Emergency Budget = emergency action?

The new coalition government is due to announce tax changes in its 22 June emergency Budget. Is there anything you could or should do before to lessen the impact of any tax rises?.

Given we don’t know exactly what will be announced or when any changes will take effect, trying to base decisions on such woolly information seems a bit foolish.

Nevertheless, as there are only a few changes you can realistically plan for in advance we can guess enough to make some reasonably sensible judgements. Let’s take a look at the key areas:

Capital gains tax

Despite protests from some Tory backbenchers it seems likely that the tax on gains will rise from 18% to fall in line with income tax rates at 20%, 40% and 50% respectively. And there’s speculation the annual allowance will fall from £10,100 towards the £2,000 proposed by the LibDems, although I’m less convinced. We’ll also have to wait and see whether any taper relief (lower tax the longer an investment is held) is re-introduced, as per before when capital gains were taxed at marginal income tax rates.

As capital gains tax is calculated over a complete tax year it would be very unusual (and unpopular) to implement any changes from June. Backdating the changes to 6 April 2010 makes more sense logistically but would be very controversial and set a dangerous precedent, so the most likely option is for changes to commence from 6 April 2011.

If you’re sitting on investment gains then realising up to your annual £10,100 allowance before 22 June makes sense, as it’s highly unlikely there’ll be a retrospective reduction in the allowance. Remember, if you don’t hold investments jointly you can transfer some to your spouse, allowing them to use their allowance too.

Should you realise gains in excess of your allowance? i.e. take an 18% tax hit rather than a potential 40% or 50%? This is a high risk strategy, so be careful. If we assume the annual allowance will be more or less unchanged then consider whether you could strip out gains over several years, effectively tax-free. But if your gains are significant then there’s a plausible argument for paying tax now and hoping that any charges are not retrospective.

If you have a second home that you’re looking to sell at a profit then it’s probably too late to complete a sale before 22 June, but with any luck tax increases will be deferred until next tax year which buys you some time.

Pension Contribution tax relief

Under current proposals those earning £150,000 or more will no longer enjoy higher rate relief on pension contributions from 6 April 2011. And if you annual taxable income has exceeded £130,000 since April 2007 you could already lose higher rate relief if you increase regular contributions over £20,000 a year.

The danger is that higher rate tax relief on pensions might be abolished altogether. It would be unusual if this were introduced mid tax year, but never say never.

If you’re a higher rate taxpayer (not caught by the £130,000 rule) and want to make pension contributions this year then doing so before 22 June seems sensible. There is a chance of retrospective legislation, but I’d be surprised if this is the case.

VAT

This may well rise, so if you’re planning an expensive purchase then doing so before 22 June seems wise, provided you can afford it.

Finally, if you’re taking advantage of any tax loopholes (of which there seem to be very few left) then brace yourself for a further clampdown. There’s nothing like a whopping deficit to motivate a government to collect every last penny of tax it can.

Read this article at http://www.candidmoney.com/articles/article113.aspx

National Grid rights issue - buy?

Question
A few years ago I inherited some National Grid shares from my father. They've since done very well, but when the 2 for 5 rights issue was announced a week or two back the share price, of course, shot down. I've now received the bumph setting out my provisional allocation and am not sure whether to take up the offer. They say that the money is needed (inter alia) to replace major infrastructure - some press comment has suggested that they need to raise additional funds in order to do so without risking their credit rating.

I hate rights issues as I never know what to do for the best (although the cost to me is only in the low hundreds). My overall portfolio is reasonably well spread, based on one of bestinvest's models so since National Grid pays a half-reasonable dividend and is more or less a monopoly I'm inclined to think that this issue might be worthwhile, especially while interest rates are so low.

What's your opinion?Answer
National Grid is raising the money to contribute towards the £22 billion it reckons it needs to spend on upgrading the grid infrastructure over the next five years. It’s certainly peeved the markets by announcing a rights issue as it had previously said this wasn’t an option they’d consider.

The company announced profits of just under £2 billion over the year to the end of March, despite revenues falling by 10% (mainly due to a drop in US gas and electricity distribution), and has announced a full year dividend of 38.49p per share (the final dividend will be paid on 18 August).

As you point out, the company effectively has a monopoly in the UK which should ensure a steady flow of business and bodes well for the future. My main concern is that it might struggle to continue delivering its pledge to keep increasing annual dividends by 8% until 2012 – the infrastructure investment could take its toll on cash flow hence put a lid on dividend increases – in which case the share price might suffer.

