at age 75. This is a long story, but the deal has always been that in return for tax breaks associated with saving for old age, with the tax free cash break at retirement thrown in, the pension saver would use the money to provide a retirement income. Otherwise, Cyril and Doris, both aged 65, would blow their accumulated pension savings on a world cruise and come home to means tested benefits.

The aforementioned lobby does not like annuities. They use words like ‘rip off’ to describe an insurance company that accepts £100,000 in return for a promise to pay an annuity of £5,000 for life, and keeps the capital when the unfortunate annuitant pops his clogs six months later. Their intellectual stance appears to be that an annuity is only a good idea if you can guarantee that you will live a long time. The flip side of that argument is that there is no point insuring your life unless you plan to die in the very near future.

Theresa hasn’t thought this one through either. Some citizens already select against the tax payer by declining to save anything for their old age, preferring to spend the cash as they go along, safe in the knowledge that whoever is in power when the time comes will sting the prudent to feed the feckless as well as the genuinely needy.

The Tories in power will have to modify their policy. They will have to be sure that Cyril and Doris don’t go on that cruise until they have bought an annuity large enough to keep the pair of them off means tested benefits. That suggests that they will have to be forced to buy an annuity of around £10,000 per annum, which needs a fund in the region of £200,000.

Read this article at http://www.candidmoney.com/articles/article61.aspx

Retail Distribution Review?

Question
Could you say what improvement you expect the FSA's "Retail Distribution Review" of the regulation of financial advisers, due for 2013, will bring for investors?Answer
Proposals resulting from the Financial Services Authority’s (FSA’s) Retail Distribution Review have yet to all be set in stone. But from what the FSA has said so far it’s clear they’re intent on pushing financial providers and advisers to treat customers more openly and fairly.

In practice I think the proposal likely to make the biggest impact is scrapping commissions in favour of ‘customer agreed remuneration’. This means that financial products will no longer be able to build commission into their charges, with financial advisers instead having to get their customers’ agreement if their fees are to be taken from the product(s) sold.

For example, at the moment a unit trust typically charges 3% initially and 1.5% a year, from which 3% initial commission and 0.5% annual commission is paid to financial advisers. Under the FSA’s proposals the charges would become 0% initially and 1% a year. If the adviser wants to charge 3% initially and 0.5% a year the customer would have to agree and this would be deducted from the fund (or, as seems more likely, a cash account linked to the fund).

On the whole I think this is very positive as it removes the possibility of commission bias, which has plagued the financial advice industry for as long as I can remember – i.e. an adviser would not have a financial incentive to sell one product over another. It should also boost interest in exchange traded funds (ETFs) and investment trusts, both of which are currently shunned by many advisers as they pay no commission.

The only downside and some will argue it’s a big one, is that evidence suggests the majority of the public are not prepared to pay a fee for financial advice. For all its sins, commission does make financial advice very accessible (although given the poor quality of some of the resulting advice you could counter argue this is not necessarily a good thing).

Other proposals include raising the level of qualifications an adviser must achieve to be call themselves independent and tweaks to how advice is categorised.

All in all I think the RDR is a very positive thing for consumers. It will, no doubt, lead to a shake-up in financial adviser circles, as many will have to make fundamental changes to how they run their business. There will be casualties and some advisers will probably decide to hang up their boots, but such a shake-up is long overdue.

One area which I don’t think the FSA has yet issued a proposal on is the issue of so-called ‘independent’ advisers selling their own product. Where an adviser company recommends more than a nominal level (e.g. 20%) of their clients’ portfolios be held in their own fund(s) I think it’s misleading for them to call themselves independent – especially if their advisers have a financial incentive to sell their own funds other others. I’d like to see the RDR address this issue before it gets out of hand.

It’ll probably take a year or two for the dust to settle post RDR, but I think IFAs will start to be seen in a more professional light and the public will slowly become less grudging at paying an hourly fee, as they would an accountant or solicitor. However, IFA’s services will probably be biased towards the more wealthy, leaving the majority of the population to seek advice from the banks and insurer sales forces – who will probably continue doing a fair to mediocre job.

I also expect more people to take matters into their own hands and advise themselves on more basic matters. Post RDR they should then be able to buy direct at a lower price than using an adviser, without needing to buy via a discount broker. While discount brokers will still have a place in the market, they’ll have to work far harder and offer more value added services to entice customers away from going direct – which should offer the cheapest deal – a sea change from where we are now.

Of course, there’s still plenty of time for the FSA to change its mind, that’s if it even still exists come 2012/13. But I hope whatever happens the RDR gives the industry the kick it so badly needs.

