Fuss over Cash ISAs

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

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

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

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

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

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

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

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

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

Reclaim Lyxor ETF withholding tax?

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

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

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

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

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

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

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

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

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

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

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

Which savings account?

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

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

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

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

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

Reduce risk?

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

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

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

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

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

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

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

Hope this helps and best wishes for a healthy recovery.

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

Checking pension performance?

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

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

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

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

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

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

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

FTSE growth a myth?

Question
Is the FTSE growth a myth?

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

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

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

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

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

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

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

Fair Commission Charge?

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

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

For this he says he will receive:

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

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

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

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

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

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

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

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

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

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

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

Surrender PMAS endowment?

Question
I currently have an existing with profits endowment policy running with the Police Mutual Assurance Society.The policy is a 20 year policy which has approximately seven and a half years to run.The monthly premiums are £200.

As it stands the policy has a guaranteed payout (if premiums continued to the end) of about £53K which is only about 5K more than i would of paid in. I have contacted them and they stated that they are currently paying a terminal bonus of 5.5% (this can obviously go up/down in 7 years). If the policy was maturing now that would mean that the policy would still only payout about 56K .The policy has been adding yearly bonuses of about £150. This seems extremely poor performance over a 20year period.Its my belief that i could of done better by saving my money in a building society account.

I'm also concerned by the fact that they never appear to feature in any performance league tables either on the internet newspapers etc.There has been a lot of negative feedback over other companies endowment's performance, such as standard life but even their policies with the same premiums and time period has paid out approx £82K. I would welcome your views on the above.

I guess my main question is would it be better for me to cash in the policy (current surrender value £31,724) and reinvest in the stock market?Answer
I’m sorry to hear you were sold such a hopeless savings plan. Based on the surrender value offered your annual return to date is equivalent to just 0.88% - so yes, you would have almost certainly done better using a savings account instead (although the endowment does provide some life insurance cover, for what it’s worth).

Getting hold of information regarding the Police Mutual Assurance Society (PMAS) with-profits fund is not easy, which is probably why they rarely feature in with-profits performance tables. There’s no straightforward information on its website concerning how much is invested in different asset types – I had to turn to its annual accounts (covering 2008) to glean some information. Based on that (out of date) information, it seems around 40% of the fund is invested in equities and the rest in fixed interest and cash (but even this isn’t very clear). PMAS cut its equity exposure by £100 million in 2008, a shame given strong stockmarket returns in 2009 – although in fairness difficult to predict at the time.

Incidentally, the same accounts show that Graham Berville, the chief executive who resigned that year, received total remuneration of £475,614 over the year and had a pension pot worth £650,000. It’s sad to see that even mutual societies reward failing executives handsomely.

If you hold the policy until maturity and receive just the guaranteed minimum payout, the annual return between now and then would equal 1.04% (using the surrender value as the current value). PMAS’s small print says it pays surrender values equal to 95% of your entitlement to the underlying fund.

The low potential return suggests you should almost certainly get out. However, it’s not that simple as it’s nigh on impossible to predict the terminal bonus. Also, double check whether a market value adjustment (MVA) is being applied to the surrender value – if so you’ll have to decide whether it’s worth waiting for that to potentially fall away.

I’d take the view that in order to get a worthwhile terminal bonus performance will have to pick up over the next seven and a half years – and if that does happen you might do better in conventional investments anyway. You’d at least know exactly where your money is invested and be able to get daily valuations, escaping the ambiguity of the PMAS with-profits fund. But, of course, there’s no guarantee you’d do better by surrendering and reinvesting the proceeds elsewhere.

Given the policy has run for more than 10 years there should be no tax implications of surrendering. The policy has ‘qualified’ meaning no further tax to pay, although underlying returns will have been taxed at basic rate.

If you decide to surrender it’d be worth checking whether a second hand endowment trader will pay you more than PMAS. You can find out more on the Association of Policy Market Makers website.

When it comes to re-investing be very careful you don’t jump out the frying pan and into the fire. Ensure a good spread of investment across a range of asset types, such as cash, fixed interest, stockmarkets, commodities and property – the split will depend upon how much risk you’re comfortable taking.

Alternatively, putting the money in a cash savings account at a fixed rate of around 5% (before tax) for five years might still earn you more over the period than the endowment if markets don’t pick up – or indeed a good variable rate if you think interest rates will rise over the period.

Good luck whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question166.aspx

Trail commission being paid?

Question
Question Re: Trail Commissions

I inherited some unit trusts and have no idea whether I am being charged a trail commission since I never approached a IFA in the first place.

If charges are still being made can I recover them? How do I find out what charges if any are being made and paid to whoever?Answer
To find out whether trail commission is being paid simply phone the unit trust manager(s) and ask whether there's an 'agent', e.g. financial adviser, on the account. If so, ask whether trail commission is paid and, if it is, how much and to whom.

Whether or not trail commission is paid the annual fund charges you pay should be unaffected. But, as you're aware, if you're receiving no service in exchange for trail commission then much better that you pocket this rather a financial adviser. Obviously, if you need advice then you could try asking the existing adviser, or simply move to a new one who'll help in exchange for the trail commission.

You can't recover any previous commissions paid, but you can enjoy trail commission rebates in future by using a discount broker. There's a few, such as Clubfinance and Hargreaves Lansdown that rebate some trail commission, while Cavendish Online rebates it all in exchange for a fee. See our ISA Discounts (the information is also relevant to unit trusts) and Trail Commission Rebates Action Plans for more details.

Assuming trail commission is being paid you simply need to sign a 'transfer of agency' form or letter to divert commission payments to the new broker or adviser – who should be able to supply a suitable form.

Read this Q and A at http://www.candidmoney.com/questions/question164.aspx

Investec High 5 closed to new clients

Investec announced this morning that its High 5 account, a favourite of mine, has closed its doors to new customers..

Existing customers are unaffected except for a new £100,000 cap on account balances, although it won’t apply to balances already above this.

The account will continue to pay the average of the top 5 savings rates published on the Moneyfacts website across the categories of no notice accounts, notice accounts, internet accounts, monthly interest accounts, accounts for the over 50’s and accounts with an introductory bonus.

My guess is that the account has become increasingly expensive for Investec to fund, especially given its growing popularity over the last couple of years. Many of the other savings accounts used to calculate the High 5 rate operate on thin margins, or are loss leaders from banks keen to attract new customers. But whereas the competition invariably cuts ‘best buy’ rates to more profitable levels over time, Investec doesn’t have this option because of the way its rate is calculated.

Investec uses most of the deposits it takes from savers to lend to businesses. If lending hasn’t grown at the same rate as savings, which seems likely, then Investec is probably left with surplus cash earning an insufficient return to pay its competitive savings rate. Throw in a few bad debts on existing lending and the squeeze on its margins becomes even tighter.

If you already have a High 5 account I don’t think there’s reason to panic. But as we’re still in uncertain times I’d suggest playing safe by holding no more than the amount covered by the Financial Services Compensation Scheme, currently £50,000 per person.

Read this article at http://www.candidmoney.com/articles/article83.aspx

Budget 2010

With an election imminent it’s little surprise that Alistair Darling used today’s Budget to dig his taxation claws further into the wealthy and put off any unpleasant announcements affecting everyone else..

Whichever party gets into power more tax rises are almost inevitable, but for now it’s the wealthy who’ll pay; via a new rate of stamp duty and frozen pension allowances. Otherwise there was some mildly good news for individual savings accounts (ISAs) and those buying properties of up to £250,000.