There’s also a question mark over whether the business will need to borrow or raise more money in future to fund its planned £22 billion of expenditures, especially if costs go over budget or revenues fall. National Grid seems loathe to borrow more at present so as not to harm its credit rating (net debt is currently about £22 billion), but it may have to do so in future.

While I’m no expert on National Grid, on balance I think my inclination would be the same as yours, i.e. buy the rights. This isn’t the type of business that is likely to crash so the downside should be quite limited and in this climate stable businesses paying attractive dividends make sense.

Incidentally, the banks underwriting the issue stand to pocket over £100 million in fees between them, so there’ll be some bankers somewhere celebrating!

Read this Q and A at http://www.candidmoney.com/questions/question205.aspx

How can I study to be my own adviser?

Question
My financial situation has recently improved due to various personal factors and I now have quite a large lump sum that I would like to learn to manage myself for growth and income.

(I've used various Financial Advisors in the past but I'm beginning to see through the obvious self interest in what they advise!)

I would like to take a course in Financial Planning/Managing personal finances so I can at least understand the basic prinicples of different financial products and learn how to develop an investment strategy/portfolio for myself.

Is there anything you can recommend? I live in London.Answer
Congratulations on deciding to take a more active interest in managing your money.

There are really five key aspects to saving and investing.

1. Get a clear idea of what you want to achieve, including how long you can tie up the money, how much income you’ll need and how much risk you can tolerate (i.e. how much could you stomach losing if markets fall).

2. Work out a sensible mix of savings and investments in line with the answers to (1) – called ‘asset allocation’.

3. Consider tax efficient ways to hold the savings and investments, for example within ISAs and pensions, as well as bearing in mind annual income and capital gains tax allowances.

4. Choose the actual products, savings, investments themselves. For example, funds or shares and, if relevant, the ISA or pension in which they’re held.

5. Once the savings and investments are in place review regularly to check whether any changes might be worthwhile (for example, a fund manager might quit affecting a fund you own or maybe your income requirements might change).

There’s no reason you can’t do this yourself with some effort and willingness to learn. And let’s face it; experience suggests a number of financial advisers make a hash of this anyway as they’re more concerned about making themselves rich rather than you.

You should be more than capable of answering (1) without too much help. The main thing is to map out a general plan of your income and expenditures over the next five to ten years to get a feel for how big a margin for error (i.e. losses) you have. If things are tight you’ll probably want to take very little risk, but if you can afford the possibility of losses it allows you to take more risk in pursuit of higher profits. It’s basically a balancing act and the correct balance is the one that allows you to sleep comfortably at night.

Working out a sensible mix of savings and investments is a bit harder, but not impossible if you use a good dose of common sense. If you’re likely to need any money within the next five years then put it in a savings account where it can’t fall in value. Any balance can then be used for investing over a realistic timescale of at least five to ten years (although you may obviously switch between investments during that time). As a starting point I’d suggest reading the investment pages on this site which should give you a good feel for the various investment (or asset) types. Most investors will tend to have a mix of stockmarket, fixed interest, commodity and property investments with proportions depending on their income requirements, risk appetite and views on markets.

To get a feel for what proportions might be appropriate you could take a look at those suggested by financial advisers and used by ‘fund of fund’ managers. For example, Bestinvest shows its suggested allocations on its website and you can look at www.trustnet.com to find the portfolio breakdowns for unit trusts – try looking at funds in the Cautious Managed sector.

When it comes to tax efficiency the investment, pension and tax pages on this site should tell you pretty much all you need to know.

Choosing the actual investments themselves is probably the hardest part and something that even professionals regularly get wrong. I’d start off by looking at funds rather than shares, as there’s less chance of making an expensive mistake. And maybe consider using low cost tracker funds where appropriate. A good way to get a feel for which actively managed funds are probably better than not is to see what investment advisers such as Bestinvest and Hagreaves Lansdown are recommending and also see which funds fund of fund managers are holding (you can use Trustnet for this). If a fund consistently appears across these mediums then it means the experts must reckon its worthwhile - no guarantee of success but a more sensible approach than simply picking what’s done well in the past.

As for courses, it’s not something I’ve ever looked at (aside from university, I've found learning from books/the web works best for me). The Chartered Institute of Insurers offers courses aimed at those studying for financial adviser exams, but they do look quite pricey and might not arm you with that much useful knowledge in practice. You could try looking on http://www.hotcourses.com, although having just had a quick search I’ve struggled to find any relevant courses.

