Avoid the 0.1% club

If you’ve got money in a savings account and haven’t checked the rate for a while, you could be in for a shock. Lots of accounts are paying 0.1% or less – potentially costing you hundreds or even thousands of pounds of lost interest..

With the Bank of England Base Rate at 0.5% you shouldn’t expect too much from your savings. But shopping around should net you 2.5% or more, significantly more than the 0.1% or less paid on a surprising number of savings accounts.

While banks and building societies often offer competitive rates on a select few accounts to tempt new customers, it’s almost a sure fire bet that the rate will gradually decline over time – or rather suddenly if there’s a temporary bonus attached. It’s a profitable move as experience suggests that many savers won’t bother moving elsewhere to a more competitive rate.

I’m stating the obvious, but check the interest on your savings regularly and if the rate’s uncompetitive then move! Don’t hesitate; switching accounts is straightforward, especially as many competitive accounts can now be opened online.

To find out more read our new Review Your Savings Accounts Action Plan.

Here’s a list of some offending savings accounts paying 0.1% or less gross a year. If you have money in one of these accounts then move it to a better rate elsewhere faster than you can say Jack Robinson. And even if your account isn’t listed below check the rate you’re getting – this list is just the tip of the iceberg...

Account	Interest (AER gross on lowest balance)
Barclays
e-savings account	0.10%
Cash ISA	0.10%
30 Day Savings Account	0.10%
Postal Savings	0.10%
Bonus Saver	0.05%
Easy Saver	0.10%
Cheltenham & Gloucester
Direct Transfer	0.05%
London Account	0.05%
90 Day Account	0.05%
Branch 10	0.05%
Direct 30	0.05%
Investment Account	0.05%
Halifax
Variable Rate Web Saver	0.10%
Variable Rate ISA Saver	0.10%
Premium Savings Direct	0.11%
Instant Saver	0.10%
Saver Reward	0.10%
Extra Income Saver	0.10%
Liquid Gold	0.05%
60 Day Gold	0.10%
HSBC
Flexible Saver	0.05%
Premier Savings	0.10%
Instant Access Savings	0.05%
Lloyds TSB
No Notice Saver	0.10%
Exclusive Saver	0.10%
Flexible Savings Account	0.10%
Gold Saver	0.10%
Instant Access Saver	0.10%
Online Saver	0.10%
Platinum Saver	0.10%
Standard Saver	0.10%
Select Saver	0.10%
Nationwide
e-Savings Plus	0.10%
CashBuilder	0.10%
Natwest
First Reserve	0.10%
Reward Reserve	0.10%
30 Day Bonus Reserve	0.10%
Savings Direct	0.10%
e-savings Plus	0.10%
Diamond Reserve	0.10%
Telephone Saver Plus	0.10%
Santander
Easy ISA	0.10%
Instant Access Saver	0.10%
Monthly Saver	0.10%
Instant Access ISA	0.10%
Super ISA 1	0.15%
ISA Saver	0.10%
Passbook Saver	0.10%
Direct Premium	0.10%
Everyday Saver	0.10%
TimeSaver	0.10%
Postal Notice Account	0.10%
Branch Saver	0.10%
Direct Notice	0.10%
Direct 60	0.10%
60 Day Plus	0.10%
Bonus 120	0.10%
Bonus Account	0.10%
All rates as at 29 April 2010

Read this article at http://www.candidmoney.com/articles/article100.aspx

HSBC 8% Regular Saver Account bad overall value

This attention grabbing account from HSBC promises to pay a staggering 8% gross annual interest on your savings. The rate is fixed for the one year duration of the account, but there are unsurprisingly catches.

Firstly, you'll need to have a HSBC Premier or Advance account to enjoy the 8% rate; other HSBC current account customers get a less benevolent 4%. And if you're not willing to open a HSBC bank account you can't apply for the regular saver account.

Secondly, you can only save up to £250 per month (the minimum is £25), meaning a maximum balance of £3,000 over the year. Save the maximum amount at 8% and you'll earn total interest of about £129 before tax, equal to £103 for basic rate and £77 for higher rate taxpayers.

Thirdly, you're not allowed to make withdrawals and if you close the account before the end of the one year term you'll only receive interest at the rate paid on the HSBC Flexible Saver account, currently just 0.05%!

If you already have a HSBC Premier or Advance account then this account is worth taking advantage of, provided you can save £250 (or close to that) a month for a year. You won't make a fortune, but could pocket up to £103 in total, after tax, for the sake of filling in an application form. Although I would strongly suggest you consider whether having a Premier or Advance account is actually worthwhile.

If you have one of the other HSBC bank accounts that qualifies for the 4% regular saver rate then it's worth considering, but with some shopping around you can currently earn around 3% on your savings in a tax-free cash individual savings account (ISA) - probably a better long term option for many.

But for the majority of us who don't currently have a HSBC bank account, is it worth opening a Premier or Advance account to access the 8% regular saver account?

To open a HSBC Premier account you need to be earning at least £100,000 a year or have at least £50,000 of savings and investments with HSBC, plus pay your salary into the account. In return for this the main ‘benefit' seems to be access to HSBC investment advice, i.e. HSBC will simply try to make more money out of you by selling investment products. The included travel insurance is probably a little more worthwhile, but you can buy similar policies for around £70 a year.

The HSBC Advance account will cost you £12.95 per month (£6 for 1st three months) in return for "£500 of benefits and services a year" (e.g. travel insurance & breakdown cover). My quick estimate puts the true value of the benefits (assuming you shop around) at about £125 a year - poor value for money given you'll be charged £155 a year.

So in both cases the answer is no, don't bother.

This account is a marketing gimmick that will only genuinely benefit a few. If you don't already bank with HSBC this account gives little reason to start now.

Read the full review at http://www.candidmoney.com/candidreviews/review29.aspx

The man from the Pru

Of all the scary stories about the economy, and there is no shortage to choose from, the one that caught my eye was about the CEO of The Prudential feeling it necessary to reassure the City that the shares would continue to be listed in London..

Around the same time there was speculation that the mighty Pru might well pack their bags and leave UK policy holders in the embrace of a Resolution or a Pearl.

It is not difficult to see why a UK Life assurer does not believe that it is in the best interests of shareholders to commit fresh capital to the home market, with its duff economy and preposterously bureaucratic regulation. But the Pru, goddamit, is a British institution like Wimbledon or the Tower of London. If they really are thinking of pottering off to the growth markets of Asia and leaving the rest of us to get on with it, someone in Westminster should be getting a message.

Moving on, I was rotten about service in one of my recent notes. So I ought to say how pleased I am that Hargreaves Lansdown are not only trying to get our money out of Santander, but are keeping us informed that Santander appear reluctant to part with it. HL made a mistake with us once. They were all over it like a rash as soon as they realised, and it was sorted in hours, not days or weeks. It can be done.

Read this article at http://www.candidmoney.com/articles/article99.aspx

Schroder Global Alpha Plus now reviewed

On the face of it this new fund launch from Schroders looks quite appealing. The managers can invest more or less as they wish with the aim of holding around 30 of their highest conviction stocks. And their focus will be on companies that can benefit from climate change, ageing populations and the growing significance of emerging economies.

This all sounds sensible, so what issues should you consider?

Probably the most important is the potential risk. Focussing on just 30 companies will likely result in higher volatility than the Index, meaning more sleepless nights if you’re a nervous investor. For example the Schroder UK Alpha Plus fund, which also invests in around 30 stocks, has been about 1.3 times more volatile than the FTSE All Share Index over the last 3 years.

The likelihood that the fund management team will succeed in beating the Index is also important (else you might as well buy a tracker fund). The two lead managers, Virginie Maisonneuve and Jonathan Armitage, have run the Schroder ISF Global Equity Alpha offshore fund since launch in February 2006, beating the MSCI World Index overall to date. However, while solid, their performance has not been exceptional; the fund has under-performed the Index in two of the four years since launch.

Given the concentrated nature of the new Global Alpha Plus fund, the managers’ investment strategy and stock selection will be paramount. The climate change theme hasn’t worked especially well so far for Schroders on its fund of the same name, which has generally underperformed the MSCI World Index since launch in 2007, although the long term strategy s plausible. The large healthcare companies that should benefit from ageing populations have also tended to lag the markets in recent years, although again the longer term argument seems convincing. Factoring the growth of emerging markets into investment decisions also sounds a good idea, although in practice this is one that most global fund managers already adopt to some extent.

