Best way to cut life cover costs?

Question
I'm in my early 30's and moving from a job that has always had life cover as part of my package to one that does not.

I'm looking at term assurance with decreasing cover, which will reduce in line with my mortgage, as this is the lion's share of the cover I require. The term I require cover for will be around 20 years, by which time my children will both have completed their education and my mortgage should be paid off.

However, my question is this: Am I better off getting this cover over (say) 5 years and reinsuring at the end of this period, or getting term cover over the full term I expect to require life assurance now?

Presumably I would have a lower monthly premium now with a five year term (as the likelihood of me dying before I'm 40 is considerably less than the likelihood of me dying before I'm 60), with higher premiums each time I reinsure, but over twenty years, would the differential between a single policy and four concurrent policies be significant (in the way buying two six-month car tax discs is significantly more expensive than renewing car tax annually)?

I would expect my salary and disposable income to increase over the term.

Finally, who are the best companies to go to for a cost effective policy, ideally one where I can go direct and the IFA's commission is saved / rebated to me.

Thanks again, I love your site.Answer
Glad you like site. The easiest way to answer your question is to look at some example term assurance quotes for the scenarios you’ve mentioned. To keep things simple I’ve assumed £100,000 level cover for a non-smoking male and listed a competitive premium (grabbed from a price comparison site).

Age 35: Cover for 5 years: £5 per month. Cover for 20 years = £5.75 per month.
Age 40: Cover for 5 years: £6.09 per month.
Age 45: Cover for 5 years: £7.31 per month.
Age 50: Cover for 5 years: £10.39 per month.

You’re right, opting for a shorter period of time is cheaper, although not by that much. The downsides are that costs will rise significantly as you get older and the risk of being unable to get cover in future if your health deteriorates for some reason.

With decreasing cover the difference in cost will be less than this example due to the level of cover falling in later years, but the principles remains the same.

Personally I’d opt for 20 years cover at the outset as it’s likely to prove more cost effective over the period, less hassle and avoids the risk of becoming uninsurable in future

Discount brokers generally waive up to half their commission to reduce term asurance premiums (rather than give cashback), although price comparison websites can sometimes give them a run for their money. To get a feel for the cheapest brokers take a look at our Buying Life Insurance Action Plan where I compare several options.

Read this Q and A at http://www.candidmoney.com/questions/question231.aspx

Tax on gifts from parents to children?

Question
How much can parents give their children a year without running into any tax problems? This would be as straight cash as a gift and not wrapped up in a complex trust fund. Two examples:

1. How much can I give my two children aged 10 and 8 (so non-taxpayers)?
2. How much can my parents give me?

I am a highrate taxpayer (40%) and both my parents are retired OAPs. Thank you.Answer
You can give your children as much money as you want, but if interest and/or dividends exceed £100 a year the income will be taxed as yours. Assuming interest of 3% you could gift around £3,300 without breaching this limit.

However, the £100 limit is per child per parent, so it’s possible for a couple to give away a total of about £13,200 at 3% interest before they’d both be liable to tax rather than the children.

This rule doesn’t apply to grandparents, so they could give as much as they want to your children without any tax implications (except, potentially, inheritance tax – I’ll cover that in a moment). Just remember that if a child’s income exceeds £6,475 a year (£7,475 from next April) then they’ll become a taxpayer – exactly the same as an adult.

If the £100 limit is an issue you could consider investing in a growth investment fund or shares. When held in a bare trust (just means completing a simple form) gains and dividends are taxable as the child’s provided the £100 income limit isn’t breached, which it shouldn’t be on a growth investment. However, this would mean owning stockmarket investments which are not without risk and you would have no further rights to the money (i.e. you can’t take it back a year or two later).

Your parents can gift you as much as they like to you (the £100 rule doesn’t apply because you’re over 18) but there might be inheritance tax implications.

They can gift any amount and provided they live for at least 7 years after making the gift then it’ll fall outside of their estate for inheritance tax purposes. The proviso is that they mustn’t continue to benefit from the gift – e.g. they can’t give you a house and continue to live in it without paying you a commercial rent.

They can also give away up to £3,000 each a year that will fall outside of their estate immediately (they can also use the previous year’s allowance if unused). The same also applies to individual gifts of up to £250, of which they can make as many as they like.

If they have surplus income (perhaps from a pension) they can make regular gifts from this that will also fall outside of their estate immediately.

Otherwise gifts made by your parents will be treated as ‘potentially exempt transfers’, which means some or all of the gift could remain liable to inheritance tax if they die within seven years.

To find out more take a look at our inheritance tax page.

Read this Q and A at http://www.candidmoney.com/questions/question226.aspx

How safe are annuities?

Question
Hi, Justin. While shopping around for annuity quotes recently, I suddenly wondered what would happen if the company from which I eventually buy my annuity expires before I do!

They're all big insurance companies, but after the mayhem in the financial sector over the past two years who knows what might happen in ten, twenty, or even thirty years' time. Once they're handed over to the insurance company, are people's hard-earned pension funds protected or ring-fenced in any way?Answer
The chances of a big insurer going bust are slim (worst case there would probably be a government bailout), but as you point out we should never say never after events of the last few years...

Annuities are usually backed by gilts and corporate bonds, but the assets don’t have to be ring-fenced from an insurer’s other assets. So insurance companies do not guarantee your annuity would be safe if they hit the rocks.

Fortunately annuities are covered by the Financial Services Compensation Scheme (FSCS) under the insurance category. This means compensation is unlimited, although only 90% of a claim will be paid.

If possible the FSCS might look to transfer the annuity to another provider on the same terms, in which case you should notice little difference except for a possible delay in receiving income will the process take place.

Otherwise you’d claim for the equivalent lump-sum value of your annuity based on the cost of a new policy to provide the same level of income and benefits (such as joint life cover and indexation). You would then expect to receive 90% of this value with which to purchase a new pension annuity.

Of course, FSCS rules and levels of cover could change in future, but I think it’s unlikely cover for annuities would fall. Ensuring safe, reliable pension income would be a pretty fundamental objective for any government.

Read this Q and A at http://www.candidmoney.com/questions/question225.aspx

CGT in a fund supermarket?

Question
If I hold a non-ISA fund on a fund supermarket (e.g. Cofunds, Fundsnetwork or Hargreaves Lansdown) and sell the fund and put the proceeds into a different fund in the same supermarket, will I potential be liable to CGT? Or does the fact that the money stayed within the supermarket mean that the change would not count?Answer
Yes, you would be liable to capital gains tax (CGT).

The only way to avoid CGT on switching investments (aside from using an ISA or pension) is to hold them within a single fund (e.g. unit trust) or investment bond. Fund supermarkets offer the convenience of holding lots of funds in one account, but the funds are still held individually, hence a capital gain or loss is realised every time to you switch/sell.