Read this Q and A at http://www.candidmoney.com/questions/question137.aspx

A Greek tradegy

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Until recently I must confess my only interest in Greece was food and mythology, oh and a nod to Stelios for bringing us cheap flights.

But my mind has turned from moussaka to money more recently as it transpires that the Greek Government has a gaping hole in its finances and hasn’t been completely honest about just how big the hole is.

The problems facing Greece are not that different to here, just more extreme. The Greek Government ran a sloppy ship during the good times and hasn’t tightened its belt sufficiently during these bad times.

After spending around 50 billion more euros than it has, the Greek Government needs to borrow heavily to plug the gap, but markets are understandably reticent to lend the money through buying government bonds as they’re worried they won’t get their money back, i.e. the bonds are viewed as ‘junk’. This pushes up the interest rates Greece must offer to attract investors, which in turn increases its annual interest bill – a downward spiral - a bit like being trapped on a high interest credit card with too little income to pay it off.

You’d expect demand for Greece’s currency, the euro, to weaken given these difficulties. But it’s not that simple, as the other 15 eurozone countries that share the same currency won’t want to see the euro suffer as a result of events in Greece – especially those with more economic clout such as Germany.

Consensus is that they’ll put their hands in their pockets to offer Greece some sort of rescue package, probably demanding a say in how Greece runs its financial affairs in return.

Nevertheless, the euro will undoubtedly take a hit, especially shorter term. And eurozone woes could continue given Portugal, Spain and Ireland are also in financial dire straits.

Why should UK investors care? Well apart from global stockmarkets catching a cold from the initial bad news, the outlook for eurozone stockmarkets has further weakened – bad news if you own an investment fund in the area.

And although a weaker euro is good news if you’re taking your summer holiday in Europe, it reduces the value of euro based investments when converted back into pounds.

What this Greek tragedy highlights more than anything is that Western economies still have a long way to go before they emerge from the global downturn with their finances intact. The inevitable tax rises and spending cuts, necessary to start balancing the books, have yet to bite. And when they do, it will hurt...a lot.

When I was growing up I always assumed I’d probably live to see the balance of economic power start to shift firmly from West to East. I just didn’t think it would so visibly be happening by the time I hit 40.

I really hope both the eurozone and the UK can emerge from this storm sooner than later, but I’ve a feeling things will never quite be the same again.

Read this article at http://www.candidmoney.com/articles/article60.aspx

They shoot horses don't they?

Back in the Nineties, With Profits bonds were as popular as Ford Sierras. But while Ford had the grace to retire the Sierra before it fell, insurers seem determined to run With Profits into the ground..

The personal finance columns must be pretty tricky for the journalists, because there really is not much around that is new. Most of us want to put something away to spend later, we'd like it to keep pace with inflation, and if we can do a bit better than that we are generally quite satisfied. Those of us who have passed the age of 40 know that we all spend the first half of our lives worrying about dying young, and the second half worrying in case we live too long.

Anyway, With Profit Bonds have been back in the headlines. A few years ago, a lot of us were sold these beauties. The sellers used to say that they were as safe as Building Society deposits, but with the chance of capital gain. All this was founded on the apparently stellar returns on many 25 endowments that matured in the late 1980s and early 1990s.

Needless to say, With Profit Bonds have delivered poor returns over the past ten years, when the stock market has gone nowhere. So the general wisdom to check the policy to see if you can get out at a five or ten year anniversary without penalty makes eminent sense.

But believe it or not, the With Profit Bond can still be found. It is actually a single premium life assurance policy, with a sum assured of £1 more than the premium. Don’t ask me why it is like it is, because we’d be here all day.

Your money goes into a 'fund' although the way the fund actually works differs quite a lot from one office to another. The actuaries who run the fund can change the asset allocation without telling you. So your bond might start with 75% in equities but wind up with 30% in no time at all. You are stuck with the fund managers, even if their performance turns out to be ghastly. The charges are very far from clear. You will benefit from an annual bonus declaration, but the only certain way to do so is to die. When you want your money back you may find that the provider applies a Market Value Reduction to the nominal value of your Bond. You will pay your share of the income and capital gains tax paid by the fund.

That is, by the way, a trick financial planning question: how can you make certain that your client will be liable for capital gains tax? The answer is to sell him or her an investment bond.

On the face of it, given that Equitable Life did for With Profits what John Prescott did for ministerial dignity, it may be a surprise that you can still actually buy what amounts to a pig in an actuarial poke. Why have these things not simply disappeared? After all, there are simpler and more transparent ways to allocate assets, and retain control of the costs and direction of the individual investments.