Perhaps start by following my suggestions above then feel free to ask me any follow up questions you might have along the way.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question204.aspx

Perth gold certificates safe?

Question
I am considering buying gold. The Perth Mint unallocated certificates seem the best (I think I can trust OZ govt.!) but I will have to buy through Goldcore .com who are in Dublin. How do I check if Goldcore are OK (will not send me fake certificates, or none!). Are there any tax implications? Also, as I intend to keep these longterm, what would happen if I should die while still owning them? Answer
Just a quick recap for those who don’t know, gold certificates give you legal title to gold and are normally backed by physical gold held in storage. The Australian Government backed Perth Mint Certificate Program offers the most widely recognised certificates nowadays – they’re backed by both physical gold bars and the Western Australian Government.

As Goldcore is the approved Perth Mint Certificate Program dealer for the UK and Ireland I think there’s negligible risk of you not getting a genuine certificate. Nevertheless, once received it would be sensible to contact the Perth Mint directly with your certificate number to verify its authenticity.

The minimum initial investment is US$ 10,000 and US$ 5,000 thereafter. When you buy there’s the option for allocated and unallocated accounts. Allocated means there’s a piece of gold held specifically for you, but you’ll have to pay initial fabrication costs and storage costs of 1% a year. Unallocated means you have an interest in a large pool of gold rather than owning a specific piece of gold. Although not as safe as allocated gold, the risk appears small given the scheme is backed by the Western Australian Government.

Any gains you make when selling the certificates will be subject to UK capital gains tax in the normal way. At the moment that means tax of 18% on any gains above an annual allowance of £10,100, but the new Government has said it intends to raise the capital gains tax rate to bring it in line with income tax rates.

If you hold the certificate jointly then full ownership will automatically pass to the survivor upon first death. If held in your name only then it will pass into your estate and be dealt with according to your will (e.g. sold with the proceeds being paid into your estate).

The certificate contains a transfer form allowing you to pass ownership to someone else by completing the form and returning it to Perth Mint. If you do this you’ll still be liable to capital gains tax on any profits unless transferring to a spouse.

Finally, remember that the government guarantee relates to your ownership and not the gold price. If the price of gold falls you'll lose money.

Hope you make a mint!

Read this Q and A at http://www.candidmoney.com/questions/question203.aspx

Why ebay buyer protection fails

This is a bit off piste, but I’d like to share why ebay’s inadequate buyer protection scheme has really ‘piste’ me off..

It started when I ordered a new pedestal sink from a business seller on ebay who had good feedback. When the sink arrived it was somewhat shorter than as described in the seller’s ebay listing, and basically useless unless you happen to be very short (I’m not).

I alerted the seller who said he’d send me a refund provided I paid to return the sink (about £30). I pointed out that under the Sale of Goods Act 1979 the cost of returning the sink was his responsibility, not mine, but this fell on deaf ears.

No problem I thought, I’ll file a claim under the ebay buyer protection scheme – which is always prominently displayed on its website (I assume to ‘re-assure’ buyers). I entered the details and the seller responded saying he’ll only refund if I returned the sink. A couple of weeks later and ebay still hadn’t responded, so I called their customer services to get an update. It was impossible to have a worthwhile conversation with both the customer services rep and then his manager as they simply read from a script that didn’t cover the questions I asked them. Anyway, bottom line, it became evident that the buyer protection scheme only pays out the original purchase cost and postage if the buyer foots the bill for returning the offending item to the seller (and this cost cannot be reclaimed).

I put down the phone thinking they must be wrong. After all, a buyer protection scheme that makes buyers pay for returning goods that are either faulty or not as described is pointless (as well as being at odds with the Sale of Goods Act). But on checking the small print, this is the case.

Just to re-iterate, if you buy an item on ebay and it arrives faulty or not as described then, unless the seller does the right thing, you’ll end up having to pay the return postage costs to get a refund from ebay (excluding those return postage costs). In my case I’d be left £30 out of pocket through no fault of my own.

Unsurprisingly I haven’t used ebay since and don’t intend to again, I feel it’s just not worth the risk. Meanwhile I’m speaking to trading standards, who might be able to help, but maybe the only way I’ll get my money back will be to take the seller to court. I’m inclined to do this out of principal, but it’s a hassle I wouldn’t have to endure if ebay buyer protection wasn’t so flimsy.