As it’s not practical to set up your own unit trust you could use a fund of funds (i.e. a unit trust that invests in other unit trusts), but they can be expensive and the fund manager will select the underlying funds held giving you no control.

Using an investment bond gives you greater flexibility as you can choose and switch funds as you like. However, it’s unlikely to be as tax-efficient as using your CGT allowance, as both income and gains from investment bonds are subject to income tax. When held onshore basic rate tax is deducted within the bond. Offshore bonds are more attractive as no tax is automatically deducted, allowing gains to roll-up gross, but you’ll still have to pay tax on annual withdrawals above 5% and eventual surrender (at which point the 5% withdrawals are included in your tax bill calculation).

Read this Q and A at http://www.candidmoney.com/questions/question223.aspx

Emergency Budget - will it work?

I thought the emergency Budget was pretty sensible, but the Government is nevertheless taking a big risk. We now have a plausible roadmap for managing the deficit and balancing the annual books by 2016, but will it work?.

Let’s start by looking at the Budget projections for spending and revenue to get a feel for the big picture.

Government accounts

Forecasts for the Government's current budget:

	2010/11	2011/12	2012/13	2013/14	2014/15	2015/16
Revenue	£548m	£584m	£622m	£662m	£700m	£737m
Spending	£637m	£651m	£665m	£679m	£693m	£711m
Depreciation	£21m	£22m	£22m	£23m	£24m	£25m
Annual Balance	£-110m	£-88m	£-65m	£-40m	£-17m	£0m
Total Deficit	-£932m	-£1,059m	-£1,162m	-£1,235m	-£1,284m	-£1,316m
Annual Debt Interest	£43m	£46m	£52m	£58m	£63m	£66m
Source: OBR Budget Forecast

Spending is still projected to increase, but at a slower rate than under the previous government. While tax revenues are projected to grow by more than a third over the next five years.

Even if these targets are met, the total deficit will still swell, from an estimated £932 billion this year to £1,316 billion by 2015/16. And so will debt interest payments, from an estimated £43.3 billion this year to £66.5 billion in 2015/16 – the annual interest equivalent to over £2,500 per household.

So the going will be very tough, but the saving grace is that if the plan works then we should start to see the overall deficit start to fall from 2016/17.

However, the plan is based on a number of assumptions about economic growth, including employment, inflation and how much we all spend. If these assumptions turn out to be too optimistic then the budgetary plan will fail and very grim times could lay ahead.

The assumptions

The forecasts behind the Budget plans include (figures show annual change unless specified):

	2010	2011	2012	2013	2014	2015
UK GDP	1.2%	2.3%	2.8%	2.9%	2.7%	2.7%
Household Consumption	0.2%	1.3%	1.7%	2.1%	2.2%	2.2%
Government Consumption	1.7%	-1.1%	-2.0%	-2.3%	-3.0%	-2.1%
Business Investment	1.4%	8.1%	10.0%	10.9%	9.5%	8.2%
Inflation (CPI)	2.7%	2.4%	1.9%	2.0%	2.0%	2.0%
Inflation (RPI)	3.7%	3.2%	3.2%	3.3%	3.4%	3.5%
Average Earnings	2.1%	1.9%	2.3%	3.8%	4.4%	4.4%
Real Household Disposable Income	0.2%	1.2%	1.3%	1.5%	1.7%	1.8%
Unemployment (rate)	8.1%	8.0%	7.6%	7.0%	6.5%	6.1%
House Prices	5.9%	1.6%	3.9%	4.5%	4.5%	4.5%
Source: OBR Budget Forecast

I think it’s fair to say the assumptions are reasonably optimistic. Gross Domestic Product (GDP), a measure of our economy’s health, is assumed to grow consistently, by over 2% a year from 2011 – by contrast European GDP is predicted to grow at less than 2% over the next 3 years.

If we slip back into recession (i.e. GDP falls rather than grows) then we can throw most of the assumptions out of the window, as they’re all interlinked with economic growth the lynchpin.

For example: economic growth means higher employment, which fuels wage rises, giving us more disposable income to spend, increasing household consumption which helps stop inflation from falling too low – with all of this boosting tax revenues via VAT, income tax, NI and corporation tax etc along the way. Take out economic growth and the house of cards might collapse.

So the key question is can the economy grow?

In part this will depend on whether the spending cuts and tax rises announced are palatable or too fierce. Labour has strongly argued the latter.

Spending cuts & Tax rises

This table shows the estimated benefit to Government finances of some of the bigger spending cuts and tax rises announced:

	2010/11	2011/12	2012/13	2013/14	2014/15
Spending Cuts
Switching Welfare Increases to CPI	£0m	£1,170m	£2,240m	£3,900m	£5,840m
Tax Credit Reforms	£0m	£1,180m	£2,860m	£3,110m	£3,220m
Total (net) Spending Cuts	£5,245m	£8,855m	£17,300m	£23,820m	£31,940m
Tax Increases
VAT Increase	£2,850m	£12,100m	£12,500m	£12,950m	£13,450m
Capital Gains Tax	£0m	£725m	£825m	£850m	£925m
Total (net) Tax Rises	£2,830m	£6,255m	£6,950m	£8,515m	£8,230m
Source: Budget 2010

No-one can argue that the impact of these spending cuts and tax rises won’t hurt. Logic says they’ll probably push us back into recession as most of us will have less to spend and our economy is hardly robust at the moment - although the Government is hoping to stimulate business (hence jobs) by cutting taxes for companies. But I think the outcome will depend on how much fat there really is on the bone.

There’s little doubt that the public sector probably has quite a lot of fat, so while cuts will hurt they’re unlikely to be lethal. And squeezing household incomes will hurt, but provided interest rates remain low then most households should be able to keep their heads above water and keep spending - although if they spend far less it would cause problems.

Conclusion

I’m far from convinced, but I can see some reason to think that we might avoid recession, giving the Government a fighting chance of meeting its targets.

The whole situation is very much in the balance - just like England’s World Cup prospects. After an awful start there’s some cause for hope, but you’re a braver man than me if you’re betting on a wholly successful outcome.

Read this article at http://www.candidmoney.com/articles/article122.aspx

How much should financial advice cost?

Question
What should an independant financial adviser charge for their services - initial and annual?Answer
There’s basically two ways financial advisers charge for their services – either a percentage of the amount invested (via commission or fees) or an hourly fee for the work undertaken.

Percentage fees and commissions are pretty much the same thing. The adviser receives a percentage of the amount invested at the outset and a smaller percentage every year based on investment value. The fees or commissions are usually deducted from the amount you’ve invested; although the fee route should also give you option to write a cheque instead – reducing the drag on your investments.

Opting for percentage fees gives you a bit more control provided the adviser has waived all commissions; if you become unhappy with the adviser you can simply stop paying the fees and take your business elsewhere.