The annual management charge is 1.50% and the estimated total expense ratio (i.e. impact of all annual charges) is 1.75%, although this may fall over time as the fund grows. The initial charge is a hefty 5.25% but most discount brokers should reduce this to zero.

On balance I’m positive about this fund, but find it hard to be especially so. The idea sounds good on paper but the managers’ existing track record of running a global fund hardly blows me away. It would be helpful if Schroders published the impact on performance of the 30 largest holdings in the existing offshore global fund, as this might give a clue to whether the managers’ highest conviction ideas have been good or bad for overall performance.

I doubt the fund will flop but I’m not yet sufficiently convinced about the managers' skills to invest my own money. Plus the potential risks mean this fund may be inappropriate as a core portfolio holding for global exposure.

The fund launches in May.

Read the full review at http://www.candidmoney.com/candidreviews/review28.aspx

Buy Insynergy Absolute China?

Question
Thank you for a very useful website.

I've recently reduced my holdings in China funds, but expect to restore them in due course. One of the funds I might then consider is "Insynergy Absolute China". The iii website categorises this as "Offshore UK Authorised".

Are there are any pros and cons I should be aware of before I put any ISA money into such a category of fund?Answer
The Insynergy Absolute China fund is an open ended investment company (oeic) domiciled in Dublin. From a UK investor tax point of view the fund will be treated in the same way as one domiciled in the UK. The fund (according to its prospectus) intends to be a ‘reporting fund’ for UK tax purposes, which means that gains will be subject to capital gains tax and income, although not distributed, must be declared with any income tax owed being paid.

However, whether you’ll benefit from any investor protection seems the subject of some confusion. The fund’s prospectus suggests that it’s not covered by the Financial Services Compensation Scheme. And on calling both Insynergy and State Street (the custodian/administrator) neither could tell me whether the fund was covered by an equivalent Irish compensation scheme. Insynergy’s press office is now helping to find out and I’ll update this page when I get a definite answer.

As for the fund itself I haven’t looked into it in any detail but the manager, Michael Lai, has performed well running the GAM Star China Equity fund that he’s managed since July 2007. Just beware that the fund has a fairly hefty uncapped performance fee of 20% of returns above 3 month LIBOR (i.e. cash) – this means that at the time of writing you should expect to pay a fifth of any annual returns above 0.66% in fees as well as the standard annual charge of 1.25%.

Insynergy Investment Management was set up by Spike Hughes, a former Hargreaves Lansdown director and boasts ‘dragon’ entrepreneur James Caan as its chairman - not sure whether this is a good or bad thing!

Read this Q and A at http://www.candidmoney.com/questions/question189.aspx

Should I be told about pension changes?

Question
Is there an obligation on employers to consult / notify in advance changes they make to final salary pension schemes? Having been with my employer for over 20 years and now 61, I find that the early retirement penalty in 2010 is double the clawback of 2009. This means taking early retirement now pays me a lower pension than last year ! No communication from the employer -only a " these are now the terms" from the pension administrator. Can this be actioned without notice/consultation? It seems that a selected few were tipped off and got out quick!

Could this be a way to help taxpayers and relieve the burden on public sector pensions costs?Answer
An employer’s obligations with respect to final salary pension schemes are set out in the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 and I’m afraid reading the regulations is as tedious as the title suggests.

In a nutshell an employer must consult employees for at last 60 days when they propose to:

• Increase the normal scheme retirement age.


• Close the scheme to new members.


• Stop existing members from accumulating future benefits.


• Stop contributing into the scheme.


• Require members to make contributions when not previously required.


• Increase the amount members are required to contribute into the scheme.

However, the regulations specifically exclude a need to consult when the proposed change “has no lasting effect on a person's rights to be admitted to a scheme or on the benefits that may be provided under it”. I suspect this probably applies to changes in early retirement penalties as the impact is not lasting if you instead work until the normal retirement age – although the rules are ambiguous.

I suggest asking the scheme administrator why you weren’t consulted and see what they say.

If some members were ‘tipped off’ then this is a potentially serious issue. When an employer makes announcements regarding the pension scheme it should be to all members (if it affects them) and not just a select few. Again, you might want to pursue this with the scheme administrator and if their answer is unsatisfactory you could take your complaint to the Pension Ombudsman.

The Government obviously has the power to reduce future public service pension benefits and let’s face it; such changes are probably inevitable over the next 5-10 years given the Government’s financial deficit. However, they would have to consult affected public sector employees and it will probably turn ugly with strikes etc, so the changes probably won't happen without some all round pain.

Read this Q and A at http://www.candidmoney.com/questions/question191.aspx

Deadly debts

The Government published a summary of its finances for the 2009/10 tax year this week. As expected, it makes grim reading, with borrowing equivalent to £34,000 per household..

Taxes and other revenues brought in £469.2 billion, a fall of 5% on the previous year.

Overall expenditures and investment were £631.1 billion, an increase of 7.5% on the previous year.

In other words, the Government spent £161.9 billion more than it earned. Add in local government and public corporation and the final deficit for the year comes out at £152.8 billion, equal to nearly £5,900 per household.

Worse still, this pushes the Government’s overall debt to £890 billion, equal to around £34,000 per household. And the final straw is that Government projections predict overall debt will rise to £1,406 billion by 2014/15, equal to £54,000 per household, which incidentally is about the same as the current level of personal debt per household including mortgages.

Now debt is not necessarily a bad thing provided you can afford the interest payments. But the Government can’t. The interest bill for 2009/10 was £30.9 billion, a cost of nearly £1,200 per household and it’s estimated to rise to around £70 billion a year by 2014/15, equivalent to £2,700 per household. To put £70 billion into context, it’s about half the total amount the Government currently raises in income tax each year.

So it’s quite clear, whoever gets into power at the forthcoming election will basically be up the creek without a paddle as far as finances are concerned. Spending will need to be slashed and/or taxes raised significantly to stop the deficit from soaring and sending interest payments further out of control. Neither will be comfortable given we’re still on the cusp of recession.

Greek finances have also been in the news again this week as its Prime Minister formally requested the previously arranged €40-45 billion bail-out loan from the EU and IMF (at a 5% interest rate). Greece has a deficit of around €300 billion, which may not sound so bad compared to our £890 billion. But Greece’s GDP (gross domestic product – basically total annual spending within a country’s economy) is far lower than the UK’s too, so that Greece’s debt is estimated at 116% of its GDP. This compares to 62% in the UK, i.e. Greece can far less afford to get out of its financial hole than we can.

Unsurprisingly, investors are demanding an increasingly high risk premium for holding Greek debt – the yield on 10 year Greek bonds is around 8.7%, about 5.7% higher than equivalent German bonds.

The debt story is going to drag on and on, meanwhile it will be interesting to see how stockmarkets cope. They’ve been surprisingly resilient of late.

Read this article at http://www.candidmoney.com/articles/article97.aspx

What's in the Invesco Perpetual Tactical Bond fund?

Question
I have broken one of my own investment rules and put quite a lot into an investment that I don't really understand. It is Invesco Perpetual Tactical Bond. I have read the fact sheet but I am unclear as to what are the instruments I am investing in. When I bought it I thought I was buying something that was probably going to be unexciting but which would have a very limited downside.

I have had enough excitement recently and wanted something close to cash but with a better return. The fund has performed well, too well not to be taking some sort of risk I wonder? Can you explain it?Answer
The Invesco Perpetual Tactical Bond basically allows its managers, the well-regarded Paul Causer and Paul Reed, to invest pretty much however they want in the fixed interest market. So holdings can include cash, gilts, investment grade and high yield corporate bonds, both UK and up to 20% overseas.

The idea behind such flexibility is that the managers can simply invest where they have highest conviction, without worrying about income levels (i.e. yield) or within reason, risk. So, the fund could feasibly be fully invested in cash if the managers are negative about bond markets or mostly exposed to high yield bonds if they’re particularly optimistic about that end of the market. In practice it’ll probably be somewhere in between, but the point is the investments held can vary quickly and widely.

Invesco Perpetual has yet to publish details of how the fund has invested since launch on 1 February 2010, although based on performance to date there’s probably a bias towards high yield bonds.