The main announcements were as follows:

Individual Savings Accounts (ISAs)

The annual ISA allowance will be linked to inflation (measured by the Retail Price Index) from 2011/12. While it’s a positive move, increases will be threatened if, as more and more are predicting, deflation (i.e. negative inflation) comes home to roost. The September 2010 RPI figure will be used to calculate the 2011/12 allowance, so there’s a good chance this allowance will rise, if not thereafter for a while. Any increase will be rounded to the nearest £120, so if September 2010 RPI is 3.7% (the current level) the 2011/12 allowance would rise from £10,200 to £10,560.

Stamp Duty

The threshold at which stamp duty on residential property kicks in will double from £125,000 to £250,000 over the next two years, potentially savings homebuyers up to £2,500 in tax. Will this re-ignite the housing market? I’m not convinced. Property sales over 2009 were under half those in 2007, suggesting many potential sellers are holding off in the hope that prices rise and potential buyers are struggling to get funding and/or waiting for prices to fall. Until sellers wake up to the fact house prices were at unsustainable levels, I doubt we’ll see much change.

The introduction of a 5% rate on properties costing over £1 million will increase tax on such purchases by at least £10,000. While unlikely to trouble the wealthy, it’s another firm signal that Labour intends to continue its Robin Hood tactics of taxing the rich to avoid (or defer) tax rises for everyone else.

Pensions Lifetime & Annual Allowances

The annual and lifetime pension allowances are to be frozen for five years at 2010/11 levels of £255,000 and £1.8 million respectively. Up until now these had been increasing each year, so the freeze spells bad news if you have a very large pension fund; it’s potentially a tax on investment performance. While this won’t lose many votes, it gives wealthy individuals another financial disincentive to remain in the UK.

Inheritance Tax

The inheritance tax threshold, or nil rate band, will be frozen at the current level of £325,000 until 2014/15. If house prices remain flat or fall the impact for many may not be so bad, but any rises will leave yet more people vulnerable to this most unfair of taxes.

Capital Gains Tax

The rate of capital gains tax remains at 18%, which I find surprising given the imminent arrival of the 50% top rate of tax. This will surely increase demand for fairly cautious capital growth investments from top rate taxpayers eager to take advantage of the diferential.

Annual Investment Allowance

The Annual Investment Allowance will double to £100,000. This is good news for business owners, as it increases the amount of capital expenditure they can offset against tax in the year spent rather than over a period of years via the capital allowances system.

Entrepreneur’s Relief

Business owners will also welcome the doubling of the entrepreneur’s relief allowance to £2 million, whereby gains are subject to a capital gains rate of 10% and not the usual 18%.

Savings Gateway

Savings Gateway accounts will be introduced in July 2010 for those in work on low incomes. For every £1 they save over a two year period the Government will add 50p at maturity. This is an excellent idea to get those on low incomes into the savings habit, assuming they can afford to.

Basic Bank Accounts

The Government plans to give everyone the opportunity of opening a basic bank account. While I hope encouraging more people to open a bank account will also encourage greater financial responsibility, I fear more bank accounts will simply mean more marketing opportunities for the banks to saddle customers with expensive and potentially unaffordable debt.

Alcohol & Cigarettes

Duty on alcohol is rising by 2% above inflation on 29 March 2010, adding 2p to price of a pint of beer, 10p to a bottle of wine and 36p to a bottle of spirits. Cider drinkers are the hardest hit, with a 10% rise above inflation adding 9p to a 75cl bottle of sparkling cider. The duty on a pack of 20 cigarettes is rising by 15p today.

Fuel

A fuel duty increase of 2.76p per litre on 1 April 2010 will be spread over three instalments: 1p on 1 April 2010, 1p on 1 October 2010 and 0.76p on 1 January 2011.

Air Passenger Duty

Bad news for frequent flyers as Air Passenger Duty will rise across the board from 1 November 2010. The lowest rate of £11 will rise to £12, while the highest rate of £110 will rise to £170.

All in all it’s a fairly muted Budget. Any bad news for the majority, of which I’m sure there’ll be plenty, is obviously being stored up until after the election.

Read this article at http://www.candidmoney.com/articles/article82.aspx

Inflation - where next?

While inflation is lower than the 21.9% we saw in 1980 and 10.9% in 1990, CPI remains well ahead of the Government’s 2% target and is around double the EU average. Which direction will it move next?.

Inflation data released today shows that prices rose by an average of 3% over the year to end of February 2010 (Consumer Price Index – CPI) or 3.7% if housing costs are also included (Retail Price Index – RPI).

While inflation is lower than the 21.9% we saw in 1980 and 10.9% in 1990, CPI remains well ahead of the Government’s 2% target and is around double the EU average.

Why does inflation matter?

It’s important because rising prices mean £1 will buy fewer goods and services in future than it can today. So the ‘purchasing power’ of earnings, savings and investments will fall unless they at least keep pace with inflation. Conversely, inflation is good news for borrowers; if prices double over the next 20 years then a £100,000 mortgage will effectively halve in ‘real’ terms to £50,000.

High inflation can also be bad news for an economy. It makes long-term corporate decisions, such as whether to build a new factory, harder which tends to reduce investment and slow economic growth.

What’s causing inflation?

The biggest contributor by far over the last year has been transport costs, largely driven by rising oil prices. Other contributors include tobacco and household goods, while the 1 January VAT rise has affected costs more or less across the board.

What might affect future inflation?

Oil price movements will likely continue to play a big role. A weak pound pushes up the price of imports, so currency movements could also make a big difference. On the other hand unemployment has been rising, so when the economy does pick up labour costs are less likely to rise (it’s harder to get a pay rise when there’s lots of competition for jobs).

Is my own inflation different?

Very likely, inflation figures are calculated using a notional ‘basket’ of goods and services and you’re unlikely to buy the same ones in the same proportion. For example, if you travel extensively you’ve probably been hit far harder by rising prices than someone who doesn’t. You can estimate how inflation affects you using the ONS personal inflation calculator ONS personal inflation calculator.

Perhaps the most interesting (and maybe worrying) thing at the moment is just how mixed views on where inflation will go next are.

What does the Bank of England say?

The Bank of England prediction seems to be CPI inflation of significantly above 2% in the ‘near term’, but eventually falling below 2% once the impact of the VAT rise and weak pound wane.

What the experts say

Fidelity Investments has gathered the opinions of several leading fund managers as follows:

Neil Woodford, Head of Investment at Invesco: "My view at the moment is we will see a pick-up in inflation. There are a number of factors that will automatically move inflation up in the early part of 2010. However, I believe the greater challenge is in medium term deflation. I think this inflation will subside and the underlying economy will not create the circumstances where that short-term blip in RPI will be reflected in structurally higher inflation in the economy."

Trevor Greetham, Director of Asset Allocation at Fidelity International: "The outlook for equities in 2010 is much better than we have seen in quite a few years. We have seen a pickup in global growth lead indicators coming at a time when there is quite substantial spare capacity in the economy. So any upturn in inflation ought to be fairly limited, policy should stay loose, and this combination of strengthening growth and loose policy means this is generally a good stage in the economy for stocks."

Richard Woolnough, Fund Manager at M&G: "In the short term there will be an inflation blip but in the long term we are very much in low deflation for a long time, but that's good deflation not bad deflation. As long as you believe free trade is going to be good, as long as you believe in technology improvements and competition, then over time it is a deflationary world, not an inflationary world. Compared to other bond fund managers we are quite relaxed about the inflation outlook, we do not think it is going to be a threat to bonds or to equities."

Hugh Young, Managing Director at Aberdeen Asset Management Asia: "Looking at Asia and emerging markets, central banks are starting to talk about the prospects of inflation. We have seen measures taken by Australia who were early off the blocks, bumping interest rates up to combat potential inflation. At the same time, we have got certain countries like Japan that are still in a deflationary mode. Things could go either way at the moment but I think we are more concerned about inflation rather than deflation."