Do any of you, whether ebay buyers or sellers, have any experience or views on the buyer protection scheme? If so, please post your comments below.

Read this article at http://www.candidmoney.com/articles/article112.aspx

How to cancel credit card?

Question
Just a quick question.

I am very near to paying off my credit card. When I have made the last payment, I wish to close the credit card account. Is closing my mastercard as simple as phoning my bank and saying I wish to close the account or is there a procedure or anything I need to look out for?

I borrowed money on my credit after I was declined a career development loan. I was blowed if I was going to let the banks decide my education / future career (and in anycase, the interest rate was not too dissimilar).Answer
Well done on paying off your card!

Yes, it is as simple as calling the credit card provider, although you might want to tell them in writing too just to make sure as it’s not unknown for call centres to make mistakes. Nevertheless, bear in mind that the credit card company will probably leave the account in place for a while longer in case any outstanding payments come through, so it’s a good idea to call again after three months and ensure that the account is fully closed.

However, before you cancel, consider whether you’ll find it useful to have a credit card in case of financial emergency. If so then keeping, but not using, this card could make sense if you don’t want the hassle of applying for another in future or require money at very short notice.

Good luck with your new career.

Read this Q and A at http://www.candidmoney.com/questions/question202.aspx

Out of pocket from bank fraud?

Question
On two occasions the representative of the British Bankers' Association repeated, on Working Lunch, that banks must prove that customers were negligent, in the case of fraud, in order to avoid refunding the money stolen.Yet recent newspaper reports show that banks are flouting the Law and the FSA seem unwilling to act against the banks.That leaves the customer with the only option to take the banks to court.

That is not feasible to many people.What is the point of the FSA when they can't or won't uphold the Law? They seem to let financial businesses do what they like instead of protecting the public! There does not seem to be an organisation that can or willing to protect customers.This is worrying because anyone can be subject to fraud and banks ignore the Law and the FSA is not interested.Answer
Banks and building societies are subject to the FSA’s Banking Conduct of Business Sourcebook (BCOBS), which replaced the Banking Code last November (although banks had until 1 May this year to implement a few of the changes).

BCOBS, which you can view here if you want, states:

If you deny authorising a payment then it’s up to the bank to prove that it was authorised. If unauthorised then they must, within a reasonable period of time, refund in full.

However, if an unauthorised payment arises from lost/stolen bank account details/cards then you can be liable for up to £50 of losses incurred before you made the bank aware of the issue. The bank can only hold you liable for all losses if it can prove you acted fraudulently.

If you think a bank or building society has acted against these rules by not refunding unauthorised payments then you can take your complaint to the Financial Ombudsman Service who will, hopefully, apply some common sense and uphold valid complaints.

But you’re right; there have been some horror stories of individuals suffering unauthorised payments and having to resort to the courts before their bank repays their money. I guess the reason banks are sometimes reticent or slow to re-instate losses is that there are criminals seeking to profit from such claims – as usual it’s the actions of a minority who spoil things for the majority.

This is all worrying as bank fraud continues to grow according to CIFAS, the UK’s fraud prevention service. It identified 80,125 instances of bank account fraud over 2009, an increase of 7,117 on the previous year, although credit card fraud fell by about the same amount over the period to 63,396 cases.

The best piece of advice I can give is to be careful and inform your bank or building society ASAP if you suspect an unauthorised payment or believe that your security has been compromised (e.g. passwords/account details/cards have been lost or stolen).

You can buy identity theft/fraud insurance if you’re especially worried, although given your loss should be no more than £50 these policies are of questionable value.

I agree that the FSA should police its rules more stringently. Given fraudulent claims are no doubt rising I can understand the banks wanting to investigate some claims, which can delay re-imbursement. But sadly what often seems to be lacking in these large corporations is common sense, a problem that’s all too common these days with the growth of call centres and scripted staff.

Read this Q and A at http://www.candidmoney.com/questions/question201.aspx

Aviva anniversary certificate?

Question
I have received an Anniversary Certificate from AVIVA. If I do nothing will this product be re invested for another period or will AVIVA pay out the value of it. Please advise.Answer
It really depends on what product you own and exactly what certificate you have.

If you own an investment bond, perhaps with-profits, then it’s rare for there to be a fixed maturity date (unless you have a guaranteed income bond). So the certificate is likely to be an annual ‘chargeable event’ certificate outlining any tax liability you may have – perhaps resulting from withdrawals you might have made in excess of the ‘5%’ annual allowance (for more details read our insurance investments page). If the certificate relates to a with-profits bond then check whether Aviva is offering the opportunity to surrender the bond without applying a ‘market value reduction’ (MVR). If so, it might be an opportune time to get out as you’ll escape this penalty if it would otherwise apply.