If you’re looking for an investment that’s similar to cash investment I’d think again. Given the quality of management I’d expect this fund to do well longer term, but there’s scope for plenty of downside if they get it wrong. For example, high yield bonds tend to be correlated to stockmarkets, so if the fund is heavily exposed to this sector and markets plummet you’ll lose money.

Compared to a plain vanilla gilt or investment grade corporate bond fund the Tactical Bond fund is potentially higher risk, less likely to deliver a consistent income and will probably alter its holdings more frequently. It’s also a little expensive with a current total expense ratio of 1.56%, although as the fund grows in size this should fall a little closer to the annual management charge of 1.25%.

Overall I like this fund, but would regard it as a medium rather than low risk investment.

Read this Q and A at http://www.candidmoney.com/questions/question188.aspx

NS&I Index-Linked Certificates Review

The key with any savings is to beat inflation after tax. If you don’t then your money will gradually buy less and less in future compared to today.

However, most savings accounts pay paltry rates of interest and consistently lag inflation. And even if you do the smart thing by keeping your money in ‘best buy’ savings accounts, there’s still a chance of lagging inflation at times, especially if you’re a taxpayer.

So, on the surface, National Savings Index-Linked Certificates sound very appealing as they guarantee to be beat inflation tax-free. And, on the whole, they’re an excellent idea for some savers.

Anyone aged 7 or over can invest between £100 and £15,000 per issue and there are currently two issues, lasting for 3 and 5 years respectively. Over this term the Certificates promise to pay you the rate of inflation, measured by the Retail Price Index, plus an additional amount of interest. The return, which is tax-free, is calculated monthly but only paid at maturity, there’s no income option.

If inflation is negative (i.e. we experience deflation) then you’ll simply receive the additional interest, your money can’t fall in value.

Withdrawing your money before the end of the term is allowed, but you won’t enjoy the full promised return. During the first year you simply get back your initial investment, while in subsequent years you’ll receive a reduced return prior to maturity.

Because National Savings products are backed by the Government then all of your money is secure (well, as secure as the Government). Unlike banks and building there is no £50,000 cap on protection.

Should you consider NS&I Index-Linked Certificates? If you’re a taxpayer who’s happy to tie up savings for either 3 or 5 years and doesn’t require an income, then yes. There is a risk of low, or even negative, inflation over that period and returns may look less attractive relative to conventional savings accounts in times of higher interest rates. But using Index-Linked Certificates for a portion of your savings could be a sensible strategy to hedge against inflation.

Read the full review at http://www.candidmoney.com/candidreviews/review27.aspx

Yorkshire BS Protected Capital Account review

This is a 6 year investment plan that links your returns to the FTSE 100 Index while protecting your original investment. It’s available as a cash individual savings account (ISA) and as a standalone plan in which case any returns are taxed as interest, i.e. you’ll pay income tax if a taxpayer.

The Protected Capital Account Tracked Growth 3 plan is run by Credit Suisse, which pays Yorkshire Building Society a sales commission of 4%, i.e. £400 per £10,000 invested – it’s easy to see why banks and building societies like selling these types of plan – but is this any good?

On the plus side the plan offers a 20% minimum return, regardless of what happens to the FTSE 100 over the plan term. But 20% over 6 years is equivalent to 3.1% gross a year, ok but short of the 5% you can currently earn on a 5 year fixed rate savings account (4.35% for cash ISAs).

Any additional return depends upon FTSE 100 performance and herein lays the potential sting in the tail. The change in the FTSE 100 Index is taken over the 12 half year periods that make up the 6 year term. Over each half year period the maximum gain or loss is limited to +6% and -6%. So if the FTSE 100 rises by at least 6% over each of the 12 half year periods during the plan’s term you’ll receive the maximum possible 72% return, equal to 9.46% gross a year. This is highly unlikely.

In practice you’ll probably be lucky to enjoy the maximum 6% return just half the time, giving you a total return of 36%, equivalent to 5.27% gross a year – little more than cash. Why take the risk?

In my opinion this plan doesn’t cut the mustard as it fails to offer enough to tempt either committed savers or investors. If you’re nervous and/or sceptical about the stockmarket then why would you want to tie up your money for 6 years when there’s a strong chance you’ll struggle to beat cash returns anyway? And if you are positive about stockmarkets then buy a tracker and you’ll enjoy the benefit of dividends (likely worth 3-4% net of basic rate tax each year) along with the potential for higher overall returns. Plus tracker fund gains outside an ISA will be subject to capital gains tax, currently more favourable than the income tax treatment of this plan.

The Yorkshire Building Society will no doubt rely on the headline 72% potential return and customers failing to understand what they’re buying to sell this plan (and pocket their commission). Business as usual in financial services...

The plan is open for business until 13 May and will commence from 7 June 2010, maturing on 7 June 2016. Your original investment is covered by the Financial Services Compensation Scheme (FSCS) up to £50,000 per person.

The way the Yorkshire Building Society Protected Capital Account plan links returns to the FTSE 100 makes it especially unattractive. This plan is best avoided by savers and investors alike.

Read the full review at http://www.candidmoney.com/candidreviews/review26.aspx

Delay buying an annuity?

Question
I've got three modest pension plans that are due to mature at the end of June. As my husband is still working and hopes to do so for another three years, my dilemma is whether to transfer the matured pensions into my SIPP (into which I intend to continue paying anyway) and hope that they'll carry on growing for a few years more, or to take an annuity income now and invest that. Even the best rates currently on offer don't seem to pay much more for someone aged 70 than they do for someone aged 65, suggesting that there's not a lot of point delaying the annuity - unless of course the funds are worth substantially more by the time I take the pension.

My inclination is to take the 25% tax-free lump sum and then purchase the best available annuity with the rest. I suppose it all depends on what happens to annuity rates over the next few years and on which way the stock markets head. I know you don't have a crystal ball so can't predict such movements, but what would you do?

And are there any other factors I should take into account?Answer
This is a great question as it’s a dilemma encountered by a lot of people. And you’re right, there is no simple answer, your decision will need to be based on a guesstimate of what will happen in future.

The bottom line is whether a higher pension fund value and/or annuity rate at the delayed retirement date will more than compensate for the pension income you could have received meanwhile. I’ll ignore your tax position in my answer, but bear in mind that if you’re still working and a taxpayer then you may wish to defer taking pension income if you’ll fall into a lower tax band when you retire.

Annuity rates are lower than they have been for some years – they’ve typically fallen by around 10% over the last two years. This is due to relatively low gilt yields and, to a lesser extent, increased life expectancy.

Insurers buy gilts to provide annuity income, so when gilt yields (i.e. gilt income / gilt price) fall annuity rates tend to follow. Gilt yields, in turn, are mainly influenced by interest rates and inflation. Rising interest rates and/or inflation usually mean higher gilt yields (hence better annuity rates) and vice versa.

Interest rates are currently low and likely to stay that way for a while yet. Inflation has recently started to rise and economists are divided on whether it will remain around current levels or fall back again. My guess is that inflation will fall later this year and then remain low next year, along with interest rates. If I’m right then annuity rates are unlikely to change much over the next couple of years, although I think it’s likely we’ll see them rise within the next five years.

You’d expect annuity rates to rise in any case as you get older because your life expectancy is shorter, but they may not rise by as much as you’d expect due to ‘mortality drag’ – you can read more about this on our annuities page.

If you remain invested then how will your pension fund perform? If you plan to buy an annuity within the next five years then it makes sense to adopt a very cautious investment strategy (particularly given the current climate), i.e. reduce stockmarket exposure in favour of less volatile assets. This will naturally limit upside (and downside too!) so you probably can’t rely on investment returns to make a significant difference to your future pension income.

Before making your decision I suggest trying out a few scenarios on our Retirement Delay Calculator to get a feel for how different annuity rates and investment returns might affect your overall retirement income.

I ran a few examples for a female assuming a 6% annual investment return and using current annuity rates to find the approximate breakeven point (i.e. when the total pension benefits received are equal) when delaying annuity purchase versus taking it at age 65, as follows:

Age pension taken	Estimated breakeven age versus taking pension at 65
67	81
70	82
75	85

If annuity rates improve and your fund grows by more than 6% a year then expect the breakeven age to reduce and vice versa.

Taking all this into account, I would personally be inclined to buy an annuitiy this year after taking the tax-free lump sum. But bear in mind that I’m quite cautious about markets and the economy at present; if you’re more optimistic (and the markets/economy do well) then delaying could leave you better off overall thanks to investment performance and rising annuity rates.