Evy Hambro, Co-head of BlackRock Natural Resources Team and Fund Manager, BlackRock Gold & General fund: "A lot of it comes down to what governments are going to do with their fiscal plans, especially in the developed world. If governments resist temptation to bring these plans to an end early, my guess would be that inflation is going to be a greater threat than deflation. It really depends on what governments do with their plans that were designed to restart the global economy."

Conclusion

So the consensus, if there is one, seems to be higher inflation now but lower, or even negative inflation (deflation) in future. Deflation is no bad thing if it’s simply the result of companies increasing efficiency to cut costs (ignoring the moral issues of outsourcing to cheap third world labour), but if it’s due to prices falling in response to economic decline and us all spending too little it can become a big problem and stifle growth – Japan being a prime example.

Read this article at http://www.candidmoney.com/articles/article81.aspx

Incredulous commissions

I almost choked on my tea when I discovered an investment company was paying 9% commission to advisers. Why on earth would they do this?.

If you’re an investment company trying to sell product, how would you go about it? The obvious answer is to build as good a product as possible, which should more or less sell itself. The other, simpler, route is to pay higher than average commission to independent financial advisers (IFAs).

While some commission based advisers do the right thing and only recommend what’s best for their clients, there’ll always be others who can’t resist the lure of high commission and compromise advice in favour of profit (for them that is, not necessarily their clients).

Thankfully the commission levels on unit trusts are pretty much standardised at 3% initially then 0.5% ‘trail’ a year (if your adviser ever recommends a fund where commission is higher than this be very wary).

Insurance company investments (e.g. investment bonds and endowments) tend to pay more than this, probably because few people would bother buying them if advisers didn’t push them – so insurers need to offer higher commissions than unit trusts to tempt advisers to sell.

But sometimes a product comes along paying commission levels that beggar belief. The Sterling Mortimer No 9 UK Land Fund 2 offers IFAs up to 9% commission, nearly a tenth of the investment! It’s a specialist fund that aims to buy land with planning consent at a discount and aims to raise £100 million. It’s not an investment I’ve looked into, but the offer of 9% commission tells me all I need to know. Any investment worth its salt doesn’t need to pay commission above typical unit trust levels, and if your adviser recommends this fund it’s probably time to find a new adviser.

Remember, however an adviser might try and dress it up, commission ultimately comes out of your pocket. Commission based advisers must disclose how much commission they’ll earn before completing a sale, so always check and don’t be afraid to walk away. Even better, use a fee based adviser that charges either fair hourly fees or a fixed amount.

And next time an adviser does give you the hard sell on an investment; ask for proof that they’ve invested their own money. After all, if it’s so good why wouldn’t they?

You can view the typical commission levels paid on financial products towards the bottom of most pages in the investment, retirement and protection sections on this site.

Read this article at http://www.candidmoney.com/articles/article80.aspx

ISAs, dog insurance & banking

It's been a week where I've: endured lots of chat about ISAs, been puzzled by the Government's dog insurance proposals and remembered how my bank once ripped me off..

The ISA Season

‘Tis the season of incomprehensible communications from the Inland Revenue and feverish promotion of ISAs for this tax year and next. Being ex-financial services - which I am - and spending far too much time on the golf course – which I do – I am frequently dragged into conversations about investments.

“I’ve got an ISA” says my partner or opponent. “What’s it invested in?” I reply. I then get a blank look, followed by “I told you, it’s an ISA.”

One of the golden rules of investing is never to make decisions based purely on tax grounds. It is clear to me that people have bought ISAs because it’s daft not to buy ISAs, but have given precious little thought to what they have put their money into.

My first bit of advice would be to make sure you are happy with the allocation of your assets, and then address the question of how you can best mitigate your tax liability. My second bit would be that you shouldn’t be surprised to find that the rules have changed – again.

More or less the same investment can be held directly in an Investment Bond (which is actually a single premium life policy), an ISA or a pension arrangement. Guess what: the tax rules are all different. This makes no sense at all, but don’t waste time looking for the political party that wants to simplify it all, because sadly there isn’t one.

Woof woof

The proposal to require dog owners to take out third party insurance came and went in a week. I really cannot understand why the Government ever thought it was a good idea, or why the Civil Service didn’t bury it before it saw the light of day.

I read somewhere that there are seven million dogs in the UK, though heaven alone knows where that number came from. If my premiums for Sophie are anything to go by, compulsion would have netted somewhere in the region of £17.5m insurance premium tax for that nice Mr Darling.

If only. Vast numbers of people would simply have ignored the requirement. Local Authorities would have been called on to enforce it, and given the pressures they are under right now they would have ignored it as well.

What goes around

Twenty years ago Barclays Bank made me a ‘Premier’ customer. I got a different cheque book, with an upmarket plastic cover. I also got a relationship manager, who came to see me, and introduced me to a nice man from Barclays IFA arm, BISCO. I had just come out of a wound up pension scheme, and the nice man from BISCO put all my loot into a with profits policy with GRE.

Before long the relationship manager disappeared, Barclays shut down BISCO, GRE went to pot, I went into financial services and quickly realised that I’d been sold a pup.

I drag this story up only because through the post this very morning my wife had a mailing from HSBC offering more or less what Barclays offered twenty years ago, right down to the ‘Premier’ name, but minus the plastic cover for the cheque book.

The clearing banks have never made relationship management work on a big scale. Why? Because maintaining relationships is costly, and the competition for the attention of the relatively limited number of people from whom it is possible to make a profit is intense.

Will HSBC pull it off?

Read this article at http://www.candidmoney.com/articles/article79.aspx

Who knows best?

There’s often quite a divergence between private and professional fund investors in terms of what they’re buying and selling – which prompts the question, who knows best?.

Every month I take a look at the unit trust sales figures published by the Investment Management Association to see what’s selling and what’s not. The figures that interest me most are the net sales (i.e. new money less redemptions) in each sector for both retail and institutional investors.

Retail investors are private investors like you and I who either buy direct or via advisers and discount brokers, while institutional investors are the investment managers who run the likes of pension funds and funds of funds.

Why do I like these particular figures? Well, it’s like comparing amateurs with the professionals and there’s often quite a divergence between the two in terms of what they’re buying and selling – which prompts the question, who knows best?

The latest figures, for January, particularly caught my eye as there was such a big difference of opinion re: UK (investment grade) corporate bonds. It was the biggest selling institutional sector taking £1.3 billion net, yet it was also the worst selling retail sector with £228 million of net redemptions.

So the professionals couldn’t get enough of UK corporate bonds while the amateurs sold them like they were going out of fashion.

Perhaps the professionals were taking 2009’s profits on stockmarket funds and investing the proceeds in bonds as they’re worried about the outlook for stockmarkets. And maybe the amateurs, having enjoyed a good run on bonds, are selling out at what they believe to be the top of the market. You could make a convincing argument for both at the moment depending on which way the economy swings, which is why I’m fairly comfortable sitting tight on modest bond exposure for the time being.

As for other sectors institutional investors sold heavily out of global emerging markets with £113 million net redemptions whereas retail investors bought £78 million. And UK strategic bond funds (which include high yield bonds) were the second highest retail seller at £284 million whereas institutional investors sold to the tune of £29 million.

However the amateurs and professionals do seem to agree on two sectors, the UK stockmarket and commercial property. Both sold heavily out of the UK all companies sector and bought into commercial property, although retail investors favoured property rather more.