Typical commissions tend to be 3% initially and 0.5% a year for unit trusts. But it’s not unknown for some products, especially investment bonds, to pay as much as 6 or 7% initial commission if the adviser chooses not to take trail commission. Such levels are totally excessive and should be avoided, especially as without trail commission the adviser has no financial incentive to look after you post sale.

The advantage of ongoing percentage fees/commissions is that they give the adviser a financial incentive to grow your investments – it’ll earn them more money. However, unless the percentage reduces as you invest more the fees could prove excessive.

For example, a 3% initial and 0.5% annual fee/commission on a £50,000 portfolio equals £1,500 upfront and £250 a year. But on a £500,000 portfolio this rises to £15,000 and £2,500 respectively unless the adviser reduces their cut.

Hourly fees sound attractive on the surface and can work well provided the adviser gives you a firm quote for the total costs you can expect to incur. There’s obviously a danger of advisers artificially inflating their overall fees by billing for more hours than they’ve worked (as with any profession charging an hourly rate), so beware. Typical rates range from £100 to over £250 per hour depending on location and experience.

What’s a fair charge? It really depends on how hard the adviser will have to work. If you want them to come and visit you at home (which personally, I’d avoid) rather than meeting at their office or speaking over the phone then be prepared to pay more. Likewise, having lots of regular chats will take up more of their time versus a simple annual review. Plus some advice, for example inheritance tax planning and pension transfers, tends to be more complex than advising on where to invest your ISA allowance.

However you pay for advice, I’d be wary of paying more than £1,000 to £2,000 upfront and £500 to £1,000 a year, unless your needs are complex.

I do have some sympathy for advisers in that the costs of regulation and associated red tape have soared; it’s only fair that some of this is passed on to the customer. But in general I feel far too many advisers (and their employers) are still more focussed on hitting sales targets (and charging as much for advice as they can get away with) rather than the quality of advice they give their clients. So when speaking to a potential adviser ensure you’re comfortable that they have your best interests at heart, as there’s a good chance they probably won’t!

Read this Q and A at http://www.candidmoney.com/questions/question220.aspx

Emergency Budget - how will it affect you?

Today’s emergency Budget contained a broad mix of spending cuts and tax rises, will the odd tax-giveaway in the name of fairness. Are you affected?.

The main announcements were as follows:

Personal

VAT

The headline VAT rate will rise from 17.5% to 20% from 4 January 2011, adding £2.13 to a £100 spend.

The standard rate of Insurance Premium Tax (IPT) will also rise at the same time from 5% to 6% (with the higher rate rising from 17.5% to 20%).

Income Tax

The annual personal allowance for under 65’s will increase by £1,000 to £7,475 from 6 April 2011. This means most basic rate taxpayers will be £200 a year better off. For an average earner on £25,000 a year it’s equivalent to a cut in the basic rate of income tax from 20% to 18.9%.

However, the higher rate tax threshold will be reduced (by around £2,500) to stop higher rate taxpayers (based on current tax bands) from benefiting.

National Insurance

Class 1 and 4 NICs are still due to increase by 1% from next April, potentially wiping out some or all of the income tax concession above. An employee earning £25,000 will pay around an extra £50 a year, although those earning below £20,000 will be protected from the rise by an allowance increase.

Capital Gains Tax

The annual allowance remains £10,100 and basic rate taxpayers will still pay 18%. But higher and top rate taxpayers will pay 28% tax effective from tomorrow (23 June 2010).

This means a higher rate taxpayer realising gains of £30,000 will pay an extra £1,990 of capital gains tax following this rise (assuming they can use their £10,100 allowance in full).

Pension Tax Relief

Although a firm announcement is not expected until shortly before Parliament’s summer recess, it looks likely Labour’s proposals to cut pension contribution tax relief for high earners will be scrapped in favour of a lower annual contribution allowance, expected to be in the region of £30,000 to £45,000.

State Pensions

The annual state pension increase will, from next year, benefit from a triple guarantee – increasing by the higher of earnings, inflation and 2.5%.

However, the Chancellor also said the Government will accelerate the increase in state pension age to 66, more details to follow. The increase is currently due to 2026.

Child Benefit

Child benefit will be frozen at current levels until April 2014. That is £20.30 per week for the eldest child and £13.40 for each other child.

Tax Credits

Families earning over £40,000 a year will see their tax credits dwindle from next April (the current threshold is £50,000). The baby element will be scrapped although the child element will increase by £150 above inflation.

Benefits in general

Future annual benefit rises (except the state pension) will be linked to the Consumer Price Index (CPI) rather than the Retail Price Index (RPI). CPI tens to be lower as it doesn’t include housing costs such as council tax and mortgage interest.

Housing benefit will also be capped, at £280 per week for a one bedroom property rising to £400 per week for a four bedroom property or larger.

Alcohol

Cider duty will fall from 30 June, reducing the price by around 9p per bottle. Otherwise, no changes to alcohol, tobacco and fuel duties.

Business

Corporation Tax

The main rate of corporation tax will fall from its current 28% level by 1% in each of the next four years, reaching 24% by April 2014. The rate on profits below £300,000 will fall from 21% to 20% next April, rather than the previous government’s planned 1% increase.

National Insurance

The planned 1% increase in employer class 1 contributions (the so-called ‘jobs tax’) will still go ahead next April. However, the level at which employers start paying contributions will increase by £21 above inflation (the current level is £110 per week) – estimated to reduce the cost of employing someone earning less than £20,000.

Employers in certain regions could also be exempt from the first £5,000 of National Insurance Contributions for each of their first 10 employees during the first year of business. The scheme is intended to last three years.

Annual Investment Allowance

The Annual Investment Allowance will be cut from £100,000 to £25,000 from April 2012. This is a valuable tax benefit for small businesses and the self-employed as it allows most capital expenditures within the allowance to be offset against tax in the year of purchase. As least there’s still time to use the existing allowance.

Entrepreneurs Relief

The amount of lifetime gains on which entrepreneurs can enjoy a 10% capital gains tax rate when selling their businesses will increase from £2million to £5 million from tomorrow. Wishful thinking...

Read this article at http://www.candidmoney.com/articles/article121.aspx

10 year fixed rate mortgage - deal or no deal?

Long term fixed rate mortgages were in plentiful supply a few years ago, with Manchester Building Society even offering a 30 year deal fixed at 5.39%. But the credit crunch put a stop to all that with 5 years generally becoming the longest period lenders were willing to fix mortgage rates.

Yorkshire Building Society (YBS) has bucked the trend with its new 10 year fixed rate mortgage. The rate is fixed at 4.99% until 31 July 2020, after which it reverts to YBS’s standard variable rate (currently 4.99%).

The maximum amount you can borrow is limited to 75% of the property value, reasonably generous in the current climate, with a minimum £25,001.