If you do delay then check whether transferring the pensions into your Sipp is cost effective. If the existing pensions offer suitable funds at a lower cost than the Sipp then staying put might be worthwhile.

Whenever you do decide to buy an annuity, remember to shop around for the best rate and buy through a discount broker to enjoy commission rebates (usually worth up to 1% of the annuity purchase price).

Read this Q and A at http://www.candidmoney.com/questions/question185.aspx

Complaints handled badly

It used to be said that an employer got the Trade Unions it deserved, and it occurs to me, following similar logic, that financial services companies have got the regulators they deserve..

The old Life companies never quite embraced the idea that the customer deserved special consideration just because, and only because, he or she was a customer. They were awful at handling complaints, and lots of people complained about the way their complaints were handled.

Enter the regulator. Now there has to be a complaints procedure. Complaints have to be answered in a standard time. Everything has to be counted, and open to inspection by the Treating Customers Fairly police. Guess what: whereas before you got treated with thinly disguised contempt, today the financial services company may well dispense with the thin disguise.

You write to complain. You get a letter to acknowledge your complaint. This a quote from a letter from AXA: "I would expect the investigation to take a minimum of 20 working days, following which you will receive our final decision. Should the investigation take longer than 20 working days then you will receive an update on the situation." Eh? I think this means that I shouldn’t expect to hear anything for at least a month, and the most likely thing to arrive next is another letter telling me that I’ll have to wait even longer for an answer.

In this case it took ten weeks, not 20 days, to get another letter that still didn’t answer the question that had been put in the first place. The final straw, which I’ve also had from Aviva, was the imperious "I am able to provide you with our final decision". Excuse me, honeybunch: you supplier, me customer, me is king and king decides when complaint is settled.

A manager with one ounce of sense and two of authority could settle most complaints with a quick ‘phone call. But common sense isn’t in the regulator’s book. And financial services companies serve their new master – the regulator – even if it means treating their customers just as badly, sometimes even worse, than they treated them before.

And that, dear reader, is called progress.

Read this article at http://www.candidmoney.com/articles/article95.aspx

Compulsory purchase annuities at age 75?

Question
Thanks for your interesting site. In your manifestos article you mention that the Conservatives will 'scrap effective compulsory annuity purchase at 75'.

Would you explain this? I am 73 receiving a State Pension how does one purchase this?Answer
Compulsory purchase annuities only apply to personal pensions and money purchase occupational pensions, not state pensions, so any changes unlikely to affect you.

When you build up a pension fund over your working life the rules currently state that you must buy an annuity (i.e. swap your pension fund for an income for life) by age 75. There is an alternative, called an ‘alternatively secured pension’ which lets you leave the fund invested and instead draw an income of between 55% and 90% of the approximate annuity you would otherwise receive (called a GAD pension). So under the alternative rules you could draw less income compared to an annuity but cannot avoid taking an income from your pension altogether.

This is unpopular with the minority that have large pensions they don’t necessarily need to use to provide income throughout retirement.

Scrapping these rules would mean you can leave your pension invested for as long as you wish, perhaps with the intention to pass on to another family member.

However, passing a pension fund to another family member in this way is currently subject to income tax of up to 70% and inheritance tax on the balance (basically, the Government doesn’t want to allow it) and it’s unclear whether and how this would change under either the Tories or LibDems.

Read this Q and A at http://www.candidmoney.com/questions/question184.aspx

CGT under LibDems

Question
Your article on the various parties Manifestos was very interesting. Am I right though that the Lib Dems are also planning to reduce the Capital Gains threshold from £10,100 to £2,000 per person? They say it's to hit the rich but we have a small investment which we are planning to sell to help pay our credit cards so I don't count ourselves as "rich".Answer
You’re quite right. While not mentioned in their manifesto, LibDem tax plans do include cutting the current capital gains tax annual allowance from £10,100 to just £2,000 (I've amended the article).

I share your view that this would be a cut too far, especially as their proposals also include taxing gains at the same rate as income tax. While investors can obviously avoid capital gains tax by holding their investments in pensions and individual savings account (ISAs), for those who choose not to this effective tax rise would be penal.

On a wider note I fear this move could discourage investment, which would be bad news all round.

If you plan to sell then it’s probably a good idea to do so, from a tax point of view at least, before the election.

Read this Q and A at http://www.candidmoney.com/questions/question183.aspx

How the manifestos could hit your poocket

I’ve just spent a couple of hours ploughing through the Labour, Conservative and Liberal Democrat election manifestos (perhaps I should get out more). Take a look at our summary to see how they might hit your pocket..

I find it hard to take the manifestos too seriously as it’s the norm to make vote seeking pledges now and neglect to implement them if elected. Nevertheless, there is quite a lot of specific detail that could affect your pocket, so I thought I’d compare each party’s pledge on a variety of money issues.

I’ve ignored areas such as education, health and defence as they all offer the usual pledges to improve standards and efficiency etc – although replacing Trident like for like is a moot point (Tories and Labour want to, LibDems don’t).

I’ve also ignored proposed spending cuts, as there’s currently so little tangible information trying to predict what will really happen is a waste of time. All you need to know is that there’ll be lots of them and the Tories would probably wield the axe faster than Labour.

And all three parties want to reduce our economy’s reliance on financial services and make us all greener.

Now to the money stuff, I’ve compared a number of key areas below (some of the Labour pledges have previously been announced and/or implemented):

Area	Labour	Conservatives	Liberal Democrats
Income Tax	Will not raise 20%, 40% and 50% tax rates during next parliament (although no mention of personal allowances or new bands!).	-	Increase personal allowance to £10k, saving 20% taxpayer under 65 £705 and 40% taxpayer £1,410.
National Insurance	1% increase already due April 2011	Scrap the 1% increase.	Reverse the rise when affordable.
Inheritance Tax	Frozen nil rate band until 2014/15.	Raise nil rate band to £1m.	-
Capital Gains Tax	-	-	Tax at same rate as income.
Stamp Duty	No stamp duty for first time buyers up to £250k for 2 years. 5% rate for £1m+ properties from April 2011.	No stamp duty for first time buyers up to £250k forever.	-
VAT	Won't extend to food, kids clothes, books, papers and public transport fares.	-	-
Council Tax	No revaluation during next parliament.	Freeze for 2 years and no revaluation.	Higher tax on 2nd homes and replace with local income tax in future.
Property Tax	-	-	Annual 'mansion' tax of 1% on properties worth £2m+.
Tax Credits	No cuts and 'toddler credit' increasing child tax credit by £4 week for children aged 1 and 2.	Stop paying tax credits where annual family income exceeds £50k.	Restrict and target those that need them most.
State Pension Age	Raise from 65 to 68 by 2046.	Bring forward increase to 66.	-
State Pension Rises	Restore link to earnings from 2012 (also includes pension credit)	Restore link to earnings.	Immediately link to the higher of earnings and 2.5%.
Personal Pensions	-	Scrap effective compulsory annuity purchase at 75.	Scrap effective compulsory annuity purchase at 75. More flexibility to access money pre-retirement.
Pension Contributions	Cut tax relief to basic rate on income above £150k.	-	Only give basic rate tax relief.
Dividend Tax Credit	-	Allow pensions to reclaim when affordable.	-
Public Sector Pensions	Cuts, but no details.	Cap above £50k.	Review (likely cap or cuts).
Public Sector Pay	1% cap on basic pay rises 2011-13.	-	Cap pay rises at £400 for 2 years initially.
Corporation Tax	-	Cut main rate from 28% to 25% and small co rate 21% to 20%. Simplify reliefs and allowances.	-
Unsecured Debt	Clamp down on interest and fees charged by doorstep lenders.	Ensure no-one is forced to sell their home to pay unsecured debts below £25k	Limit maximum interest rates on credit cards.
Charity Donations	-	-	Increase gift aid to 23% and stop higher rate tax relief.
Child Trust Funds	Protect and extra £100 for disabled children.	Scrap government contribution for all but poorest families.	Scrap government contributions.
Privatisation	£20 billion of asset sales planned by 2020.	-	-

Of course, some of these pledges may never happen if the party is elected and others will likely turn out to be quite different. But I hope this gives you a flavour of what to expect and that it might help you when deciding to vote for – that’s if you haven’t already given up on politics altogether...if you have I can’t blame you.

Read this article at http://www.candidmoney.com/articles/article92.aspx

Hold or sell Standard Life shares?