In the past the professionals generally seem to have had the upper hand in making what turn out to be good investment decisions, although they’ve made their fair share of mistakes. Will they be right this time? I suppose only time will tell who really did know (or guess) best on this occasion.

A final thought. If you accept that the professionals get it right more often than the amateurs, then would private investors do better to follow the professionals rather than make their own decisions?

Please post a comment below if you have views either way.

(If you’re interested, the most and least popular sectors are updated each month on the unit trust page).

Read this article at http://www.candidmoney.com/articles/article78.aspx

Tax-free gambling on shares?

Question
I understand that income taxes do not apply to gambling winnings, so can I bet on stocks and shares?Answer
Gambling winnings are free from both income and capital gains tax in the UK – a welcome bonus if you win the lottery or on the horses.

Although it might seem like a gamble, buying shares doesn’t qualify as gambling for tax purposes (because you own an asset). To save tax you need to consider using your capital gains tax allowance or perhaps hold them in an individual savings account (ISA), which keeps the taxman’s hands off income and gains. But you’ll still pay 0.5% stamp duty on purchases and only higher rate taxpayers save tax on dividends within an ISA.

However it is possible to gamble on share price movements tax-free by spread-betting, which involves betting a fixed amount per point that the share price moves (you can choose up or down).

For example, suppose shares in Company X are trading at 100p and you place a spread bet of £10 per 1p (or ‘point’) that the share price rises. If the share price rises to 110p then you’ll make £100 profit, but if the price falls to 90p you’ll lose £100. The spread betting company will require you to put down an initial deposit (or ‘margin’) of around £50 in this example, but start losing money (even on paper) and this could increase.

As this simple example shows, both the risks and rewards can be high. On an initial £50 stake a 10% rise in the share price could generate £100 of spread betting profit, versus just £5 had you bought the shares. But, unlike buying shares, you can lose a lot more than your initial stake when spread betting. Mike Ashley, the Sports Direct founder and owner of Newcastle FC famously lost £300 million in 2008 when a spread bet on the HBOS share price backfired.

Because shares have a difference (or ‘spread’) between their buying and selling price, this is reflected by the prices used by spread betting companies, in fact they usually add their own small margin too. So in our example Company X’s share bid price might be 99p and the offer price 101p, rising to 109p and 111p when you close the bet. Your gain would be 109p – 101p x £10, i.e. £80.

Spread betting is a very efficient way to play stockmarkets and other investments such as commodities. There’s neither tax on profits nor any stamp duty, plus you can bet on either rising or falling prices. However, there is considerable risk, especially on larger bets per point of movement, so it’s not for the faint-hearted.

Read this Q and A at http://www.candidmoney.com/questions/question90.aspx

Don't rush into a mistake!

As 5 April looms we’re reaching that time of year when money floods into tax breaks such as pensions and individual savings accounts (ISAs). Taking advantage of tax benefits before the end of tax year may well be sensible, but making a rushed purchase could prove a costly mistake..

As there’s nothing like an enforced deadline to close a sale, this time of year leaves you especially at risk from unscrupulous financial advisers as there’s less time than usual to find a good adviser you can trust. And, if you're making your own decisions time is running out to make an informed choice.

If you don’t already use a trusted adviser and are unsure what to do then how can you avoid a costly last minute mistake? I think there are two key considerations:

1. Will you miss out by not using this year's tax breaks?

Ask yourself whether missing out on this year’s allowances will leave you worse off? If not then making a more informed decision next tax year could make sense, provided the Chancellor doesn’t introduce any nasty surprises in his Budget next week (24 March).

ISAs

Skipping this year’s ISA allowance makes little difference if you’re not planning to invest more than £10,200 (£5,100 in cash ISAs) in total over this tax year and next. Just invest after 5 April.

Pensions

It’s rare for pension contributions to reach anywhere near the allowed annual limit (in general, your earnings) so you may not lose out by delaying. However, those at risk of losing out include non-taxpayers benefitting from 20% tax relief on pension contributions of up to £3,600 gross, and higher rate taxpayers who could have to wait up to a year longer to reclaim the additional tax relief.

Venture Capital Trusts (VCTs) & Enterprise Investment Schemes (EIS)

Inappropriate for the vast majority of investors anyway. Missing your allowance is unlikely to matter unless you’re hell bent on maximising the 30% VCT income tax rebate this year and next or desperately wish to defer some capital gains using an EIS – although both could be Budget targets.

2. Invest carefully and, if in doubt, choose the safest option for now

If it does make sense to invest now but you’re unsure what to do and can’t find a good adviser in time, consider harnessing the allowances in as safe a way as possible with the option to make straightforward adjustments later on.

ISAs

If you want to invest in a stocks & shares ISA but are contributing no more than £3,600 (£5,100 if aged 50 or over), you could use an easy access cash ISA - giving the option to transfer across to a stocks & shares ISA in future when you’ve made up your mind.

Or, if you want to invest more, consider using a fund supermarket or stockbroker that offers a short term cash option within its stocks & shares ISA. For example: FundsNetwork has an ‘ISA Cash Park’ and Cofunds a ‘Cash Reserve’. Don’t expect much interest and what is paid will be taxed at 20%, but it bides you a month or two to decide where to invest.

Pension

If you don’t have an occupational pension and are not sure what to choose then you probably won’t go far wrong with one of the better stakeholder pensions, such as Legal & General or Scottish Widows. Charges are low and you’re not tied into making any future contributions. Plus, you won’t be penalised for transferring elsewhere later on if you decide another pension is better for you. Again, if you don’t want to rush an investment decision then choose a cash option within the pension for now.

Good luck whatever you decide and remember you can always ask me questions here.

Useful links

Read our end of tax year checklist to find out which tax benefits and allowances you might benefit from using by 5 April.

Find out more about ISAs here

Find out more about Pensions here

Find out more about VCTs & EISs here

Read this article at http://www.candidmoney.com/articles/article77.aspx

Sippdeal e-sipp any good?

If pension investment choice is important to you then a self-invested personal pension (SIPP) might be of interest. Unlike stakeholder pensions, which are usually limited to a handful of investment funds, SIPPs allow you hold eligible investments from across the marketplace.

The Sippdeal e-sipp provides access to most eligible shares, gilts, corporate bonds, ETFs and investment trusts, as well as around 1,800 funds, which should prove ample choice for most investors. The bottom line is therefore charges.

There are no fees to open an e-sipp nor any annual administration fees, plus you can stop and start contributions as you wish without penalty.

When you buy investments within the e-sipp you’ll pay a fixed £9.95 dealing fee for online deals, rising to £29.95 if you prefer to deal by phone. The online dealing fee is competitive for shares, but unlike most competitors it applies to funds too, which is disappointing. The dealing fee also makes regular monthly contributions uneconomic unless you’re investing upwards of £1,000.

Aside from the £9.95 dealing fee the initial charge on most funds is zero, although Sippdeal pockets any trail commission meaning you’ll pay standard annual fund charges.

If you want to hold cash in your pension you’ll need to use the provided SIPP cash account, which (at the time of writing) pays miserly interest rates of between 0.05% - 0.10%. Profitable for Sippdeal but not customers!

When the time comes to buy an annuity you’ll be charged £125* or, if you choose to draw an income instead (i.e. take an unsecured pension) you’ll pay £150* initially and £75* annually, plus a further £75* every time you review income levels. Transferring the pension to another provider will set you back £75* plus £20 per holding unless first converted to cash (* Plus VAT).

All in all the charges are reasonable versus competitors if you invest lump sums. It’s not the cheapest for funds due to the extra dealing charge, but if you’re contributing thousands of pounds and hold shares too it’s unlikely to be a deal breaker.