Fees are reasonably steep with a non-refundable £195 application charge and a further £800 completion fee, which can be added to your mortgage. Beware that adding fees to a mortgage means the lender simply earns even more money by charging you interest on the charges. In this case the £800 would end up costing you more than £1,250 over 20 years assuming 4.99% interest throughout - better to pay upfront if you can.

The rationale behind fixing rates for such a long period is certainty. A fixed mortgage payment means you can sleep peacefully even if interest rates soar over the next 10 years, although you might get a shock thereafter when the mortgage converts to a variable rate. But if interest rates remain low you could end up paying well over the odds.

A £200,000 interest only mortgage at 4.99% would cost you £832 per month, whereas opting for YBS’s 2 year 2.89% fixed rate would only cost £482. So at current rates the peace of mind offered by the 10 year rate is costly - an extra £4,200 a year in this example. Of course, if interest rates soar you could end up quid’s in, but I think there’s a good chance they’ll stay low for a few more years yet.

If you want to switch elsewhere during the first 10 years you could pay a high price - early redemption penalties start at 7% over the first three years and progressively fall to 1% in the final year. Don’t consider this mortgage unless you’re pretty sure you’ll hold it for close to 10 years.

You can overpay up to 10% of the mortgage each year without penalty, but above this redemption penalties kick in. There’s also a final £90 fee when you eventually redeem the mortgage.

Interest is calculated daily, which is a good thing if you opt for a repayment mortgage as any payments you make reduce the interest charged straight away.

Is this mortgage a good idea? Well it’s hard to know without a crystal ball. At the time of writing 10 year gilt yields are about 3.5%, suggesting the market believes interest rates will rise from their current level (0.5%) over the next 10 years, but not by that much. Of course, it’s not unknown for markets to be wrong, but for as long as our economy is depressed (which could be several years) I think it’s unlikely we’ll significant interest rate hikes (because this would stifle recovery).

I’d take the view if you want peace of mind and/or can’t be bothered to shop around for a decent mortgage rate every few years then this isn’t a bad deal.

But I think it’s likely you’ll probably do better overall opting for a good discounted variable rate/tracker or short term fixed rate mortgage, re-mortgaging if necessary to ensure a competitive deal over 10 years. Yes, you might pay fees and endure some hassle when re-mortgaging, but the potential savings could make this worthwhile.

Read the full review at http://www.candidmoney.com/candidreviews/review35.aspx

The Budget, FSA, BP and renminbi

There continues to be lots of noise about the emergency Budget, although none of us know exactly what will happen. BP shares appear to have stabilised, for now at least, while the FSA is due to be broken up and the World Bank renews its call on China to revalue its currency..

As we approach next week’s emergency Budget there’s plenty of speculation as to what might happen. But as the potential changes have been discussed ad nauseam and none of us know exactly what’s going to be announced, it’s all getting a bit tedious so roll on next Tuesday!

If you’re interested in reading about the potential changes then take a look at these previous articles: article 1 article2.

Financial Services Authority R.I.P.

The new Chancellor, George Osborne, this week announced the breaking up of the FSA.

The Bank of England will take charge of all the big picture stuff (such as the economy and spotting any issues that might affect stability) via a new Financial Policy Committee. It will also oversee two new authorities: The Prudential Regulation Authority (PRA) and Consumer Protection & Markets Authority (CPMA).

The PRA will regulate banks and insurers while the CPMA will be responsible for ensuring financial consumers are treated fairly.

What change will this mean for you and I? Very little I suspect. It should hopefully reduce the risk of future financial bubbles and subsequent crisis (although I’m not convinced) but otherwise it’ll be more or less business as usual – at the expense of vast amounts of paper pushing and taxpayer’s money.

The FSA's Retail Distribution Review proposals (read this article for more details) are still due to be implemented by 2013 and Hector Sants, the FSA’s chief executive who presided over its apparent failure, will head up the PRA - do chief executives ever pay for failure?.

BP

BP shares have recovered very slightly after the oil giant agreed to pay $20 billion into a special compensation fund over the next three years and suspend dividend payment for the rest of this year.

Of course, the final compensation bill could be a lot higher, with some estimates running at $100 billion, but at this stage the final number really is anyone’s guess.

There is some concern that ratings agency Fitch has slashed BP’s credit rating from AA (high quality) to BBB (just above speculative), as this could push up borrowing costs if BP does need to raise money. Interestingly, the price charged by markets to insure against BP failing to repay debt soared this week, suggesting they’re worried.

But in BP’s favour any further compensation payments are likely to be spread over a number of years, so provided the oil price holds up it should be able to fund payments from its annual profits (typically $20-30 billion pre-tax). Although this could mean dividends being put on hold for longer, it reduces the likelihood that BP will hit the rocks.

Chinese Renminbi

The World Bank has reiterated its call for China to let its currency strengthen against others. China pegged the renminbi to the US dollar in July 2008 to protect the price of its exports during the credit crunch See this previous article for more info.

But now things have picked up the renminbi looks artificially weak, giving Chinese exporters an unfair advantage. There’ll have to be change at some point, but expect the arguments to run for some time yet. When revaluation dos occur we’ll feel the pinch at the till, especially if the US dollar continues to strengthen against the pound, so enjoy cheap Chinese goods while you can...

Read this article at http://www.candidmoney.com/articles/article120.aspx

Premium Bonds worth a punt?

National Savings & Investments (NS&I) Premium Bonds are the most popular savings product of all time, holding over £40 billion of savers’ money. But save £1,000 and you’re roughly three times more likely to be struck by lightning than win the £1 million jackpot each month*, so are they worthwhile?

On the plus side Premium Bonds offer a safe way to gamble. Over 16's can save between £100 and £30,000 (parents and grand-parents can save on behalf of children) and each £1 saved buys a chance, currently 24,000 to 1, of winning a tax-free prize in every monthly draw. The numbers of the winning bonds are randomly drawn by a computer system called 'ERNIE' (Electronic Random Number Indicator Equipment).

But although you can’t lose money, any returns are likely to be modest. NS&I quotes an official 'Prize Rate', 1.5% at the time of writing, which is the annual return you'd expect if you owned every single Premium Bond.

While 1.5% tax-free sounds ok, in practice you'll probably receive less on your own Premium Bond holding. The prize rate includes all prizes, yet the likelihood of winning the larger prizes is so slim you'll almost certainly never win one. The lucky few who win a large prize will enjoy an annual return well above the prize rate, but at the expense of everyone else.

For example, save £24,000 and you’d expect, on average, to win one prize a month. But there’s about 96% likelihood it’ll be the minimum £25, so chances are you’ll win £300 over the year, equivalent to 1.25% annual interest.