Question
I have about 1400 Standard Life shares. I reinvest the the income from these to give me extra shares.

There are no charges for holding these shares,but the price of them does not appear to be moving of late. What should I do with them?Answer
At the time of writing Standard Life shares are trading at around 207p, valuing your holding at around £2,900, which is well below the 230p you paid at flotation back in July 2006.

Since flotation Standard Life has concentrated on long term pension and investment business, selling its banking business to Barclays for £226 million, outsourcing life cover to LV=, offloading some annuity liabilities to a Canadian Insurer and generally cutting costs. It’s also reported to be mulling over the sale of its healthcare insurance division for around £200 million.

As for its focussed strategy Standard Life has made some headway, increasing its presence in the self-invested personal pension (Sipp) market and continuing to build a reasonable reputation for investment management.

So what’s gone wrong?

Well, the credit crunch hurt revenues through a combination of fewer customers investing new money and falling markets reducing the amount that Standard Life earns from managing investments (usually a percentage of investment value).

It also seems that the market believes Standard Life lacks dynamism and is overly reliant on the UK market – which could prove to be as fragile as its economy.

Nevertheless, 2009 results were better than expected, despite doing little for the share price. And the appointment of a new chief executive, David Nish, might inject some fresh air into the business, although I wouldn’t hold your breath.

To put this into perspective, Standard Life’s share price has risen by about 13% over the last year compared to the FTSE 100 at 45%, and fallen by about 11% over the last six months (FTSE 100 +10%). The 2009 dividend payout was worth about 6% of your investment – nice, but not enough to compensate for poor share price performance.

Should you hold or sell? Stockbrokers seem pretty neutral on the stock. If you’re concerned (as some are) that markets are due a fall then selling would seem sensible. Otherwise if markets are flat I think it’s likely you’ll continue to enjoy dividends worth around 6% of your investment, which seems worthwhile when savings rates are so low. If markets continue to race ahead then Standard Life will probably continue to get left behind, unless David Nish can really get the business firing on all cylinders. In practice he’ll probably do an ok job and get paid a disproportionately large bonus...

Hope this helps you make a decision. Personally I’d sell, primarily because I’m nervous about markets, but of course I could turn out to be wrong.

Does anyone else have a view on this? If so, please let us know by posting a comment below.

Read this Q and A at http://www.candidmoney.com/questions/question181.aspx

Does Family Investments take the stakeholder CTF crown?

Unlike most competitors, the Family Investments stakeholder child trust fund (CTF) invests globally, not just in the UK. This is a good idea; after all it’s what most investors do with their conventional investment portfolios, so why not a CTF?

When Family Investments originally launched this CTF it employed New Star to run the fund, a seemingly clever move at the time. However, New Star’s investment performance bombed versus the competition (as did New Star themselves) so Family Investments quite sensibly switched to index-tracking funds (managed by Santander) in April 2009.

Your child’s investment will be split between funds tracking the FTSE 100, FTSE Europe ex UK, FTSE USA and FTSE Developed Asia Pacific indices. Santander can alter the balance as it sees fit, but around half is usually exposed to the FTSE 100 with the balance split equally between the other three indices – disappointing this isn’t clearly displayed on Family Investment’s website.

Annual charges are the stakeholder standard 1.5%. This is excessive for tracker funds, but I’m afraid that’s just the nature of the stakeholder CTF beast. F&C’s charges are lower, but then you’re restricted to a UK only tracker fund.

There are no initial or exit charges, minimum top-ups above the basic CTF voucher are £10 and the investments will be progressively moved towards less risky investments between your child’s 13th and 18th birthdays – as per stakeholder CTF rules.

This CTF is also marketed by the Post Office, Sainsbury’s Bank, Bradford & Bingley and The Early Learning Centre amongst others. Family Investments pays small initial commissions and annual trail commission of up to 0.4% a year (not available to financial advisers), although this does not affect the charges you pay.

Overall this is a sound choice if you’re looking for a stakeholder child trust fund. It’s more diversified than competitors which should bode well longer term. However, it’s still expensive for a tracker and I’d like to see Family Investments follow F&C’s lead by shaving charges – after all, they can afford to pay commission to introducers.

Read the full review at http://www.candidmoney.com/candidreviews/review25.aspx

F&C stakeholder CTF - is cheap cheerful?

This is a very straightforward stakeholder child trust fund (CTF) that invests in a fund tracking the FTSE All Share Index.

Once you’ve invested the basic £250 CTF voucher the minimum for additional top-ups is just £10, either lump sum or monthly.

Where the F&C CTF really scores over the competition is cost. Like all stakeholder CTFs there are no initial or exit charges. But whereas most stakeholder CTFs charge 1.5% a year, F&C’s total annual charges are just 1.05%. This comprises total annual costs of 0.35% on the underling tracker fund plus an annual child trust fund plan fee of 0.7%. Yes, the overall cost is still expensive for a tracker, but that’s the nature of child trust funds and it’s a lot cheaper than the rest.

As with all other stakeholders the investment will be progressively moved towards less risky investments between your child’s 13th and 18th birthdays.

Is a tracker fund a good idea for your child’s CTF? I think that in general it probably is. There’s risk, but 18 years should give plenty of time to ride out stockmarket volatility. And although the FTSE All Share is dominated by a handful of industries and companies (your money is not invested equally across all companies), it still tends to fare well against many of the active fund managers who are paid large sums of money to try and beat it. You can read more about index-tracking funds on the trackers page in our investment section.

If you want investment choice then a stakeholder CTF is not for you. But if you’re in the market for a tracker-based stakeholder CTF this should be at the top of your shopping list, thanks to far lower charges than the competition.

Read the full review at http://www.candidmoney.com/candidreviews/review24.aspx

Is the Children's Mutual CTF any good?

This is a non-stakeholder child trust fund (CTF) that offers a choice of 11 investment funds from 5 different fund managers: Gartmore, Insight, Invesco Perpetual, SWIP and UBS.

You can invest the basic £250 CTF voucher in one fund and there’s a £250 minimum per fund for subsequent top-ups, falling to £25 per fund for monthly saving (subject to a minimum £50 overall monthly contribution).

While fund choice is probably too narrow to excite keen investors, the funds offered are generally reasonable, with highlights being Invesco Perpetual Income, Gartmore European Selected Opportunities and Gartmore US Growth. So, on the whole, fairly attractive compared to stakeholder CTFs, where your money is invested in just one fund (usually a tracker). But there’s one major difference, initial fund charges.

While the funds offered by Children’s Mutual have typical annual charges of around 1.5% (the same as stakeholder), they also have initial charges of between 3% - 5%. And if you switch funds you’ll be clobbered by the full initial charge all over again, which seems unfair. The initial charges are there because Children’s Mutual pays sales commission of 3% initially (not on the £250 voucher) and 0.5% annually to financial advisers, but given most advisers won’t get out of bed for such small sums (3% of the maximum allowed £1,200 annual top-up is just £36) it all seems a bit self-defeatist.

There’s the option to automatically shift into a less risky investment fund between ages 13 and 18, at a rate of 20% a year, which will be sensible for most.

Because this is a simple product that pays commission it makes sense to buy via a discount broker and cut costs by reclaiming some of the commission. However discount brokers don’t seem to be interested in child trust funds, probably as the amounts are so small it’s not worth their while. The only broker I’ve found that obliges is Clubfinance, which waives 2% initial commission on any top-ups and rebates 75% of any annual trail commission received, although the latter is only refunded after the child’s 18th birthday - a long wait.

Overall this is a worthy alternative to stakeholder CTFs if you reduce initial fund charges by using a discount broker. Otherwise the initial charges are mostly rather steep and the fund choice is probably too narrow for keen investors.

Read the full review at http://www.candidmoney.com/candidreviews/review23.aspx

UK/Irish inheritance tax?

Question
We live in the UK and have no children. We have made wills in the UK and in Dublin leaving everything to the surviving partner. We pay tax in Ireland and in the UK on the rental income from two houses we own in Dublin.

Will we have to pay inheritance tax on the property in Dublin as the houses are in my husbands sole name would I have to pay tax on the proceeds of them if he died?Answer
Under both UK and Irish inheritance tax rules a husband and wife can pass assets (including property) between each other on death free of inheritance tax. So if your husband dies before you and leaves the houses to you in his will then there should be no tax to pay.