The Sippdeal e-sipp is a good value low cost SIPP and an excellent choice if you don’t wish to contribute monthly, hold cash or only invest in funds. If the latter then the Hargreaves Lansdown Vantage SIPP is likely to prove cheaper, while Interactive Investor will probably be better value for regular share investing despite an annual SIPP fee.

Read the full review at http://www.candidmoney.com/candidreviews/review19.aspx

Credit card changes

The Government has announced changes to credit card charges that it reckons will save consumers nearly £300 million a year. What are they and will they work?.

Personal debt in the UK is alarmingly high; estimates suggest the average Brit has unsecured debts of more than double the European average.

Credit cards are the worst culprit. According to British Bankers’ Association figures two thirds of the 34 million credit cards in active use incur interest and the average balance is around £1,850.

Good news then that the Government (which has major debt problems of its own!) has today announced five new measures that it believes will save credit card users £296 million a year:

1. Repayments will count against the highest rate debt first. And on new accounts the minimum monthly payment must cover at least interest, fees and charges, plus one per cent of the principal to encourage better repayment practice – so likely higher than current levels.


2. Customers will have the right to reject future credit limit increases and may also reduce their limit at any time.


3. The notice period for interest rate rises will double from 30 to 60 days. During this time consumers can reject the rise by closing the account and repaying the balance at the current rate.


4. Customers at risk of financial difficulties will be given guidance on the consequences of paying back too little.


5. Customers must receive an annual statement that allows for easy cost comparison with other providers.

These new measures will come into force on 1 February 2011, although lenders are encouraged to adopt them as soon as possible.

Will they make a difference? A little, hopefully, but the main problem remains a combination of irresponsible borrowing in the first place and financial hardship, the latter exacerbated by the economic downturn – personal insolvencies during 2009 were 25% higher than 2008 (roughly 1 in every 320 adults). I think it’ll take a lot of financial education and improved economic fortunes to solve these issues.

The other notable announcement is that from June 2010 everyone will be able to access their credit report online (via the 3 mains agencies) for a maximum of £2. At the moment the service is only available via post (unless you pay a small fortune for a ‘premium’ service).

Useful credit card calculators on this site include:

Credit Card Minimum Payment - How long will it take you to clear your balance making just the minimum monthly payment.

Credit Card Interest - How much interest might you end up paying on your credit card?

Read this article at http://www.candidmoney.com/articles/article76.aspx

Long gilt pension?

Question
I am 58 and have a lifestyle pension (paidup) with Aegon. They have switched this into long gilts and more stable funds preparing for my retirement at 65.

They have stated they do not have a fact sheet showing what monies are in what funds etc but Aegon long gilt fact sheet states it is a low risk to other funds but more sensitive to market fluctuations?

I do not understand this aspect and feel that I should be in a more aggressive fund for some years yet.
Can you please shed some light.Answer
A long gilt fund invests in UK government gilts with maturity dates of at least 15 years away. To help explain why they’re more sensitive to market movements than gilts maturing sooner, let’s look at what affects their value.

The value of fixed interest investments, such as gilts and corporate bonds, tends to be most influenced by interest rates, inflation and the likelihood the borrower will repay your interest and loan at maturity.

Rising interest rates are bad news because gilts, which pay a fixed rate of interest, will look less attractive by comparison. Rising inflation is also bad news because it means future income payments and your loan, when returned at maturity, will buy increasingly less in future compared to today. In both cases you’d want to pay less for the gilt, pushing down its price.

Timescale matters too; the longer the period to maturity, the greater the impact of interest rate and inflationary changes. Suppose you own two gilts, one maturing next year and the other in 20 years. If interest rates rise then you’ll lose out on the one year gilt, but at least you’ll get your money back next year allowing you to earn higher interest elsewhere. Whereas you’re stuck with the other gilt and could continue losing out for another 20 years – therefore its price will fall by more. The scenario would be similar for inflation too.

[note: the amount of income paid by the gilt matters too (forms part of a measure called ‘duration’ that predicts a bond’s sensitivity to interest rate changes), but I’ve ignored here to keep the example simple].

Actual performance over the past year reflects this. The Aegon (Scottish Equitable) Long Gilt fund fell by around 8%, largely due to fears over rising inflation/interest rates and the Government’s soaring debts, whereas short gilt funds fell by around 1%.

The reason insurers tend to suggest long gilt funds when you’re approaching retirement is that in theory they help protect your annuity purchase as they buy long dated gilts to pay annuity income. If gilts fall in price then while your pension fund will suffer you should get a better annuity rate to compensate (and vice-versa).

Is this too conservative given you’re still seven years from retirement? There’s no right or wrong answer, it really depends on how much risk you’re comfortable taking. If you don’t mind volatility and have other sources of income that might allow you to delay taking the pension beyond age 65 (if markets are unfavourable at that time) then by all means consider more adventurous investments such as corporate bonds, property and global stockmarkets. Nevertheless, in these very uncertain times I wouldn’t try to be overly speculative and it would still make sense to move progressively towards cash and gilts as you near 65.

Read this Q and A at http://www.candidmoney.com/questions/question161.aspx

The pension cash catch

You may not pay much notice to pension cash accounts. But if you're nervous about markets or approaching retirement they should form the backbone of your pension fund. Yet, based on current rates, they'll almost certainly lose you money.

If you have a money purchase pension (whether occupational, stakeholder or sipp) you’re bound, at some point, to want to hold cash.

When it’s only a small amount for a short period then the rate of interest paid is fairly inconsequential. But hold a large sum for more than a few weeks, perhaps as you approach retirement, and the rate you earn could make a difference of hundreds or even thousands of pounds.

With the Bank of England Base Rate at 0.5% you wouldn’t expect cash in a pension fund to be earning much at the moment. But, given some conventional saving accounts currently pay up to 3% a year, you might expect say, 1% or 2%?

Wrong. Try almost zero, because if you own a low cost self-invested personal pension (sipp), which usually ties you to a single bank account, then that’s what you’ll probably earn. The pension providers must be laughing all the way to the bank, literally.

Sipp Cash Account Annual Interest Rates

Sipp Provider	Rate on £10,000	Rate on £50,000
James Hay	0.00001%	0.00001%
Sippdeal	0.05%	0.10%
Cofunds	0.10%	0.10%
Hargreaves Lansdown	0.10%	0.25%
Fundsnetwork	0.65%	0.65%

Rates correct as of 12 March 2010

If you’re paying higher charges for a fully flexible sipp then you can probably choose whichever eligible bank account you fancy, for example the Investec Pension and Trust Reserve Account paying 1.98% (1 month notice, minimum £25,000), but then sipp charges might outweigh interest earned.

Alternatively you could invest in cash funds, which aim to mimic a savings account but are arguably less safe - Threadneedle, Standard Life and Prudential cash funds all lost money during the 2008 banking crisis. A typical cash fund currently yields around 0.4% after charges, better than most sipp bank accounts but not by much.

If you have a stakeholder or conventional personal pension then one of these funds will likely be your only cash option, meaning at current rates you’ll probably lose money after paying typical annual pension charges.

So, whichever route you take, it looks like holding cash in your pension will currently lose you money. Any clever solutions? I can’t think of any. The best I can come up with is to hold relatively cautious investments instead and keep your fingers crossed – not very satisfactory if you’re a year away from retirement.

If anyone has any bright ideas please post them below. I’m sure some readers could benefit!

Read this article at http://www.candidmoney.com/articles/article74.aspx

Tax changes for 2010/11

The new tax year, starting 6 April, brings a mix of some fairly major changes along with no changes at all where you’d normally expect them. Will they affect you?.