There are three reasons. One: we consumers are gullible, we like being reassured, and ‘With Profits’ is a quite wonderful name. Would you like it with profits, or without, sir? Two: sales people can earn twice the commission payable on a portfolio of Unit Trusts. Three: Life companies are surrounded. There is nothing they can do that no-one else can do, except of course With Profits. And there are no charges that they can obfuscate, except of course for With Profits. Which is why a few people have made a lot of money hovering up old With Profits funds.

Once upon a time financial services was a three player game in which the product makers and the product sellers ganged up on the product buyers. Regulation was supposed to change all that. It hasn’t. The very existence of the With Profit Bond proves the point. If it were a horse...

Read this article at http://www.candidmoney.com/articles/article59.aspx

Use cheap mortgage to invest?

Question
I have an agreed mortgage of upto £70,000 at 0.75% above the BoE base rate (1.25%).

Should I borrow the max and buy a Buy to let or invest it at a higher rate than I would be paying? Or not do anything with it?Answer
It depends on how much risk you want to take and whether the attractive rate (0.75% above base rate) is for the life of the mortgage or just an initial offer period.

Let’s start with the lowest risk option, take the money and put it in a savings account. If you’re ok with 90 days notice you could currently earn 3.24% gross via an Investec High 5 account, equal to 2.59% for basic rate taxpayers and 1.94% if you pay higher rate.

Assuming you put the whole £70,000 in this account (in practice you’d probably want to limit it to £50,000 – the amount covered by the financial services compensation scheme) and choose the monthly interest option (to pay the mortgage on an interest-only basis) then at current interest rates you’d make a theoretical annual ‘profit’ of £1,393 if a non-taxpayer, £938 if a basic rate taxpayer and £483 if a higher rate taxpayer.

Sounds good, but you’ll need to factor in any costs relating to the mortgage, especially redemption charges in case you want to bail out - if interest rates rise there’s a risk the savings could start to lag the mortgage, especially if the mortgage rate is introductory rather than for the life of the mortgage.

No-one knows what will happen to interest rates over the next few years. My guess is that they’ll remain low, but I wouldn’t place a big bet on that.

If you can pay off the mortgage at any time without a prohibitive penalty and the figures work for you, then the savings route might appeal. You could even opt for a four or five year fixed rate savings account, where gross annual rates of 5% or more are on offer, but this could leave you stuck if rates rise.

A buy to let property is a lot more risky and inflexible, but could work out favourably longer term. Residential property yields currently seem to be around 5% a year, before costs and tax. However, you’ll need to factor in both purchase and ongoing costs (such as management fees, ongoing repairs and maintenance, as well as empty periods) - try using our Property Rental Yield Calculator to get a clearer idea of what profit, if any, you might make.

In the past many buy to let investors have been happy to break even re: mortgage costs on the basis they’ll profit from rising property prices. I wouldn’t be keen to run this strategy in the current climate, unless you think you can add value through development or plan to run the mortgage for the full term so you eventually own the property.
As for other types of investing, I’d be very nervous taking a punt with borrowed money. Invest in emerging markets and/or commodities over the next 20 years and I think you’ll do very well, but it’ll probably give you some very sleepless nights along the way.

Ultimately I think you need to gauge the possible profit then decide whether the potential hassle and/or risks are worth it. Our risk/return attitudes all vary, so there’s no right or wrong answer, other than feeling comfortable with whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question133.aspx

AiM shares not allowed in ISAs?

Question
Why is it that HMRC does not allow ISA investors to hold AIM-listed shares in their portfolios if such investors are willing to accept the limitations of AIM shares? After all, one may include corporate bonds and even hedge funds in this vehicle.Answer
Sadly the decision seems to be based more on a technicality than common sense. After all, you can hold shares listed on the US NASDAQ exchange within an individual savings account (ISA) – and NASDAQ and AiM both tend to have similar types of companies (small) listed on their exchanges.

The reason HMRC does not recognise AiM as a stockmarket is that AiM shares and securities are not admitted to the 'official list' maintained by the UK Listing Authority (UKLA), which happens to be the Financial Services Authority (FSA).

As far as I can see this is the only reason AiM shares cannot be held within in an ISA, I don't think HMRC has gone out of its way to preclude them.

If a share is listed on both AiM and a stock exchange recognised by HMRC then it may be held within an ISA, but such companies are obviously few and far between.

As an aside, AiM shares (with some exceptions) do qualify for business property relief. This means that provided you hold qualifying AiM shares for at least two years they normally fall outside of your estate for inheritance tax purposes.

Read this Q and A at http://www.candidmoney.com/questions/question136.aspx

Tax when newly self-employed?

Question
I am new to business and i hoping to start out my own wedding and corporate event photography business in the next couple of months.