However, this doesn’t necessarily mean there won’t be inheritance tax to pay in future. If your husband outlives you, or passes the property to you on his death and you own them on your death, then the resulting estate might exceed the tax-free threshold.

This will depend on the value of the properties along with your other assets and possessions as well as whether you fall under UK or Irish inheritance tax rules. The latter will depend on where you’re deemed to be ‘domicile’.

You can only have one domicile and it’s usually the country where you have your permanent home. You normally inherit your father’s domicile from birth but can change it from age 16 if you settle in another country and can demonstrate you intend to live there permanently.

Under UK inheritance tax law you can also be ‘deemed’ domicile in UK when you transfer assets if you were resident in the UK for 17 of the last 20 income tax years. And if you leave the UK permanently you’ll still effectively be deemed domicile for three years afterwards.

Assuming that both you and your husband are UK domiciled and resident then the properties will fall under the UK inheritance system (it will apply to your worldwide property). Both you and your husband have an inheritance tax allowance of £325,000 before tax of 40% is charged. If your husband passes everything to you on his death his unused allowance can be passed to you, giving you an effective allowance of £650,000 on your death (obviously the allowance could change in future).

If your husband passes the property to someone other than you (e.g. children) when he dies and it’s within his £325,000 allowance then no inheritance tax will be payable. Or if he gifts them to someone else and lives for at least seven years afterwards, they’ll fall outside of his estate so won’t be subject to inheritance tax.

If your husband is domiciled in Ireland but resident in the UK then both Irish and UK inheritance tax could apply on his death. There is however an agreement between both countries to avoid paying tax twice. In this instance he’d be liable to Irish inheritance tax on his worldwide property and subject to UK inheritance tax on any UK property, although any UK tax paid should be credited against any Irish liability on the UK property.

Hope this makes sense – international inheritance tax is not the simplest of subjects...

Read this Q and A at http://www.candidmoney.com/questions/question180.aspx

Fund charges after 2012?

Question
I use a funds broker who rebates both sales commission and part of trail commission. I make my own investment decision and receive no advice from the broker. Is the proposed abolition of commission to financial advisers results in investors paying the full funds managers initial charges?

With no commission being paid by funds managers there will be no incentive to use funds supermarket for investments in unit trust/OIEC. The loser will be the investor in the case of unit trusts/OIEC with the full charges being applied. So fund managers must all agree with the proposal because investors will have no choice but to go direct to them.

And will this be the end of Funds Supermarket?Answer
Based on the FSA announcements to date, this is my understanding of how fund charging might work from 2013.

The abolition of commission means that it will no longer be built into product (e.g. fund) charges. For example, a fund currently charging 3% initially and 1.5% annually will likely reduce its charges to 0% initially and 1% annually (assuming 3% initial and 0.5% annual commission). Any fees you pay for financial advice will be negotiated between you and your financial adviser, i.e. they’re independent of product charges.

The FSA has also proposed that product providers will no longer be able to pay fund supermarkets for administering their funds. This cost seems to average about 0.25% a year, so in theory we’d see annual fund charges fall by the same amount, meaning an annual charge of 0.75% in our above example. However, the fund supermarkets would instead charge investors, so you’ll probably still end up paying a total of around 1% annually, but you’ll be able to clearly compare the costs of using different fund supermarkets.

This means if you’re taking advice you can expect a typical fund to have no initial charge, annual charges of 0.75% and to pay a platform (fund supermarket) fee of about 0.25% a year. Will this mean it’s cheaper to buy direct from fund providers? (i.e. avoid the platform fee). Not necessarily, one of the key reasons providers pay platforms is that it removes their administrative burden, i.e. they don’t have to deal directly with the public and produce valuations etc, which saves them money. So funds bought directly might end up having an additional charge to reflect this.

There’s one final twist, the FSA does not intend to stop commission payments for ‘non-advised sales’, i.e. execution-only business (as is the case with most discount brokers). So we could end up having the strange situation where (ignoring any fees paid for advice) funds are cheaper through a financial adviser than a discount broker.

Will discount brokers be able to offer any cost advantage if you don’t want to pay for advice? I think it depends on whether fund supermarkets decide to compete head on. However, as discount brokers currently generate a lot of platform business this is probably unlikely, meaning fund supermarkets will have to charge more for buying direct from them than via a discount broker (else discount brokers will have no way of being cheaper unless they run their own platform and make money that way) – although this doesn’t make much sense to me.

Bottom line, I very much doubt you’ll end up paying more and there’s a chance of paying less – I’m just not quite sure as yet whether it’ll be through a discount broker or directly with a platform or fund provider.

Read this Q and A at http://www.candidmoney.com/questions/question179.aspx

Fidelity China Special Situations raises £460 million

Fidelity has today announced that its China Special Situations investment trust, to be managed initially by Anthony Bolton, has raised £460 million. Have investors backed a stellar opportunity or blindly followed the Bolton brand?.

Whatever the merits of the Fidelity China Special Situations trust, I reckon Fidelity would have struggled to raise £100 million had Anthony Bolton not been involved. So despite falling short of its £630 million target, the fact Fidelity has raised £460 million suggests investors’ love affair with Anthony Bolton is far from over.

I genuinely believe that Bolton was the driving force behind launching a Chinese fund. Let’s face it, he doesn’t need to work and why bother risking his considerable reputation unless he believes he can succeed. I also sincerely hope he does succeed, for the sake of both him and the many investors who have bought shares in the China Special Situations trust.

However, I’m not totally comfortable with this launch and fear that maybe Fidelity has been more concerned about milking the Bolton brand one last time than offering investors a genuinely attractive investment opportunity.

Let’s ignore Chinese investment prospects, as there are arguments for and against. And investors who don’t want exposure to the region shouldn’t have bought this fund anyway (for what it’s worth I’m keen on the region over a 10+ year timescale).

My discomfort stems from several main concerns:

Anthony Bolton lacks experience in Chinese markets

While he did, at times, have a small exposure to Chinese stocks within his flagship Special Situations fund, this amounted to just a handful of companies. I don’t doubt Bolton’s ability or expertise as a fund manager, but there is a question mark over whether he can replicate his UK success in a very different market.

Bolton has only committed to managing the trust for 2 years

This is more of a concern, especially if Bolton does perform well. Of course, Bolton may enjoy the role so much that he decides to extend his tenure, but there’s no guarantee of this. Given investors should be prepared to hold this fund long term, investing makes little sense to me when the lead manager could leave after just two years.

Fidelity is paying trail commission on an investment trust

It’s rare for investment trusts to pay trail commission. I’m sure the only reason Fidelity decided to pay 0.5% annual commission on the China Special Situations trust was to boost sales via commission-based financial advisers and discount brokers, who otherwise wouldn’t have promoted the trust.

It’s a shame because investors end up paying higher charges and trail commission on an investment trust is against the spirit of the Financial Services Authority’s proposals to clean up financial services.

Fidelity will win whatever happens

Based on the sum raised Fidelity stands to earn around £4.6 million a year from the trust (after paying trail commission) and the performance fee could push this to over £11 million. Fund growth will obviously increase these figures.

But Fidelity’s real trump card has been launching the fund as an investment trust. If there is a mass exodus of investors when Bolton retires then Fidelity’s annual fees should be unaffected. This is because, unlike unit trusts, investment trust shares are not cancelled when sold. All that happens when there are more sellers than buyers is that investment trust share price usually falls, hurting investors trying to get out. But this won’t bother Fidelity, as both its annual and performance fees are calculated on the value of the trust’s underling assets rather than its share price.

Trading begins on the London Stock Exchange at 8am on Monday 19 April. It’ll be interesting to see whether the price falls to a discount (to the net value of the underlying assets). Given the offer wasn’t fully subscribed there’s a fair chance this could happen.

Read this article at http://www.candidmoney.com/articles/article91.aspx

Taxman slaps 'kick-out' ISAs

The taxman has stirred up a storm following a recent HMRC bulletin for individual savings account (ISA) managers. The controversy surrounds protected capital plans that include the option to end the plan early (often referred to as 'kick-out' plans)..

Kick-out plans have become increasingly popular in recent years, partly because the combination of low interest rates and volatile stockmarkets has made it more expensive for protected plan providers to build traditional protected plans that simply match index growth (you can read more about protected plans in our investment section). So this news has potentially significant consequences.

What are kick-out protected plans?