If you have an endowment then it may be coming to maturity, but you’d expect to receive details of this from Aviva, not simply an annual certificate.

I suggest checking the name and type of product that this relates to and if you enter that below in the comments section I can take another look.

Read this Q and A at http://www.candidmoney.com/questions/question200.aspx

Will they ever come clean?

Will the new Government finally come clean about the extent of our economic dire straits?.

Stand by for the budget, and please remember that David Laws is not, as far as I know, a relative. Please also remember that the last budget made some heroic assumptions about economic growth and tax revenues over the next few years. The situation is almost certainly a lot worse than the last Government admitted.

There is a huge body of academic opinion that says that the best and quickest way out of a hole is to stop digging, ie to start to cut public spending. I prefer Winston Churchill’s crack that trying to make the economy grow by increasing taxes is like standing in a bucket and trying to lift it up by the handle, but you’ve heard that one before.

The first test of the new politics will be whether Cameron and Clegg are prepared to come clean on the dire economic situation, or whether they will go on fudging it as they both did – disgracefully – throughout the election campaign.

When they stand up and tell us that we’re all going to get poorer, and that the people who have been careful and saved some cash for their old age are going to suffer disproportionately, I will believe that something has changed.

Read this article at http://www.candidmoney.com/articles/article108.aspx

Stick to cash or invest?

Question
I have retired early do to ill health (55) and my husband has also taken early retirement he will finish work in june and has opted to take the cash lump sum (57).

We are now looking at the best way to generate income from funds around £150,000 we also hold ISA's valued at around £40,000.

Because of my health I am a little put off by to long a time of tying up money hence we don't want to put it into an annuity.

Investing the money sounds a little scary but we do need to have an income and also look to keep the capital value there. Another thing that puts us off is the fees and commission IFA charge we don't want to be paying all the interest and income out and ending up with less than I could get in a long term fixed account.

We really need some good sound advise.Answer
Firstly, apologies for not replying sooner, I’ve been busy with other stuff lately giving me less time than I’d like to spend on this website.

The safest option is to keep the money in high interest savings accounts, including cash ISAs. Assuming your existing ISAs are cash ISAs then the best variable rates you can currently get are around 3% and the same too for conventional savings accounts, although beware that the top rates generally include temporary bonuses.

This means an annual income of around £5,700 from your £190,000. The non-ISA income will be taxable, so if one of you is in a lower tax band than the other it would make sense to hold most, if not all of the money in that person’s name. Also don’t forget that only the first £50,000 per person per institution is covered by the Financial Services Compensation Scheme (FSCS).

Opting for fixed rates of up to five years could increase interest to 4% or more, providing an annual income of £7,500 to £8,500 before tax.

Although safe, the downside of cash, especially if you withdraw interest, is that your pot of money will buy less and less in future if prices rise, i.e. you’ll lose out to inflation. Interest rates can also fluctuate, although they can't really get much worse than current levels.

Investing in assets such as corporate bonds, stockmarkets and property can overcome this problem, because as well as producing income the underlying value (e.g. share or property price) might also increase. However, you also risk losing money, in which case inflation would be the least of your worries.

Such investments could currently produce an income of around 4 to 6% before tax (after basic rate tax for share dividends), i.e. £7,600 to £11,400 a year from your £190,000. However, you should be prepared to remain invested for 5-10 years to reduce the risk of losing money.

In practice a combination of cash and investments is likely to be a sensible compromise. The exact mix will depend very much on how cautious you want to be and how much income you require.

Although it sounds like you’d probably benefit from good independent financial advice, I share your concerns over the difficulty of finding a good, honest and cost effective financial adviser.

You could try using www.unbiased.co.uk/ to find fee-based independent financial advisers in your area then speak to a few to see whether you can find one you’d be happy using. You could also try speaking to Bestinvest, which is currently the only discount broker I know of which also gives advice (paid for by trail commission).

You might also find our financial advice page helpful, as it includes tips of what to look out for when choosing an adviser.

If you do decide to invest I wouldn’t rush. Markets are pretty volatile at the moment and I expect there’ll be more bad news before things improve. Bearing this in mind cash doesn’t look unattractive despite the low rates on offer.