I have been in full time employment for a year and this venture would be done in my future spare time (I do not intend to quit my job), but I am confused over the regulations for the AIA (annual investment allowance) and VAT, hopefully you can put me straight. Here's how i see it after my limited research:

To start up my business i would need to but some equipment (cameras, lenses, computer etc..). I have calculated these costs to be £8000 (Including VAT). I will register for VAT (as i will hopefully have some corporate customers), and so would look to claim back 17.5 % of this intial outlay. Balance remaining £6816.

Now on to AIA...as I understand it I would be entitled to claim back 100% of the cost of the new equipment (provided its 100% for business use) against my income tax. So...say i make £1000 in the first year (not much but a start), then presumably VAT (flat rate for photographers is 8.5% i believe, and income tax is taken off this value (20%?). My full time employment gets me 25,000 a year, so £1000 - £85 - £200 = £725 NET (also minus NICs).

Because of my inital outlay on expenses (£8000), can i claim for a tax rebate of the £200 from my self employed income and the full amount of tax from this and last year of my full time income (approx £3250 per year)? This would pay off the inital outlay by the end of my first trading year.

I have no idea if this is correct, and it is probably a rambling incoherent babble, but as i said i am a newbie and would appreciate the help. Cheers in advanceAnswer
You're on the right lines...but some of your maths is a bit optimistic!

It's simplest if we consider separately the three taxes that you could face as a sole trader: income tax, national insurance (NI) and value added tax (VAT).

Income tax
Income tax will be due on all your business profits, i.e. earnings from the business less any expenses 'wholly and exclusively' incurred in carrying out that business. This might include expenses such as travel to venues, stationary and telephone calls. If you use some items for both personal and business use, e.g. home/mobile phone and internet, you can charge the proportion used for your business.

Assets such as cameras and computers are normally deducted from revenue (when calculating profits) over several years via 'capital allowances' but you're right, under the Annual Investment Allowance they can be fully deducted in the year of purchase up to £50,000 (excluding cars).

Be careful though if you intend to use capital items for personal use too. If so, then you'll only be able to claim the proportion (of time) they're used to carry out your business, e.g. if you use the camera equipment a quarter of the time for your own pleasure then you would claim £6,000 and not £8,000 against your business revenue.

The business profits, or losses, would then be entered on a self-assessment tax return, along with your employed income to work out how much income tax you need to pay or reclaim.

VAT
You must register for VAT if your self-employed turnover exceeds £68,000 (2009/10 tax year), below this it's optional. If you register then you must add VAT, currently 17.5%, to all your sales but you can offset VAT paid on allowable business expenses.

The benefit is that you can re-claim VAT on business purchases and corporate customers won't mind as they can probably re-claim the VAT you must add to your invoices. However, wedding customers will likely be private, so becoming VAT registered could make you 17.5% more expensive in their eyes than non-VAT registered competitors. Registering for VAT also means more paperwork as you must submit a VAT return each quarter.

If the VAT you pay on business expenses exceeds the VAT you receive from sales you can reclaim the balance via your VAT return. As with income tax, any non-business use must be apportioned, i.e. reflected in the VAT you reclaim on expenses.

If you register for the flat rate VAT scheme you can't reclaim any expenses – you just pay a fixed VAT rate on revenue (including the VAT you've charged) – although you can reclaim VAT paid on capital items costing £2,000 or more (including VAT) which aren't intended to be sold or rented out. The £2,000 minimum can comprise several items provided they're bought at the same time from the same supplier via a single payment.

Flat rate VAT does make life simpler and worth considering if you decide to register for VAT and don't expect to have lots of smaller expenses below £2,000.

The current rate for a photographer is 10%, although you get a 1% discount during your first year.

National Insurance
A self-employed person normally pays class 2 and class 4 contributions. Class 2 is a fixed weekly amount of £2.40 for earnings over £5,075 and class 4 is a percentage of your profits (8% between £5,715 - £43,875 and 1% thereafter). If your earnings are low in the first year, you might avoid both.

Putting all this together, where would it leave you if you spent £8,000 (including VAT) on capital equipment (100% used for business) and generated £1,000 (including VAT) of revenue in your first year? (We'll ignore other possible expenses for now).

Well, you wouldn't have to worry about NI, except for making sure you've registered for a class 2 'small earnings exemption'.

You would owe £149 of VAT on your invoices, but could reclaim £1,191 on the capital expenses, netting you a VAT refund of £1,042 under the standard scheme.

Under the flat rate VAT scheme the net refund would be £90 – £1,191 = £1,101, assuming all the capital equipment qualifies via the £2,000 rule. If none qualifies you'd owe £90.