To help you find out whether and how you might be affected, I’ve taken a look at the main areas to see what you can expect.

Income Tax Personal Allowances – frozen, but will reduce over £100,000

Personal allowances will be frozen at current levels (£6,475 for those under 65) rather than benefitting from the usual inflation-linked increase, as will income tax bands.

However, a new rule means your personal allowance will reduce by £1 for every £2 of income you earn above £100,000. So (assuming you’re under 65) if your income exceeds £112,950 you’ll lose your entire personal allowance, effectively increasing your annual tax bill by £2,590 if you’re a 40% taxpayer or £3,237 if you pay 50%.

50% Income Tax

A new 50% tax rate will apply to income over £150,000 – estimated to affect the top 1% of earners. Such earners will also have to pay 42.5% tax on dividend income, equivalent to an extra 36.11% on dividends they receive (rather than the extra 25% paid by 40% taxpayers).

The State Pension - £2.38 weekly increase, qualifying years reduce to 30

The basic state pension for a single person is due to rise by £2.38 to £97.63 per week and by £3.80 to £156.10 for married couples. However, additional state pension elements such as SERPS/S2P are due to be frozen.

If you’re a woman then the age at which you’re entitled to a state pension is gradually increasing from 60 to 65 between 6 April 2010 and 6 April 2020. You can use the DirectGov State Pension Calculator to find out your exact retirement date.

On a brighter note, you’ll only need 30 qualifying years of national insurance contributions to get a full basic state pension – it’s currently 44 years for men and 39 for women.

Retirement Age Increase – from age 50 to 55

The minimum age at which you can take a pension will rise from 50 to 55. This means if you’re aged between 50 and 54 and want to take your pension before you reach age 55 you’ll need to do so before 6 April 2010. As this is rarely an instant process you’ll need to get a move on.

ISA Allowances – increasing to £10,200 for everyone

The annual Individual Savings Account (ISA) allowance will increase from £7,200 to £10,200 for everyone eligible to contribute into an ISA – currently the higher allowance is only available to those aged 50 and over. Up to half of the £10,200 ISA allowance (i.e. £5,100) may be held in a cash ISA with any unused balance (up to £10,200) available for a stocks & shares ISA.

Car Tax – free/more expensive tax discs for first year on new cars

If you buy a new car from 6 April 2010 you’ll have to pay a different rate of tax for your first year’s tax disc. Buy a low emission car (less than 131 CO2 g/km) and it’s free, but buy a big polluter (more than 255 CO2 g/km) and it’ll cost you £955 – full details on the Direct Gov website.

The cost of standard tax discs is also changing, becoming a little cheaper for lower polluters and more expensive for higher polluters.

Pension contributions – reminder if you earn above £130,000

No change to the rules, but a reminder if your annual taxable income has exceeded £150,000 (£130,000 from 9 December 2009) since April 2007:

If you increase existing regular (i.e. monthly/quarterly) pension contributions and annual contributions exceed £20,000 then you'll have to pay tax on the excess to remove the benefit of higher rate tax relief.

If you make ad-hoc pension contributions, then your higher rate tax relief is limited to the lower of your average annual contribution over the three years to April 2009 and £30,000. Any excess is again taxed to reduce the tax relief to basic rate.

Anything else?

The inheritance tax nil rate band will be frozen at £325,000, as will the annual capital gains tax allowance at £10,100.

National insurance band and rates will be frozen with the exception of a £2 increase to the lower limit (currently £95) at which the Government credits NI contributions to low earners as if they had been paid.

Benefits such as Working Tax Credits, Child Tax Credits and Child Benefit are generally increasing.

Of course, there may be further changes in the 2010 Budget, expected sometime this month – I’ll update the site as soon as we know what they are.

Read this article at http://www.candidmoney.com/articles/article73.aspx

Do gains affect my age allowance?

Question
Is a Capital Gain classed as income for purposes of age allowance? And If I turn 65 half-way through the tax year, at what point do I qualify for the increased allowance i.e. at the beginning, end or pro-rata?Answer
Good news on both fronts. Capital gains are not classed as income so they don’t affect your age-related income tax allowance. Plus the increased allowance applies for the whole tax year in which you celebrate your 65th birthday. So, for example, even if you turn 65 on 5 April 2010 you’ll enjoy the higher allowance for the whole tax year running from 6 April 2009 to 5 April 2010. It’s always worth checking with your tax office before you reach 65 to ensure they know your date of birth, so that the additional allowance is applied correctly.

There’s a change affecting the seriously wealthy from 6 April this year. If you earn above £100,000 then your personal income tax allowance will reduce by £1 for every £2 of income above the £100,000 limit. This means that for a few people above 65, not only would they lose their additional age-related allowance, but the allowance could be wiped out entirely. Mind you, I doubt those earning over £100,000 in retirement are overly worried!

Read this Q and A at http://www.candidmoney.com/questions/question158.aspx

Why aren't IFAs revolting?

Question
Why aren't IFAs revolting?

As I understand it the FSCS is funded by a levy on financial advisors (amongst others?) and the FSCS covers investments regulated by the FSA. Despite employing 3,300 people at a cost of £450,000,000 the FSA has failed to prevent many failures and frauds which have have caused billions to be paid in compensation by the FSCS.

So IFAs foot the bill but do not have a say in the regulation. Why do they put up with such an unjust system? If they are to pay the compensation surely they should be running the regulation.Answer
Based on recent questions there’s no shortage of people who find financial advisers revolting!

But, joking aside, a large number of IFAs probably feel hard done by at the moment. The ballooning costs of running the Financial Services Authority (FSA) and paying compensation via the Financial Services Compensation Scheme (FSCS) have led to increases in the levies that IFAs have to stump up as their share of the overall cost.

And it’s the FSCS levies that are especially contentious at present. The FSCS wants to charge ‘investment intermediaries’ (which includes IFAs) £70 million to cover claims relating to the demise of structured products provider/administrator Keydata and a couple of stockbrokers. That the FSA is categorising Keydata as an investment intermediary and not a product provider doesn’t make much sense to me. There are technical reasons why they might, but common sense says it’s wrong. I think it’s also fair to criticise the FSA for not spotting and subsequently nipping problems such as Keydata in the bud.

However, IFAs are not blameless. As an industry they’ve done plenty of things over the years that haven’t been in consumers’ best interests, incurring the wrath of both the FSA and customers. Plus it’s up to an IFA to carry out sufficient due diligence before recommending a product to clients (the Arch Cru funds fiasco being a good example – Keydata possibly less so as fraud is sometimes hard to foresee).

I think a lot of IFAs are up in arms and keen to revolt against this recent levy, but they lack a single representative with the necessary clout to make a difference. The closest is the Association of IFAs (AIFA), but in my view their voice probably isn’t strong enough to really change much. And, let’s face it, if you’re a good, honest, successful IFA why would you want to join a trade body that might also represent the interests of less salubrious advisers in the industry?

The whole situation is a shame as putting IFAs under increased financial pressure is really in no-one’s best interests – if the trend persists it could drive good ones out of the sector and motivate dishonest ones to make up the shortfall via excessive commissions or fees.

I don’t think I’d want to see IFAs running the FSA, but I share your view that the FSA should put its hands up and share some of the blame and, perhaps, financial pain. It's a travesty that government bodies are rarely held to account – at least in any way that makes a tangible difference.

Read this Q and A at http://www.candidmoney.com/questions/question157.aspx

Fed up of IFAs

Question
I'm fed up with being ripped off by IFA's since being widowed 7 years ago. Realised its happened twice now.

I was interested to hear about Bestinvest. Are they a fund/investment management company themselves or not?