Read this Q and A at http://www.candidmoney.com/questions/question199.aspx

Say it with numbers

Just how many votes does it take to get elected these days?.

Anyone out there old enough to remember the Interflora adverts will recognise the play on the strapline. He might not have been the first to use it, but for my old boss Mark Wood, late of AXA and The Pru, and now deputy chairman of Paternoster, it was much more than a slogan. He expected any argument to be supported by numbers, he made sure the numbers were right, and he made sure that the interpretation of the numbers was watertight. Having tested his managers to the limit with this analytical rigour, he then let them get on with it, so he was far and away the best boss I ever had.

I was reminded of Mark and his catchphrase when I listened to some of the post election coverage. One ex Labour minister suggested that the election showed that 70% of the electorate did not want a Tory Government. Others suggested that the Conservatives, with only 36% of the votes, could not possibly have a mandate to govern.

Well, guess what: in 2005 Labour got a thumping majority with only 35.2% of a 61.4% turnout. As for the 70% not wanting a Tory Government, you can only get to that figure by assuming that the 34.9 % of the electorate who did not vote did not want to see a Tory Government, and thought that the best way to make their wish come true was to stay clear of the polling booth.

Here are some more numbers: for every five electors who voted Labour, nine did not vote at all. The Tories and the Lib Dems between them got 58% of the votes cast, so were actually supported by less than four in ten on the electoral roll. That is scary, but not as scary as the fact that the last Labour Government was actually elected by less than one in four of us all.

It is to be hoped that the new administration really can say it with numbers that have some basis in fact and add up.

Read this article at http://www.candidmoney.com/articles/article106.aspx

How do I invest in an Investment Trust?

Question
How do I buy shares in an Investment Trust?Answer
Investment trust shares are traded on the stockmarket so you’ll need to buy them via either a stockbroker or an investment trust share dealing scheme.

If you want to buy and sell investment trusts from different companies then online stockbrokers tend to offer the most convenience and cheapest deals, at around £10 per trade. If you want to hold the investment trust within an individual savings account (ISA) then most stockbrokers will charge an annual fee for the ISA ‘wrapper’, but a few offer this free of charge – see the answer to this question for more details.

The investment trust share dealing schemes (often called ‘share plans’) offered by the investment trust companies usually only allow dealing in their own trusts. Some offer free purchases, while others might end up costing more than a stockbroker when investing lump sums. Nevertheless, these plans are usually the most cost effective option if you want to invest monthly. You can view a full list of these plans in the Association of Investment Companies (AIC) monthly statistics publication.

The exception to this is when an investment trust launches (called an initial public offering - 'IPO'), in which case the shares may also be offered through some financial advisers.

Read this Q and A at http://www.candidmoney.com/questions/question198.aspx

Irish ETF tax efficient?

Question
I have read your interesting reply about dividends and ETFs in the FT of 16 April.

Would I be correct in thinking that, if you hold an Irish or Luxembourg based ETF in an ISA you would not pay any income tax on the dividends? Does this mean that you would receive higher net dividends in an ISA, all else being equal, by holding e.g. an Irish based FTSE 100 ETF than a UK FTSE 100 Index Tracking Unit Trust that deducts Withholding Tax?

I have only discovered your website as a result of the FT article.

Well done, it's a useful resource!Answer
Thanks for the positive feedback. I’m afraid there’s no tax advantage in holding the exchange traded fund (ETF) versus a unit trust. The tax works along the following lines:

When a UK company pays a dividend it’s out of taxed profits, i.e. corporation tax has already been paid. In recognition of this HMRC attaches a tax ‘credit’ to the dividend. While the tax credit can’t be reclaimed in ISAs, pensions or by non-taxpayers (Gordon Brown put a stop to this in 2004), it’s deemed to be worth 10% which offsets the 10% basic rate taxpayers must pay on dividends. Higher rate taxpayers must pay 32.5% tax on the dividend including the tax credit, equal to 25% tax on the dividend received, but can avoid paying this extra tax if the shares are held in an ISA or pension.

If the shares are held in an ETF or unit trust domiciled overseas then the foreign country might deduct further tax from the dividends, known as a ‘withholding’ tax. When this happens double taxation agreements usually allow up to 15% to be offset against your UK tax liability (although it does vary), meaning basic rate taxpayers have no further tax to pay and higher rate taxpayers can offset up to15% against their 32.5% liability.