With many savings accounts currently paying so little interest, NS&I Premium Bonds aren’t necessarily a bad idea. Don’t expect to win very often, if ever, when saving the minimum £100. But save a few thousand pounds or more and there’s a reasonable chance of picking up prizes, they’re just likely to be small ones.

If you want to cash in some, or all, of your Premium Bonds you need to complete a form and NS&I will send you the money within eight working days. Not quite instant access, but sufficient for most people.

I’d be wary of using Premium Bonds for all your savings as inflation could reduce the spending power of your initial stake over time if you don’t chalk up reasonable winnings – you may well do better using ‘best buy’ cash ISAs. But if you fancy a safe flutter then Premium Bonds don’t look a bad proposition in the current low interest rate climate. Just don’t get too excited about the prospects of striking gold – you almost certainly won’t.

* Calculated as follows: Odds of winning the £1 million jackpot with £1,000 of Premium Bonds about 40 million to 1 (24 to 1 chance of winning a prize and a 1.7 million to 1 chance it’s the £1 million jackpot). Odds of being struck by lightning in the UK about 1 million to 1 over a year (approx 60 people hit a year out of a 60 million population), equal to 12 million to 1 over a month.

Read the full review at http://www.candidmoney.com/candidreviews/review34.aspx

£5.95 share trades a winner?

Online share dealing has slashed the cost of buying and selling shares in recent years, with typical dealing costs falling to around £10 per trade.

But X-O.co.uk, a 'no-frills' online share dealing service launched by Jarvis Investment Management, appears to be cutting costs to the bone by charging just £5.95 per trade with no extra fees for an ISA wrapper. Is this a bargain or a false economy?

When trading online you need to be confident that a stockbroker’s dealing system is both reliable and competitive when quoting buying and selling prices for shares. X-O.co.uk should be ok on both counts. Its dealing system is also used by other companies, suggesting it should be robust, and there’s a ‘best execution’ policy in-line with other stockbrokers.

Dealing charges are fixed at £5.95 per deal (shares are held in a nominee account) and there are no extra charges to hold shares within an ISA. However, if you decide to transfer the ISA to another broker in future, or simply close it, you’ll be hit by a £50 charge. Plus transferring to another broker will also incur a £15 per stock charge. These penalties are pretty much the norm, but still annoying. It’s also annoying that telephone enquiries are charged at 9p per minute, although email enquiries are free.

The biggest downside for most is likely to be that X-O.co.uk only allows you to trade shares listed in the UK. While this includes the 350 or so US and European shares listed on the London Stock Exchange’s International Retail Service, avid overseas investors will likely find the choice rather restrictive. Also beware if you regularly hold significant cash balances, as you’ll receive no interest.

X-O.co.uk includes the plain vanilla features you’d expect including limit orders, tax vouchers and the ability to transfer in stocks from another broker, but don’t expect frills such as company research, regular savings schemes, discounts for reinvesting dividends or a self-invested personal pension (Sipp).

If you primarily trade UK shares then X-O.co.uk appears to offer an excellent deal, especially if you hold shares within ISAs. But, those who regularly trade overseas stocks and/or other more exotic investments should probably look elsewhere.

Read the full review at http://www.candidmoney.com/candidreviews/review33.aspx

How similar are gold investments?

Question
I have some ETF shares where the fund owns Physical Gold. I also own some physical gold directly. One asset is shares and the other is metal. There are different risks and liquidity benefits too. Hence reasons to own one or other or both types. But both tend to track the gold price (excluding costs). Am I correct to treat these as separate assets with regard to recording capital gains or losses or should they be lumped together as "gold investment"? Thank you.Answer
For the purposes of monitoring asset allocation (i.e. the split between different investment types) in your portfolio I'd be inclined to lump them together as 'gold investment' as performance of both should be near identical (excluding charges).

But when it comes to recording capital gains/losses for the purposes of tax then you'll need to treat them separately. Capital gains tax applies to individual investments, so each will need to be accounted for whenever you sell and realise a gain or loss.

For the benefit of other readers: does it make sense to lump together shares in gold mining companies and/or funds investing in such shares with physical gold and gold ETFs when monitoring your portfolio?

It really depends on how pernickety you want to be. Performance of all is linked to the gold price, so if you want to keep things simple then viewing them together as 'gold exposure' is fine. But gold shares (hence funds) generally react more aggressively to changes in the gold price, so tend to be more risky. You might therefore categorise them as 'higher risk gold exposure'.

Read this Q and A at http://www.candidmoney.com/questions/question218.aspx

Are fund managers too greedy?

When most of us want to earn more money we have to work harder or more productively. But for fund managers it’s a lot easier, they just hike their fees - usually with little justification..

There have been plenty of examples in the past. In June 2004 Invesco Perpetual raised the annual charge on several funds, including Neil Woodford’s High Income fund, from 1.25% to 1.50%, boosting revenue by over £13 million a year since then.

And the fund managers running absolute return funds seem to have settled on a norm of 1.5% annual charges PLUS 20% of all positive returns (in some cases returns above cash). I guess investors put up with it because there’s little alternative, but this smacks of an informal cartel to me.

Annual management charges are fine, as are performance fees, provided they’re fair and align a fund manager’s interests with those of investors (and, of course, the manager delivers value for money). But in fund management this seems more the exception than the norm.

Where performance fees are charged I’d expect to see a reduction in the standard annual management fee. So if a manager doesn’t deliver they earn less than usual and if they perform well they can earn more than usual. But such funds are scarce; it’s easier finding a needle in a haystack.

Absolute return funds are a good idea, but the only guaranteed winner is the fund manager. They’ll pocket around 1.5% of your money each year come what may, and if they do manage to make you some money they’ll take a fifth of that too. At the very least these managers should set a reasonably demanding annual target, say between 5-10%, before they can take their cut.

In defence of the above examples, they’re transparent. The fees might be steep, but investors can clearly see what they’ll pay before investing. Arguably more worrying is Legal & General's far sneakier rise in charges.

When you buy and sell unit trusts and oeics the price you pay or receive will depend on whether the manager has to create or cancel units in the fund. If the manager has to create new units they’ll incur stamp duty, dealing costs and spreads on the underlying investments, passed onto you via an increase in the price you pay for units. And when a manager cancels units they’ll build dealing costs and spreads into the price they offer you (see our unit trusts page for a more detailed description of fund pricing).

Most funds take the sensible approach that when there are both buyers and sellers they can pass units from one to the other and if there’s a net surplus units will be priced at either creation or cancellation prices as appropriate.

But Legal & General has decided to always sell units at the creation price and buy them at the cancellation price, even if they’re simply passing units between buyers and sellers.

Does this matter? On mainstream funds the difference is typically up to 1%, but on smaller companies and property funds the difference is more usually around 5%. Easy money for L&G and a worse deal for investors.