I'm trying to get my head around the different types of companies within the industry to understand who I'd be paying money to and for what?

I'm considering using them pending a reply to an email I've sent to them, but am not sure if they'll only advise on their own investments? Can they also do insurance products etc and full range of tax wrappers?Answer
I’m sorry to hear about your bad experiences. While they’re not representative of all IFAs, I fear far too many people are still not getting the advice, value and service they deserve.

The good news is that provided you keep your eyes open and know what to look out for, it’s fairly easy to spot when a financial adviser (or product provider) is trying to take you for a ride – allowing you to walk away. Raising awareness of these issues is my main motivation behind running this site.

You should find our financial advice page helpful in explaining the difference between different types of advisers, but a quick summary below:

• Independent financial advisers (IFAs) – can recommend products from the whole of the market. They must offer a fee option, although many still offer commission as their default option. If fees, they might charge a percentage or hourly rate.
• Tied advisers – can only recommend products from one company.
• Multi-tied advisers – can only recommend products from a selected range of companies.
• Discount brokers – generally offer no advice but can transact most products in the marketplace and refund some of the commissions they receive.
• Product providers – the companies that run the financial products offered by advisers, e.g. unit trust managers and insurance companies. Their products will incorporate fees and quite possibly sales commissions. But although they might also offer their products for sale direct to the public, the cost is likely to be the same as buying via an adviser.

Bestinvest is an IFA but also offers discount broking amongst its services and is unique in offering full initial commission rebates with independent advice on fund portfolios of £50,000+, paid for by trail commissions. I think this advice tends to be restricted to fund investments (e.g. it wouldn’t include protection or inheritance tax advice) although it probably does include advice on fund investments held in pension and investment bond wrappers. I’m sure they’ll clarify when replying to your email. Bestinvest does run its own funds of funds, but also offers access to other funds in the marketplace. The latter is probably a better deal if you get advice as it'll be cheaper (lower overall annual fund charges).

Alternatively, consider using a fee-based IFA who charges an hourly rate or, if the sums involved are modest, a percentage-fee. You might have to speak to several before finding one that you feel you can trust and offers value for money, but it’s worth taking the time to find a good one. You certainly don’t want to get ripped-off again and a good IFA who charges a fair fee and looks after you long term can be worth their weight in gold.

Read this Q and A at http://www.candidmoney.com/questions/question156.aspx

£30k commission for advice?

Question
This is more prehaps a comment and a request for you to write an article rather than a question. Like you I am concerned about paying the correct amount for the same advice but your recent articles on paying for advice, trail commission etc etc tend to concentrate on UT's/OEICS rather than Life Products where the differences can be somewhat starker and your article on FA's who get paid too much struck a chord.

We recently looked at a particular vehicle to take steps to protect a substantial amount of a family members capital from IHT. We saw both a tied and an IFA. One was going to charge a commmssion of c£30k which was no negotiable, the other would rebate 2/3rds of the commission back into the investment. Also the latter had access to a wider pool of investment opportunities. The advice offered and given was the same, the big difference was in their personal skills and the personality of the individuals involved and how they came across.

To me its a no brainer, but its the family members' capital and their choice. This is not dishonest, but it serves to illustrate prehaps that there are some people out there who whilst giving good advice are raking it in and preying on a certain type of person. I would certainly have to ask why, if they do have such good personal skills, are they joining a tied company but your FA article gives the answer and I also beleive the parent company takes ownership of the 'FSA red tape' issues. I only wish they were more transparent about where such a large amount of commission is going as it certainly isnt all going to the adviser as if an IFA can give the same service for 1/3rd the cost so can they!!!Answer
Interesting comments which highlight a very important point – the reason some financial advisers can ‘get away’ with earning sky high commissions is because of their personality. Someone with a strong, likeable, personality is more likely to be able to pull the wool over a customer’s eyes than someone who’s rather dull. It doesn’t mean you should use them though. And in my experience that likeable personality might well turn to indifference once they’ve completed the sale and pocketed the commission (it’s not just financial advisers, the same is true of all sales-based professions).

As for commissions, £30,000 is simply ridiculous. It’s exceptionally rare that any financial advice should cost more than a few thousand pounds in the hands of a fair, fee-based adviser. Advisers tend to argue that the higher the sum involved, the greater their potential liability if things go wrong and they end up having to pay fines or compensation – so they should charge more. While there’s some justification for this, if an adviser provides good, robust, advice then the likelihood of incurring future liabilities should be small. While I think it’s fair to charge a modest risk premium on larger sums, there’s no way that fixed prorated remuneration such as commission or percentage fees is fair when investing large amounts of money.

Do tied or independent advisers charge more? It really varies. In your example the independent adviser was cheaper, but it could easily have been the other way round. I personally wouldn’t touch a tied adviser with a barge pole. I’m sure there’s some good ones out there, but why buy from someone who can only sell products from one shelf? At least an independent adviser can choose from the whole store (although there’s no guarantee they’ll be honest or any good).

Where an adviser, tied or independent, works for a company then it’s normal for the employer to take a proportion of any commissions/fees earned to cover costs such as compliance, administration support and marketing etc. If an adviser works for themselves they’ll incur these costs anyway. In fact there are plenty of examples where independent adviser companies or ‘networks’ have been far too generous to their advisers, resulting in the companies eventually going out of business.

There’s quite a lot of information on the site regarding excessive commissions on insurance- based investments, but I agree, an article would help bring all this together. I’ll write one this week.

I’d urge your family members to get a quote from an independent adviser who charges an hourly fee and rebates all commissions. I’d expect the advice to cost them significantly less than the existing quotes.

Read this Q and A at http://www.candidmoney.com/questions/question155.aspx

Protecting against a weak pound?

Question
I am in my seventies and therefore more than usually interested in capital preservation. But I am concerned about the future of the pound and would like to have some hedge against its further depreciation. US Treasuries look interesting to me, as a pretty safe stronger currency haven. Do you agree?Answer
The pound has weakened recently, seemingly due to concerns over the extent of our government debt and economic fragility. It's hard to know whether the slide will continue, but if it does then holding overseas currency may well prove profitable if you subsequently sell before the pound recovers (assuming it does).

The safest way to play the currency movements is simply to hold the currency itself. You could, for example, open a US dollar bank account. While you'd lose a little on exchange rate margins when converting, the underlying money should be safe.

Alternatively you could consider an exchange traded currency fund. ETF Securities offers a range that allow you to track movements between several popular currencies.

Buying US Treasuries is another option, but rising interest rates and/or inflation could reduce their value, so you'd need to be comfortable with this added risk.

Having said all this, unless you plan to spend a lot of money overseas in future then I'm not sure you need to worry unduly about the future of the pound. A weak pound does obviously increase the cost of imports, including fuel, but it shouldn't have too great an impact on the costs of day to day living for most of us.

Read this Q and A at http://www.candidmoney.com/questions/question153.aspx

Better qualifications = better advice?

Financial advisers are being pushed to improve their qualifications. Seems a good idea, but will it result in better advice?.

If you have a financial adviser, there’s a fair chance that he or she will be studying for an exam of one kind or another. It isn’t all that long ago that advisers were first required to gain a qualification. It was called the Financial Planning Certificate – FPC – and a lot of advisers made a terrible fuss about having to get it. Believe me, it wasn’t hard.

The bar is about to be raised again, and once again there is an argument along the lines of “I’ve been doing this job for 35 years, and I’ve never had a complaint, so why on earth should I be put through all this?”

Part of me has no sympathy with this view, and wants to tell the old timers to stop watching East Enders and get on with the studying. Another part pauses, and wonders what really makes a good adviser. Then I reflect on some of the ones I came across before I came into the industry, and many I have met since.