In the case of an Irish domiciled FTSE 100 ETF the fund receives the dividends from UK companies after corporation tax has been deducted and the 10% tax credit is attached (just as you would if you held the shares directly). The fund then pays these dividends onto you and the 10% tax credit is deemed to be attached, i.e. it’s no different to holding the shares directly or using a UK tracker unit trust. This is because the Irish authorities don’t levy an additional withholding tax on the dividends.

Were the ETF domiciled in France then the French authorities would deduct an extra 25% withholding tax, leaving you out of pocket as only up to 15% can practically be reclaimed.

Hope this makes sense.

Read this Q and A at http://www.candidmoney.com/questions/question196.aspx

How much should I save?

Is working out how much to save an exact science? Or is the answer, in fact, much simpler?.

For as long as I have been associated with the financial services business, actuaries assigned to marketing departments have produced endless figures showing that unless you start pension saving the minute you start earning, and keep going all your life, you have no chance of retiring on a comfortable two thirds of your final salary. And journalists desperate for copy have peddled these fictional projections.

All the projections are based on assumptions. They assume that your earnings will follow a certain path. They assume a rate of inflation. They assume an investment return. The estimable Peter Clark, president of the Institute of Actuaries ten years ago, showed what was then –and still is – rare humour for a prominent member of the profession:

“An actuary is a person who passes as an expert on the basis of a prolific ability to produce an infinite variety of incomprehensible figures calculated with micrometric precision from the vaguest of assumptions based on debatable evidence from inconclusive data derived by persons of questionable reliability for the sole purpose of confusing an already hopelessly befuddled group of persons who never read the statistics anyway.”

Quite. The journalists who peddle this twaddle do not seem to realise that many of us can’t afford to save when we’re young, and can afford it even less when our children are growing up. It would make more sense for them to deal with the real world, where even people who are by any standards quite well off actually accumulate their retirement assets quite late in life.

It would help a lot if the FSA banned the use of projections which are, to the first order, worthless. No-one knows what the financial landscape is going to look like for the next thirty years. And, by the way, what matters is not percentages of your final salary but how much money you actually need to support the lifestyle you actually want.

The only sane advice is “save as much as you can for as long as you can”, but any adviser who came up with such advice would probably be condemned by the regulator.

Read this article at http://www.candidmoney.com/articles/article104.aspx

Hold onto commodities?

Question
I’ve read several articles recently suggesting that commodities have become overpriced and might even be the next bubble waiting to burst. Others, though, think that China’s appetite for raw materials is such that they’ll be in demand for some time.

A few years back I invested a small sum in JPM Natural Resources. This has since grown to the point where it now represents 7% of my portfolio. I’m wondering whether I should sell half of it and add the proceeds to one of my income funds (charges aren’t too much of an issue as I bought the fund through a discount broker and it’s in a funds supermarket, but I’d still lose 0.25%).

On balance I’m reluctant to sell as I believe there’s hope of yet more growth and I’m not likely to need the money within the next 5 years or so. What’s your own view?
Answer
Personally I’m a fan of commodities for long term investing. A reasonable chunk of my pension fund is exposed to commodities – this might seem high risk and unbalanced but given I’ve probably got 20+ years until retirement I’m comfortable with this.

My rationale is very simple. As far as we know commodities, both hard and soft, are in finite supply. Provided the world’s economies continue to develop and its population continues growing (growth rate is still positive although slowing) then demand for most commodities is likely to increase and if supply can’t keep pace then prices should rise.

To give a simple example: the average person in China currently consumes about two barrels of oil a year while in India it’s one barrel. Contrast this to the US where the average is 25 barrels per person (admittedly an extreme example) and it’s obvious that demand could, over time, grow significantly. Indeed, China’s demand for oil in January 2010 was 28% higher than the previous January according to the International Energy Agency.

I don’t doubt there’ll be a lot of volatility along the way, but 10-20 years should be sufficient to ride this out.

The JPM Natural Resources fund is primarily exposed to energy, gold and other metals. Although the gold price is arguably high at present it may well hold up over the next five years if global economic uncertainty continues as it’s a popular safe haven (although supply did outstrip demand last year according to World Gold Council figures – largely due to a fall in jewellery demand). And if emerging markets continue to prosper then gold, energy and metals should all benefit. However, commodity prices tend to be rather volatile, in part due to speculative investors affecting prices, so they’re by no means a one way bet – especially over five years.