I can’t see fund managers voluntarily reducing their revenues so any catalyst for change will have to come from investors. And therein lays the problem. Billions of pounds continue to sit in underperforming funds, so if investors are generally too lazy to react to failing fund managers I think it’s unlikely they’ll ever protest against expensive ones.

Read this article at http://www.candidmoney.com/articles/article118.aspx

Sell BP Shares?

Question
I have held onto my BP shares during recent weeks and - with the threat of additional costs and calamitous legal actions as well as potentially no dividend - am I wise to keep hold of them having lost 50% value? Or is this the time to buy some more? I saw your answer on 7.6.10 on BP.....but that now seems an age ago?Answer
No-one knows how much compensation BP will end up paying so the share price is incredibly sensitive to any hints, good or bad. President Obama’s aggressive stance has continued to hurt the share price as it suggests the compensation bill could be very high. But it would probably only take a comment or two that suggests a softening in Obama’s stance to send the share price upwards.

My gut feeling is that BP will likely be fine longer term and the shares are probably underpriced at the moment. However, buying now is not for the faint-hearted, as short term volatility is likely to remain very high. You could find yourself losing 10-20% in no time at all if there’s more negative news flow.

There is a risk of take-over bids, if other companies try to capitalise on BP’s predicament. This would be bad news for BP shareholders as it could lead to selling out at a very unattractive price. However, while not out of the question, I’m less convinced there will be a successful bid unless BP’s position deteriorates further.

I’d be tempted to sit tight and ride out the storm if you can stomach the volatility. And while there’s a reasonable argument for buying BP shares at present, only do so if you’re feeling very brave.

Read this Q and A at http://www.candidmoney.com/questions/question217.aspx

Norwegian pension currency exchange?

Question
I worked in Norway for a few years in the 90s and am now receiving a small Norwegian state pension monthly.

When this was due to start I opened a NOK account with my bank to receive the payments but they arrived in sterling and nobody could tell me who was doing the conversion; my bank said it arrived in sterling and the Norwegians said it left in NOK. As the money was being converted twice I diverted the payments into a normal account but I am concerned over the erosion of all the charges.

Is it possible to open an account with a Norwegian bank, as a non resident, and do a transfer say once a year? Or what is the best way to handle a small foreign pension? The Norwegian pension authorities have no problem with this. There must be a lot of oil workers who will soon be having the same problem.Answer
The simple answer is, I’m afraid, there doesn’t seem to be a practical solution.

Norwegian banks only offer accounts to residents with a Norwegian social security number, so this doesn’t seem an option.

Some UK banks such as Barclays and the Co-Operative offer foreign currency bank accounts that allow you to hold a Norwegian Krone (NOK) account (which it seems you already have), but charges can be prohibitive and interest probably zilch. It seems common to charge £6 every time money is received from overseas unless the amount is less than £100, even though it remains in the same currency. The Co-Op also charges a £40 annual account fee while Barclays charges £7 per quarter if the average balance drops below an equivalent US$2,000.

I suspect such charges could leave you no better off than the current arrangement of receiving the sum in your sterling account.

Nevertheless, someone is obviously converting the Krone to sterling somewhere along the line. I'd try asking again to see where this is occurring. You could ask your bank for the details of the bank sending the payment and double check it's not being converted to sterling by that bank before the money leaves Norway.

If anyone knows of a better solution, please tell us below.

Read this Q and A at http://www.candidmoney.com/questions/question215.aspx

Why are policemen still buying endowments?

The Police Mutual Assurance Society (PMAS) Regular Savings Plan is an endowment policy targeted at members of the police force. And surprisingly (for an endowment) it continues to sell by the bucket load: 10,000 new policies were sold in 2009.

Does this mean the PMAS endowment is succeeding where others have failed? Or are our police men and women just financially naive?

The plan, which targets savings over a 10 to 30 year period, invests in the Police Mutual with-profits fund. The fund returned 7.2% last year and lost 9.4% in 2008, broadly in-line with what you’d expect from a fund that invests around two thirds in fixed interest and a third in stockmarkets (although the corporate bond exposure underperformed significantly last year compared to the wider market).

From the little information available it’s difficult to get excited about the quality of investment management on offer – PMAS decided to move about 10% of its fixed interest investments into stockmarkets towards the end of last year and early this year – just in time to catch the worst of the recent market falls...

But the main problems with this regular savings plan are those which affect most endowments – charges and inflexibility.

There’s a one-off £74 charge at the outset, followed by an annual charge of £12.90 and £14 on maturity. On top of this there’s a 0.5% annual fee plus charges for running the with-profits fund, which are not explicit.

According to the PMAS key features document, these charges would reduce a 5% annual return to just 2.5% if you were saving the £20 per month it seems to target.

PMAS’s own projections show that in the above example you’d get back less than you put in after 5 years (£1,305 contributions but only £1,190 policy value) and after 10 years your total return might be just £3,050 based on £2,610 of contributions – hardly worth it.

There is a guaranteed minimum payout of slightly more than your total contributions over the policy term, which you'll receive at maturity along with any added bonuses. And if you die meanwhile this sum will be paid out to your esate. But sell before maturity and you'll face a 5% penalty and the plan doesn't allow you to miss or skip monthly payments.

Returns are taxed internally at the basic rate of tax and there’s no further tax to pay at maturity. If you surrender the policy within 10 years and it hasn’t run at least three quarters of its term then you might face a tax bill, especially if a higher rate taxpayer.

Bottom line, avoid this plan. You’ll be lucky to earn a worthwhile return and there are much better savings vehicles on the market. For example, a cash or stocks & shares ISA is more tax efficient, offers far greater flexibility and, in the case if stocks & shares, a much wider investment choice. Plus it's likely to be better value.

Sadly, I can only conclude that the 10,000 police workers who were sold one of these policies last year have little idea what they’ve actually bought - else it's unlikely they'd have signed on the line.

Read the full review at http://www.candidmoney.com/candidreviews/review31.aspx

Credit card refund for item not delivered?

Question
In the later part of April I ordered a desk, from an online supplier, paying with Barclaycard. Early in May I was advised that they were unable to deliver as it had been damaged in transit, and further supplies would not be available for some weeks.

They offered to refund the money, £128.08, and I accepted. However, in spite of my subsequent reminders, no credit has yet shown on my account.

How do you recommend I proceed, and is there an organisation that deals with this type of problem on the Internet?Answer
The good news is that because you paid by credit card and the purchase was a single item over £100 then Barclaycard should refund the money to your account.

Under section 75 of the 1974 Consumer Credit Act the credit card company is equally liable with the retailer for your purchase (even if only part of the purchase price was made on your card), provided it’s between £100 - £30,000 with a minimum £100 per item.

If you call Barclaycard and explain the situation they should resolve the matter, although they may require you to first complete a claim form.