They're like conventional capital protected plans in that they usually protect your initial investment and link investment returns in some way to a stockmarket index over five or six years. However, they also allow the provider to end the plan early, typically on an anniversary, if the index hits a certain level.

For example, a kick-out plan might offer a return of 8% a year for five years with the caveat that it will end before then at the end of any year where the FTSE 100 has risen. So if the FTSE rises over the first year the plan will close and you get back your original investment plus 8%.

Why the problem?

HMRC ISA rules state that an ISA manager must not hold securities (i.e. shares, bonds and other underlying investments) that are required to be repurchased or redeemed within five years of purchase. This means, for example, that corporate bonds due to be redeemed within five years cannot be bought within an ISA.

HMRC's view is that kick-out plans may have broken this rule because there's a chance they'll end before the five years are up. If this happens the underlying security used to build these plans is effectively redeemed.

Have the providers done wrong?

It's difficult to say at this stage. The providers' view seems to be that the rules can be interpreted as 'the security won't definitely have to re-paid within 5 years' and/or that simply passing the security back to the issuing bank if kick out does occur is ok as it's not then technically repurchased or redeemed. Whereas HMRC seems to be saying this isn't the case.

Why hasn't HMRC highlighted this issue before?

This is a grey area and my guess is that HMRC has been fairly relaxed in the past as most kick-out plans looked fairly likely to run their full course of five years or more. However, most of the recent plans have terms that make kick-out after just a year a two quite likely, which appears to be against the spirit of the rules, prompting HMRC to clamp down.

Which providers might be affected?

In theory any provider that has sold kick-out plans within an ISA, which would include the likes of Barclays, Santander, Morgan Stanley, Investec, Legal & General, Meteor and Blue Sky Capital. However, I must stress that at this stage it's not clear whether any of these companies has done anything wrong or have any offending ISA plans.

Will I lose out?

Unlikely. When HMRC announced last year that some Keydata ISAs did not comply with the ISA rules they sought to recover outstanding tax from Keydata and then the Financial Services Compensation Scheme (given Keydata was in administration), rather than investors. They also allowed affected investors to retain their ISA allowance on maturity or sale of the offending investment.

What happens next?

HMRC says that ISA managers must check their ISAs to see whether any break this rule. However, given the ambiguity over the issue I'm sure ISA managers will in turn seek further clarification from HMRC. I expect we'll find out more over the next few weeks. I'll keep you posted...

Read this article at http://www.candidmoney.com/articles/article90.aspx

Barclays Growthbuilder Plan any good?

The Barclays Growthbuilder plan, available until 1 June 2010, offers a potential return of up to 39.6% over a six year period.

The idea is fairly straightforward. You invest between £3,600 and £75,000 for six years and for each year the FTSE 100 Index is higher at the end of each year compared to the start of the year, 6.6% is added to your final return.

So, suppose you invest £10,000 and the FTSE 100 Index rises over three of the six years, you’d receive £10,000 x 6.6% x 3 = £1,980 plus the return of your original £10,000. If it falls every year you’ll simply get back your £10,000. The only scenario where you’d lose money is if Barclays Bank PLC, which underwrites the plan, fails to pay what’s owed to you at maturity – unlikely, but never say never. Should this happen you’ll be covered by the Financial Services Compensation Scheme up to £50,000 per person.

The plan can be held in an individual savings account (ISA). When held outside of an ISA any gains at maturity will be subject to capital gains tax.

While I applaud Barclays for keeping things simple, unlike some competitor plans, I have a major gripe with the Growthbuilder plan: the potential annual returns of 6.6% are not compounded, which effectively overstates returns when comparing to conventional savings. If we factor in compounding (i.e. interest on interest) then the 6.6% potential annual return falls to 5.73%.

Let’s take a look at the possible returns:

Number of years when FTSE 100 rises	Return on £10,000	Equivalent Gross Annual Compounded Return
0	£0	0%
1	£660	1.10%
2	£1,320	2.11%
3	£1,980	3.07%
4	£2,640	3.99%
5	£3,300	4.88%
6	£3,960	5.73%

Not very compelling are they? Especially when you can get 5% gross fixed for five years via a savings account. However, higher rate taxpayers could benefit from any returns being subject to capital gains tax and not income tax, although this obviously depend on tax rates and rules in six year’s time...difficult to predict!

Overall I think this plan offers a poor deal. The potential upside just doesn’t compensate for the added risk versus a fixed rate savings account. To get a worthwhile return the FTSE 100 will need to rise consistently over the next six years. And if you believe that will happen then probably better to invest in a tracker fund instead and benefit from the full extent of any rises plus dividends too.

Read the full review at http://www.candidmoney.com/candidreviews/review22.aspx

Provident Financial 7% 2020 bond worthwhile?

Provident Financial is a very successful doorstep lender. Its 11,500 strong army of self-employed commission-based agents target individuals who would struggle to get credit via more conventional means, such as banks or credit cards.

The loans, typically £300 - £500 for up to a year, are unsecured meaning the company is especially vulnerable to bad debts. However, Provident Financial charges customers very high rates of interest; the typical APR is 254.5% - 272.7%. With such a massive margin it can afford to pay agent commissions and incur some bad debts while still making handsome profits – something it's achieved consistently in recent years.

Provident Financial also offers a credit card through its Vanquis Bank operation, which typically charges 39.9% APR.

The company is listed on the London Stock Exchange and its share price has been fairly resilient over the last few years relative to overall market volatility. However, the price dipped in early March this year when Provident Financial announced lower than expected profits and warned of tougher times ahead. Nevertheless, it's likely to remain profitable and the dividend yield is currently attractive at around 7.3%. Invesco and Schroders own around 40% of the share capital between them.

While there is a moral issue over supporting a company that charges the financially vulnerable such high rates of interest, there's little doubt that this is a profitable business model that has so far weathered the economic downturn well.

I think the biggest threat to profitability remains bad debts. Provident Financial's 2009 accounts show an impairment charge (effectively bad debts) over the year of £283.4 million, a 19% increase on 2008. Given Provident Financial has around £1.14 billion of outstanding customer loans then bad debt provision appears to be running at about 25%.

So, against this backdrop, is Provident Financial's 7% 2020 corporate bond worthwhile?

If you buy the bond and intend to hold it for the full 10 years until maturity, then I think there's a reasonably good chance of getting your money back plus all the interest payments meanwhile. But I certainly wouldn't take this as a given. As highlighted above, the business makes money by borrowing cheaply (in this case, at 7% plus commissions) and lending at sky high rates able to absorb relatively high levels of bad debts. If bad debts rise to unsustainable levels or future legislation restricts the amount of interest that can be charged, then profitability (hence bond payments) could come under severe pressure.

The credit rating agency, Fitch Ratings, rates Provident Financial as BBB+. This is classed as 'lower medium quality' – the BBB category is one notch above non-investment grade (or junk) bonds.

You can expect to receive income payments of £35 per £1,000 invested on 14 April and 14 October each year.

If you sell before the redemption date you may make a profit or loss on your original investment. The factors most likely to influence the bond price are interest rates, inflation and Provident Financial's financial strength. Rising interest rates and/or inflation will likely cause the bond price to fall, as would deterioration in Provident Financial's financial position.

How does the 7% yield compare to other bonds in the marketplace?

Provident Financial issued £250 million of 8% 2019 bonds to the institutional market in October 2009, currently yielding around 7.3% gross to redemption. The 7% yield on this new issue looks a bit stingy by comparison (perhaps because Provident Financial is, unusually, paying a 0.5% tail commission to the broker distributing the bond).

Otherwise, the yield looks reasonable versus similarly rated companies – for example, Severn Trent Water (rated BBB+ by S&P) 2024 6.125% bonds have a current gross redemption yield of about 5.5%.

I don't think the Provident Financial 7% 2020 bond is a bad deal if you're prepared to sit tight for 10 years and don't anticipate higher inflation (means your money will purchase less when you get it back in 10 year's time) and/or interest rates (means you might end up getting higher rates in the bank).

But personally I wouldn't take the risk when bank savings accounts are offering up to 5% gross fixed for five years. Plus I'd always be wary of investing in a single corporate bond. Better to spread your money across several, perhaps using a fund to do so.