If you’re comfortable with the risk then by all means maintain your exposure. But bear in mind you might also have a reasonably high exposure to the energy sector via other investments you own (it currently accounts for about a fifth of the FTSE 100 Index). If risk is a concern then your idea to sell half and re-invest in a lower risk income fund sounds sensible.

Good luck whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question194.aspx

Deal or no deal?

How can you turn business weaknesses into your bank balance strength?.

One in three of the UK’s small businesses are rubbish at bargaining to get the best deal for themselves and their firms. And that's just the ones who recognise their weakness in this area – or are prepared to admit it. So it's likely that the percentage of small business folk with poor negotiating skills is higher than the 31% who owned up to overpaying to researchers for a survey for phone operator T-Mobile.

And let's face it, it's not just businesses who are poor at negotiating, it's an area where most of us could improve.

The T-Mobile figures relate to small firms' relationships with their own suppliers. The near one in three who confess to saying deal when it should be “no deal” end up paying over the odds on a wide range of goods.

This can include catering firm owners fail to get a good price when they buy raw materials for their dishes to van hire operators who pay over the odds for their vehicles and servicing.

But if this one in three is bad at controlling its own costs, then there could be advantages for consumers who are prepared to haggle. Like martial arts experts, the trick is to turn their weaknesses into your strength.

So here are some nuggets from the figures – and how you can convert them to your advantage.

• Nearly a third of small business owners or managers (31%) do not see themselves as naturally strong negotiators. Give them a lesson. If you have a choice of more than one firm, then make it clear that you are asking them to tender for the work – and that the best offer secures your business. But don't push them to the brink of bankruptcy – a good negotiator lets the other side save face. It may be easier if you ask for an upgrade or some extra work rather than a cash reduction. In any case, if you force the price down too far, you might get a sub-standard job.


• 38% of small business leaders expect suppliers to quote an unreasonably high first price Knowing that is a key to a better deal because firms that expect to be quoted over the odds will often try it on customers to get their excessive payments back. You have near enough a four in ten chance of meeting someone like this. If the firm you're dealing with expects to haggle its way to a lower price, then it won't be surprised if you bargain.


• 63% of small business owners or managers have walked away from a supplier who has quoted an unreasonable first price That should mean nearly two out of three businesses won't be surprised if you walk away. Walking away does not mean the end of negotiating – just a sign that mean business on your own terms.


• One in ten (10%) only try to negotiate when they are having cash flow problems Oh dear! They probably have cash flow problems because they didn't negotiate before. Just because you might be feeling flush that month does not mean you should not get the best deal going. You are not a charity.


• One in eight (13%) business bosses believe negotiations won’t make any difference. Obviously, you won't get too far bargaining at Tesco. But many small businesses will be flexible – especially if you are spending a substantial sum and make a special order. After all, that way, the business does not even have to hold the stock.


• A further one in eight (13%) small business owners say they don't have time to negotiate. Time is money – but only sometimes. These firms may be happy to get your business speedily – on your terms. Remember bargaining gets easier (and faster) with practice.


• One in three (32%) feel uncomfortable or stressed when they are negotiating with suppliers. There's no easy answer to this other than practice makes perfect.


• Three out of four business bosses have had no negotiation training and almost the same number offer none to their staff.

That's a good chance for you provided you learn about how to negotiate. There is plenty of online help try http://sbinfocanada.about.com/cs/marketing/a/negotiationkr.htm – it's Canadian (but applies universally across the globe) so the other side will probably never find it or its hints!

Read this article at http://www.candidmoney.com/articles/article103.aspx

Capital gains tax on foreign shares?

Question
Can I use my yearly capital gains tax allowance against Barclays ishare ETFs and other foreign registered shares?Answer
Yes you can. Gains made on foreign shares are treated in the same way as UK shares, meaning gains can be offset against your annual capital gains tax allowance, currently £10,100.

If the shares are traded in a foreign currency then the purchase and sale prices must obviously be converted to pounds sterling based on the exchange rates at the time.

The same is also true if you profit from exchange rate movements when holding foreign currency in a savings account (note, the gain is only triggered when you withdraw money from the account).

[If you're tax resident in the UK but domiciled abroad then gains on investments held overseas are not subject to UK capital gains tax (under the 'remittance' basis) unless you bring the gains into the UK. But in this scenario you won't get an annual capital gains tax allowance.]

Income is more complicated, as it may be subject to foreign withholding taxes which may be partially or fully credited against any UK tax liability.

Read this Q and A at http://www.candidmoney.com/questions/question193.aspx