If Barclaycard declines your claim, which seems unlikely, then submit a complaint to the Financial Ombudsman Service who will review the decision.

Good luck, but I doubt you’ll need it – this should be a simple claim.

Read this Q and A at http://www.candidmoney.com/questions/question212.aspx

Buy BP shares?

Question
What do you think is going to happen to BP next..should one invest? Can the company go under?Answer
I’m sure arguments and court cases will rattle on for a few years before the total compensation bill for the oil spill is known. BP may not be liable for all of this if other parties involved (e.g. sub-contractors) are also held liable, but it’s fairly safe to assume it will end up paying a significant sum.

It’s too soon to guesstimate the impact of the oil spill on BP’s finances, but I think it’s highly unlikely BP will go under given it routinely posts pre-tax profits of around US$20-30 billion a year and holds about US$8 billion in cash. Perhaps at worst case BP might have to sacrifice profits (hence dividends) for a while, but unless the oil price plunges it seems plausible that BP should be able to shrug off the impact of this crisis within a few years, if not sooner.

Is now a good time to buy BP shares? Very difficult to say. Whether the shares are good value or not depends primarily on how much compensation BP ends up having to pay, which, of course, no-one knows. So buying BP shares now is a pretty big gamble. While I doubt you’ll lose your shirt, share price volatility could give you quite a few restless nights.

I suppose there is a moral and financial issue arising from this. As oil becomes progressively more difficult and dangerous to extract, you'd expect the likelihood of more catastrophic oil spills to increase - meaning more risk for both investors and the environment.

Read this Q and A at http://www.candidmoney.com/questions/question211.aspx

Why protected plans look bad value

During these volatile markets you’d expect capital protected plans to be selling like hotcakes. Yet those on offer look distinctly unappealing and are unlikely to seduce many investors. .

The plans that fully protect your money are struggling to offer potential returns of more than a few percent above cash, with the risk of delivering far less. While plans offering possible returns of up to 10% or more a year put your original investment at risk, so you may earn less or even lose money.

Of course, you never get something for nothing when it comes to investing. And protected capital plans are no exception.

The reason these plans are struggling to offer attractive terms at present is largely due to a combination of low interest rates and volatile markets.

In simple terms protected plans work something like this. You invest £100 in a 5 year capital protected plan. The manager takes, say, £80 and puts it in a fixed rate cash account to return £100 after five years – so they can return your initial investment if markets fall. Of the remaining £20, the manager pockets £5 - £10 to pay a sales commission and still leave them with a healthy profit. The balance is used to buy financial instruments, called derivatives, from an investment bank that provide some returns linked to a stockmarket index, e.g. the FTSE 100.

When interest rates are low the manager must keep more of your £100 in cash to ensure they can return it at maturity, whatever happens to markets, leaving less money to buy derivatives.

Derivatives also tend to be more expensive when markets are volatile, as there’s a greater chance they’ll have to payout. For example, suppose I buy a derivative that allows me to buy shares at 110p in a year’s time and the shares are currently priced at 100p. If markets are pretty flat the bank selling the derivative will probably take the view that it’s not that likely the share price will rise above 110p (meaning they’ll lose money). But if markets are up and down like a yo-yo then there’s a greater chance the share price could be higher than 110p after a year, so the bank will charge a higher price for the derivative to compensate for the extra risk of them losing money on the deal.

So with less money to buy derivatives and the derivatives themselves more expensive to buy, the protected plan manager can afford to buy less stockmarket exposure than in the past.

Despite this, plans that fully protect capital with a decent chance of returning just above cash do hold some appeal to higher rate taxpayers provided the returns are subject to capital gains tax and not income tax. If gains on maturity are within their annual capital gains tax allowance then it’s a reasonably safe way to enjoy tax-free returns. Trouble is, protected plans don’t generally mature for five to six years, by which time capital gains tax allowances could be a lot smaller than today – leaving the owner potentially facing a big tax bill.

Read this article at http://www.candidmoney.com/articles/article116.aspx

Jupiter shares a good buy?

Question
I noticed Jupiter is planning to float on the LSE this month. Do you think it's worthwhile buy shares?Answer
Your question arrived just before I posted this article discussing the Jupiter IPO. Take a read of the article for more detail, but in summary my view is as follows.

The business model for fund managers like Jupiter is really very simple.

1. Attract lots of assets under management (AUM).
2. Charge percentage annual management fees on those assets.
3. Watch the money roll in.

Of course, the hard part is attracting the assets (i.e. fund investors) in the first place. Fortunately for Jupiter it has some very capable fund managers in its stable and strong performance has, over the years, led to lots of investors putting money in Jupiter investment funds.

The problem with this business model is that falling markets really hurt. Not only does revenue from existing customers fall (remember, annual management fees are charged as a percentage of fund value), but there’ll likely be fewer new customers and some existing customers will decide to sell their fund holdings. This hits revenue, so unless a fund group can significantly reduce costs then profits are likely to take a heavy hit during a downturn.

In Jupiter’s case it has reduced costs in recent years, largely by paying staff lower bonuses, but there’s probably not much fat left on the bone to shave off. On the plus side the flotation will allow Jupiter to cut borrowing costs by repaying its most expensive debt, but falling markets could outweigh these savings and leave the company struggling to turn a profit shorter term.

Should you be nervous about markets? Well Jupiter’s financial stocks expert clearly is. Philip Gibbs currently holds nearly one third of his Financial Opportunities fund in cash – as clear a signal as you could get about his pessimism (although knowing his 6.37% personal stake in Jupiter could be worth over £40 million should cheer him up!).

Nevertheless, I think Jupiter is a well run company and should do well longer term provided it can hold onto its key fund managers such as Anthony Nutt, John Chatfeild-Roberts and Philip Gibbs. So if you do think markets will perform well over the next few years then buying shares in Jupiter could make sense.

Personally, I won’t be buying any Jupiter shares, at least not now. I think markets are just too volatile and uncertain, with the timing of the float appearing to suit Jupiter staff better than potential investors.

Read this Q and A at http://www.candidmoney.com/questions/question210.aspx

Does Nationwide Champion Saver deserve a medal?

Nationwide’s Champion Saver account is a branch based 60 day notice savings account which promises savers a consistently competitive rate of interest.

It does this by paying the average of the top five branch based instant access, limited access and notice savings accounts offered by eight high street rivals: Barclays, Halifax, HSBC, Lloyds TSB, Natwest, Northern Rock, Royal Bank of Scotland and Santander.

Only one account per bank can be used when calculating the average, so you could lose out if one bank has particularly competitive rates on several accounts as only one will be included. A less attractive rate from one of the other banks will then be used to make up the numbers.

The rate is calculated at 9am on the second Monday of each month assuming a balance of £10,000 (using rates compiled by Moneyfacts) and then applies from the first day of the following month. Interest is paid on 31 December each year.