Income tax would normally be due on your profits, which exclude VAT under the standard VAT scheme. In this example you'd make a loss of £851 - £6,809, i.e. £5,958, which you should be able to offset against tax you've already paid on your employed earnings. Assuming basic rate tax of 20% you could claim a £1,191 income tax refund.

Under the flat rate VAT scheme your loss would be calculated as £910 - £8,000 = £7,090 (note: expenses shown inclusive of VAT), meaning you could reclaim £1,418 of income tax.

Hope this all makes sense and good luck if you go ahead with the venture.

Finally, a general warning: bear in mind that HMRC expects self-employed individuals to be running a serious ongoing business. If they suspect someone is using a business as a ruse to save tax on equipment for personal use they might take a closer look...

Read this Q and A at http://www.candidmoney.com/questions/question131.aspx

Electron cards vanishing?

Question
Thank you for your recent response re: student accounts. Following on from that I am looking for a student account that also provides an Electron credit card. I have read a couple of articles that the Electron card is being withdrawn from use. I would be most interested to hear your thoughts on this.Answer
Visa Electron cards are similar to Visa debit cards in that money is taken from your bank account – there’s no credit. But, unlike debit cards, Electron cards always check your account balance to make sure you can pay for a transaction before authorising it. Purchases that would push your bank account overdrawn are declined.

This is why you can’t use Visa Electron cards to pay via offline terminals (e.g. on trains and planes), the seller can’t carry out a real time check to ensure you have sufficient funds for the purchase.

The reason sellers, especially budget airlines, like Electron cards is that the ‘interchange’ fees charged by card providers tend to be lower than credit and debit cards. If you spend £100 in a store, the shop owner might have to pay £2-3 in card fees if you pay by credit card but less than 50p if you pay by debit card and lower still if you use a Visa Electron card.

Nevertheless, many UK banks have been withdrawing Electron cards in favour of debit cards on the basis they’re similar enough and more widely accepted - a pain if you like low cost flights!

Because you can’t use an Electron card when overdrawn it’s rare for student accounts with an overdraft facility to offer Electron cards – I can’t find one (if anyone does know of one please let me know).

However, if you really want one you could try opening a basic bank account (with no overdraft facility) that offers Electron cards, e.g. the Halifax Easycash account. This could be held alongside your student account.

Read this Q and A at http://www.candidmoney.com/questions/question130.aspx

Holiday protected by credit card?

Question
Is it right that if I pay the deposit for a holiday with a Visa credit card, but the balance by other means, I still have payment protection for the whole amount for the holiday should the provider go bust?Answer
In general, yes, but it’s not always straightforward.

When you pay for a single item costing between £100 and £30,000 using a credit card then you’re protected under section 75 of the 1974 Consumer Credit Act – which says the credit card company is equally liable with the retailer, even if only part of the purchase price was made on your card.

So you could, for example, pay a £50 deposit for a £500 holiday on your credit card and the rest in cash and you’ll still be covered for the full £500 via your credit card provider.

However, if you book a flight or package holiday through a travel agent who simply sells you a ticket/package from an airline or tour operator directly, you won’t normally be protected by section 75. This is because the travel agent is deemed to have only supplied you with the tickets and not the flight or package itself – silly, but that’s the way it is.

If the travel agent builds a package for you then you should be protected by section 75, although whether travel/accommodation/car hire are classed as single items re: the £100 minimum depends on whether they’re billed separately or as a single ‘package’ price.

It’s worth remembering that provided you book a holiday through an Association of British Travel Agents (ABTA) member then you should be covered by their protection scheme in any case. If you’re on holiday and the tour operator or airline goes bust the agent will ensure your holiday continues as originally planned and get you home afterwards.

Also, flights protected by Air Travel Organisers’ Licensing (ATOL) cover you against airlines going bust. While most tour operator flights are ATOL protected, scheduled flights booked directly with an airline, and often travel agents, aren’t.

Back to section 75, the cost of a single item excludes any credit card fees, delivery and other similar charges. And where low cost airline flights are purchased on a one-way basis, each flight will be treated as a separate item whereas a return flight is one item.

Finally, remember section 75 only applies to credit cards. Debit cards, cheques and card cheques are not covered.

Bottom line, it’s usually worth paying holiday deposits by credit card if it appears you’ll be protected by section 75. Also check whether your holiday/flight is ABTA and/or ATOL protected. Nevertheless, it’s sensible to buy travel insurance in any case, but shop around for a good deal - the policies sold by travel agencies are often overpriced.

Read this Q and A at http://www.candidmoney.com/questions/question134.aspx