They have a problem, which is that the regulator is convinced that they are simple sales people. The regulator clearly thinks that what we consumers buy is financial products. And the regulator is wrong. Some of us buy reassurance. We want to be told that we’re doing the right thing. Some of us buy back our own time. We could do more for ourselves but we are just too busy. Some of us buy convenience. We like someone else to keep an eye on things, pull it all together and, from time to time, to tell us where we stand. Some of us buy status. We actually like our neighbours to know that the chap who turned up the other night in the Jag was our financial adviser.

So the first thing an adviser ought to be thinking about when he or she meets us for the first time is what it is that we really want to buy. A good adviser has two eyes, two ears and one gob and if he uses them in that proportion he won’t go far wrong.

But the adviser’s head is full of rules and regulations that are about him, not about us. I can count on the fingers of one hand the number of good listeners I have come across among hundreds, if not thousands, of financial advisers.

So are we all going to get better advice when the person selling us a straightforward ISA has passed all the exams? Personally, I doubt it. Most of the people in the banks and insurance companies that brought the world to its knees last year were brilliant. Most had PhDs from the best schools. They lacked a couple of things that good financial advisers need, that must be learned, can’t be taught, and can’t be tested in an exam room. Common sense and common humanity.

Spare a thought for your adviser and his or her struggles with the studies, but if you’ve a choice between a qualified and a highly qualified adviser, choose the one you think is most interested in you.

Read this article at http://www.candidmoney.com/articles/article71.aspx

Flat as a base rate

Today’s decision by the Bank of England to maintain its base interest rate at 0.5% marks a year at this level. During this time we’ve seen the cost of borrowing generally rise slightly and a small decline in savings rates. Why?.

Today’s decision by the Bank of England to maintain its base interest rate at 0.5% marks a year at this level. During this time we’ve seen the cost of borrowing generally rise slightly and a small decline in savings rates.

Nervous lenders

Not all borrowers have been hit. If you’re lucky enough to have a mortgage linked to the base rate then it’s probably been quite a good year. But some other mortgage rates, along with typical credit card, loan and overdraft rates have crept up.

Why? Most likely because there’s been a sharp increase in the number of borrowers failing to repay what they owe. Banks’ willingness to lend does seem to be rising, slowly, but lenders are being picky and generally demanding a higher premium to compensate for a greater perceived risk of not being repaid.

Looking at the Government’s insolvency figures it’s not hard to see why. Over 2009 the number of individual insolvencies increased by more than a quarter on the previous year hitting 134,142, equal to around 1 in every 320 adults. These are worrying figures and there could be more bad news to come before it starts to get better.

Stingy cash ISAs

Meanwhile banks and building societies have mostly been pruning back the rates they pay on savings accounts, especially cash ISAs. I think the main reason behind this is simply because they can. They’re not as desperate to attract funds compared to a year ago and cash ISAs are an easy target; the tax benefits mean savers are a little less rate sensitive versus conventional accounts. A few higher rates (comprising mostly of temporary bonuses) have recently popped up to catch some money either side of the tax year end, but they’ll probably fade in a couple of months.

When will the base rate rise?

For as long as our economy is struggling then there’s big pressure on the Bank of England to keep rates where they are. An increase would almost certainly damage our prospects of recovery.

Rising inflation is a threat, as hiking interest rates is the usual weapon of choice to keep inflation at bay, but the drivers behind the recent rise, oil and VAT, don’t really warrant this approach. In any case, the impact of higher oil prices on annual inflation figures should start to recede over the year (if prices are stable) and the impact of the VAT rise will fall away next January.

I’d therefore be surprised if we see a rate rise this year. And if it does I can’t see it being more than 0.5%.

Meanwhile, what about my savings and debt?

If your debt is costing you more than you’re earning on savings then consider using some savings to repay debt, provided there’s no prohibitive penalties and you still leave some money set aside for emergencies. Otherwise it’s simply a case of hunting out the best deals, as always.

Read this article at http://www.candidmoney.com/articles/article70.aspx

Buying an ISA?

Thinking of investing in a stocks & shares individual savings account (ISA) before the end of the tax year? If so, there are two key factors that will likely determine how successful your investment is: What you buy and how you buy it..

What you buy is by far the more important. Invest in the wrong market at the wrong time and you’ll incur painful losses. Get it right and you’ll reap nice profits.

Of course, this is also the hardest decision to make. Unless you have a crystal ball you’ll never get it right all the time, which suggests that making smaller bets within a good spread of investments is more sensible that betting your shirt on a single investment – this is certainly the approach I take.

When deciding what to buy I think there are five main issues to consider:

Look for gaps in your existing investments

In general it makes sense to invest across the main investment types: cash, fixed interest, stockmarkets, commercial property and commodities. And, where appropriate, to hold a mix of investments in each, e.g. global stockmarkets, not just the UK.

Rather than simply opt for whatever’s performed well in recent years, take some time to consider the best way to complement any investments you already own.

What do you want to achieve?

Ok, the obvious answer is to make money. But do you need an income? How long can you afford to tie up the money? And, if markets do fall, how much could you stomach losing?

Your answer to these questions will impact on the mix of investment types that is probably right for you. For example, fixed interest is more suited to income and usually less volatile than commodities. And while emerging stockmarkets hold more promise longer term than developed, there’s a greater risk of large losses along the way – I reckon it’s at least a 10 year bet.

Rather than cover all aspects here, I’ll point you to our investment pages that contain far more detail, including the pros and cons of each main investment type.

Funds or shares?

Once you’ve decided on where to invest, you’ll need to choose between using a fund(s) and buying directly, e.g. shares. In the case of commercial property you have little choice; you can’t buy an office block in an ISA, so you’ll need to use a fund. But you could buy individual gilts and corporate bonds for fixed interest exposure and shares for stockmarket and commodities exposure.

There’s no right or wrong answer here. If you’ve got the time to research investments then picking your own shares is likely to be cheaper than using a managed fund and you could outperform the professionals. On the downside, it’s unlikely you’ll be able to get as much diversity (most funds hold 50+ shares/investments) and you might fail miserably.

Active or passive?

If you opt for a fund you have a fundamental choice between an active fund manager, who’ll likely charge you between 1-2% a year, and a passive (i.e. tracker) fund, probably costing less than 0.5% a year.

Tracker funds tend to work well in some markets but are less successful in others – in practice you’ll probably want to hold a combination of both active and passive funds. Before deciding, I suggest reading our trackers page to find out more.

Choosing a fund

When choosing a tracker the main considerations are: the index being tracked (i.e. does it provide worthwhile exposure to the area where you want to invest), whether the fund accurately tracks the index and charges.

As for actively managed funds, they key question is whether the manager is likely to beat the index (else you might as well buy a tracker). Studying the manager’s credentials, including past form (look for consistency) and whether their management style (e.g. aggressive or cautious) suits the current outlook, can help. But ultimately you’ll be taking an (educated) leap of faith.

Once you’ve decided what to buy then seek out the best deal. If you opt for shares then consider a stockbroker with low dealing charges that doesn’t charge for an ISA wrapper. See my answer to this question for more details.

When investing in a fund decide whether or not you need advice. If you do, then seek help from an independent financial adviser (IFA). But if you’re happy making your own decision (perhaps with the help of useful research and guidance) then using a discount broker, who’ll refund some of the commissions normally paid to an adviser, can save you money. Read our ISA Discounts Action Plan to find out more.

If you want to find out more about ISAs in general, including whether the tax benefits are likely to be worthwhile, please take a look at our ISAs page.

Read this article at http://www.candidmoney.com/articles/article68.aspx