Regardless of the outcome, there will almost certainly be one winner in all this – Hargreaves Lansdown - the broker selling the bond. Provident Financial will, unusually for a corporate bond, pay Hargreaves Lansdown up to 0.5% a year on the principal amount of the bonds in issue until redemption in 2020. Maybe that's why Hargreaves Lansdown has sent me several emails in as many weeks encouraging me to invest!

You can read more about fixed interest investing in our investment section here.

Read the full review at http://www.candidmoney.com/candidreviews/review21.aspx

The new tax year

The 2010/11 tax year has now started. I've fully updated the site to relect this, but a quick recap on the major changes the new tax year brings..

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

Personal allowances remain at 2009/10 levels (£6,475 for those under 65) rather than increasing with inflation (because inflation was negative over the period used). Income tax bands remain unchanged too.

However, your personal allowance will reduce by £1 for every £2 of income you earn above £100,000. So 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 applies to income over £150,000 – estimated to affect the top 1% of earners. Such earners 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 - £2.40 weekly increase, qualifying years reduce to 30

The basic state pension for a single person has risen by £2.40 to £97.65 per week and by £3.85 to £157.25 for married couples. However, additional state pension elements such as SERPS/S2P are unchanged.

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

On a brighter note, you now only need 30 qualifying years of national insurance contributions to get a full basic state pension (it was 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 is now 55, having risen from age 50.

ISA Allowances – £10,200 for everyone

The annual Individual Savings Account (ISA) allowance is now £10,200 for everyone eligible to contribute into an ISA. Up to half of this 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 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 has also changed, being a little cheaper for lower polluters and more expensive for higher polluters.

Pension allowances

The annual and lifetime pension allowances have increased to £255,000 and £1.8 million respectively, but will now remain at these levels for five years.

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

No change to the rules, but a reminder if your annual taxable income has exceeded £130,000 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 is frozen at £325,000 until 2014/15 and the annual capital gains tax allowance remans £10,100.

National insurance band and rates remain the same 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 have generally increased.

Read this article at http://www.candidmoney.com/articles/article88.aspx

Historic annuity rates?

Question
Please advise where I can see an historic table of annuity rates. I see these week by week in papers/ magazines but would like to be able to track the performance over several years by provider or average collective rate for the various types of annuity eg impaired, joint etc.Answer
Good question and one that I tried to find an answer to when building this site.

I'm afraid the simple answer is that there's very little publically available information re: historic annuity rates. I ended up getting hold of some past level annuity rates from an insurer to power the chart at the top of the annuities page. It's not as comprehensive as I'd like, but you may find it helpful. When I can find an insurer willing to provide me with additional data I'll widen the scope of the chart(s).

Otherwise, the most comprehensive source I've found is www.williamburrows.com/rates.aspx, an annuity broker. The freely available information is still quite basic, but you can access extensive historic data by subscription (£100 for 24 hours or £250 a year).

If anyone has found a better, freely available source, please post details below.

Read this Q and A at http://www.candidmoney.com/questions/question177.aspx

Last minute ISAs & pensions

If you still want to use your 2009/10 individual savings account (ISA) or pension allowances then time is running out. However, provided you apply online you still have until midnight on Monday 5 April 2010..

Should you bother using the allowances?

I won’t cover whether an ISA or pension is worthwhile here, take a look at our ISA and pension pages to get a clearer idea of whether they’ll suit you. But if you think you want to use the allowances do you need to rush?

ISAs

If you don’t plan to invest more than £10,200 within an ISA (with no more than £5,100 in a cash ISA) in total across this tax year and next then relax, you can simply use next year’s from 6 April as that allowance should suffice.

Otherwise it’s probably worth securing this year’s ISA allowance provided you’re not paying for the ISA ‘wrapper’ and want to buy the underlying shares/funds or save cash anyway.

Pensions

As for pensions it’s unlikely you’ll fully fund your allowance both this tax year and next (as you can generally enjoy tax relief on the lower of your earnings and £245,000, rising to £255,000 next tax year). However, if you’re a higher rate taxpayer then contributing to a pension this tax year allows you to reclaim the additional tax relief via your 2009/10 tax return; contribute after 5 April and you may have to wait longer.

Do I need to choose the investments now?

No. Buy your stocks & shares ISA via a fund supermarket or stockbroker and you’ll usually have the option to hold cash for up to a few months while you decide which investments to buy. Most pensions also have a cash option which you can use for as long as you like.

What else should I bear in mind?

When investing online you’ll need to have sufficient funds in the current account linked to your debit card. You’ll also probably need your National Insurance number to hand.

Cash ISAs – buying online

Not all cash ISA providers accept online applications, especially if you’re not an existing customer. Here's a couple of examples that do:

Marks & Spencer Money Cash ISA 2.65% (includes 1.25% bonus for 1st 18 months) – you can apply online until 1pm on 5 April and 4pm by phone 0808 002 2222.

NS&I Direct Cash ISA 2.5% - you can apply online until midnight on 5 April.

Stocks & Shares ISAs – buying online

You can buy fund-based 2009/10 stocks & shares ISAs through the Cofunds and FundsNetwork fund supermarkets until midnight on 5 April. Even better, save money by going via a discount broker - read our ISA Discounts Action Plan for full details of 20 discount brokers.

If you want to buy shares, investment trusts or ETFs then most stockbroker self-select ISAs are available online until midnight on 5 April, including Interactive Investor, Alliance Trust Savings and TD Waterhouse.

Pensions – buying online

You can buy several stakeholder and self-invested personal pensions (SIPPs) online until midnight on 5 April. Legal & General accept stakeholder applications online while Hargreaves Lansdown and Funsnetwork accept SIPP applications. Read our Choosing a Personal Pension Action Plan for more details.

Finally, remember that even if a provider accepts ISA or pension applications online up until midnight on 5 April, if the application fails to reach them in time then it’s your problem not theirs. So give yourself plenty of time to complete the application in case of technical glitches.

Happy Easter!

Read this article at http://www.candidmoney.com/articles/article87.aspx

Buying property with a friend?

Question
I own my own property (2 bed flat in North London) and I am thinking of buying another property with one of my best friends (I would then rent my current place out, and we would live in the new place). He would be a first time buyer.

I am pretty comfortable with the whole residential mortgage process etc, but please could you tell me how easy/hard it is for two people to purchase a property together and how we would go about it.Answer
Good to hear from a fellow North Londoner!

If your friend hasn’t purchased a property before (worldwide not just UK) then he should be able to benefit from the increased stamp duty threshold of £250,000 for first time buyers announced in the recent Budget. However, to qualify the property would have to be purchased in his name only which is unlikely to be practical given you wish to purchase jointly.

Otherwise the process is quite straightforward provided you watch out for a few potential pitfalls.

Most lenders will let you apply for a joint mortgage with a friend and as the market appears to be easing hopefully you should be able to get a competitive rate - although you’ll probably need a deposit of at least 25% to access the best mortgage deals.

However, under a joint mortgage you would both be fully responsible for the whole mortgage. So if you fall out and your friend stops paying his share of the monthly payments you could end up footing the whole bill. Because of risks like this it’s wise to draw up a legal agreement beforehand covering all likely (and unlikely) scenarios. Issues it should cover include:

• Your percentage shares of the property and mortgage (if tenants in common – see below)
• What happens if one of you wants to sell?
• What happens if one of you wants to leave and rent out their share?
• What happens if one you dies? (It’s a good idea to ensure you both have sufficient life cover to repay your share)
• What happens if one of you can no longer afford mortgage repayments? (e.g. you lose your job)


• What happens if one of you simply stops repaying the mortgage?

Some money spent on legal fees now could save a lot of potential tears further down the line.

You’ll also need to decide whether to own the property as joint tenants or tenants in common.

If you own jointly you’ll have equal shares and if one of you dies the other will automatically own the property. This works for married or civil partners but makes less sense when buying with a friend.

Buying as tenants in common is likely to make more sense as you’ll each have a separate share in the property that need not be identical. This allows you to leave your share to someone else (e.g. relatives) in your will – if you haven’t already written one you should when taking this route.

Finally, bear in mind that of you live in the new property with your friend this will become your main residence. If you then sell your existing property you could be liable to capital gains tax on any profits, although you should be ok if s3lling within three years of moving out. You can read more details about Private Residence Relief on the Directgov website http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4020890.

Good luck if you go ahead and remember to offset mortgage interest and all other available income tax allowances on rental income from your existing flat when you rent it out.

Read this Q and A at http://www.candidmoney.com/questions/question176.aspx