The average rate for June 2010 is 1.71% gross and it had been stuck at 1.59% over the year before then. Nationwide is adding a bonus of 1.10% gross to this until 31 January 2011, so the headline rate being advertised at the time of writing is 2.81% gross.

You’ll need to give 60 days notice to access your money else lose 60 days worth of interest on withdrawals. Subject to losing this interest, you can withdraw up to £500 per day from a cash machine. Otherwise you can draw a cheque of up to £500,000 in branch or pay £20 for an electronic transfer.

Although you only need £1 to open the account Nationwide will pay a rather uncharitable 0.1% gross (at the time of writing) unless your balance exceeds £1,000, when it’ll qualify for the normal rate.

Is this an account worth using? Well, maybe.

On the plus side it should help ensure you don’t fall victim to the common bank/building ploy of gradually reducing rates on a ‘best buy’ account to almost nothing once you’ve become a customer.

However, Nationwide’s Champion Saver account is a poor relation to the Investec High 5 account, now closed to new customers.

By restricting its universe to branch based accounts from just eight high street banks Nationwide is severely limiting the average rate you can expect to receive. Many of the highest rates on the market are paid by other institutions and internet/postal accounts which, coupled with the averaging, means you’ll almost always fall well short of market leading rates. The fact Nationwide is having to pay a 1.1% bonus to make this account look appealing speaks volumes.

You might also find the hassle of a branch account a downside as Internet functionality is limited to viewing your statement online.

Bottom line, the Champion Saver account is not a bad choice if you’re a lazy saver who’s probably earning 0.25% or less on their savings at present. But you could probably do a lot better longer term if you’re prepared to seek out ‘best buys’ and switch when those rates become uncompetitive.

Read the full review at http://www.candidmoney.com/candidreviews/review30.aspx

Invest lump sum in an oeic?

Question
I have a lump sum to invest. Is it worth putting it in a OEIC and just leaving it there as I will not be able to add to it on a monthly basis?Answer
Maybe, but the key thing to consider is how your money is invested within the oeic.

Open-ended investment companies (oeics) are similar to unit trusts, i.e. they’re funds that combine your money with that from others and invest it according to an agreed objective.

There are lots to choose from and you’ll find oeics and unit trusts that invest in most areas, ranging from cash and corporate bonds to property, commodities and stockmarkets. So whether or not investing is worthwhile for you really depends on how comfortable you are owning the underling investments and the likelihood you’ll make more money versus leaving the cash in the bank.

The problem right now is that markets are so volatile and the outlook so uncertain I think the next year will be a particularly tough one in which to make money.

You should also bear in mind that the majority of fund managers who run oeics and unit trusts often struggle to beat the market, which gives rise to the argument for using index-tracking funds – although these don’t fare well in all markets.

If you’re happy to invest for 10+ years you’ll probably do better than cash, but you’ll need to be comfortable with the possibility of losing money, especially in the shorter term. If this will give you sleepless nights then consider a good fixed rate savings account or National Savings Index-Certificates instead.

Should you decide to invest then think carefully about how much risk you’re comfortable taking and do some homework to help pick a fund manager that’s likely to be successful, or opt for a tracker fund if available for the type of investment you choose. You could also consider drip feeding your money into a fund over a period of time to lessen the pain should markets fall just after you invest.

Finally, unless you need advice then using a discount broker should prove cheaper than buying direct from a fund manager. Take a look at our ISA Discounts Action Plan for more details.

Read this Q and A at http://www.candidmoney.com/questions/question206.aspx

The price of Krugerrands?

Question
What's the price of a 1 once Krugerrand in Sterling please? Answer
South African 1 ounce Krugerrand coins are 22 carat gold rather than 24 carat – they contain a small amount of copper to harden the coin. However, they weigh more than 1 ounce to compensate, so that they contain 1 ounce of pure (24 carat) gold.

At the time of writing the price of 1 troy ounce of pure gold was about £837 (US$ 1,222).

However, you’ll normally find that dealers build in a 5-10% margin on the buying and selling prices they offer versus the actual price of gold. For example, current dealer prices seem to be about £900 if you’re buying Krugerrands and £800 if selling.

It’s worth shopping around a few dealers on the web to find the best price as their margin is your loss. You’re also likely to get a better deal when dealing in several coins rather than one.

Read this Q and A at http://www.candidmoney.com/questions/question207.aspx

Broken NEST egg?

I've finally received a reply to my letter urging Alistair Darling to amend the proposed NEST pension rules to allow transfers..

There follows the text of the letter I sent to Mr Darling, when he was still in No 11.

"I welcome the NEST proposals, although I do not believe for one moment that the charges will cover the costs. Whatever assumptions are being made in this regard are in my opinion on the optimistic side of heroic. My opinion is supported, by the way, by the USA experience with 401(k).

I am however especially concerned about the decision not to allow transfers in or out of NEST. This seems to run counter to everything that has been done to create flexibility for savers. I guess any employer running a Stakeholder will simply switch to NEST. This will leave the members with mostly trivial pension pots charged at 1.5% or 1% of the fund value annually. There will also be a significant number of self employed people with fairly small Stakeholder funds. The fund resulting from an investment growing at 5% for 20 years, charged at 0.3%, is 14% greater than if the charge had been 1%.

This situation arises because the not altogether irrational dislike of front end loaded charges drove the Treasury to the not altogether rational opposite of back end loaded charges.

While I agree that allowing free for all transfers in could be massively disruptive, I think the Government has a duty to the people in the original Stakeholder target market. It would be fairly easy to allow anyone enrolled in NEST to transfer in up to say £20,000 from a Stakeholder or any other personal pension.

It would be equally easy to recognise that circumstances change, and that NEST members may subsequently become much better off and want to manage their growing pension savings in, for example, a SIPP.

Transfers in would help the NEST finances in the early years. Transfers out would not happen for some time, and their impact on NEST finances would then be negligible.

Will you ask NEST to reconsider this part of the rules?

Even if NEST declines to change the rules on transfers, will you ensure that Stakeholder schemes are obliged to inform their members that staying in Stakeholder for the long term will almost certainly damage their wealth, and that they should take advice about the alternatives open to them?"

I thought this was all quite reasonable. After a two month delay I have a response from a jobsworth in the DWP that could have been written by Humphrey Appleby himself.

We spent decades getting to the point where pension savings could be moved around. Millions of people have now brought all their pensions bits and pieces together in SIPPs. Transferability works. Thus, a clear case for knocking it on the head. We are ruled by fools.

Capital gains tax

I’m much more bothered about the prospects of a flat rate of CGT at 40%, with no indexation relief. £100,000 invested over five years with the portfolio (ex dividend, which is taxed anyway) growing at 5% per annum delivers £127,628. If all the gain is taxed at 40%, and inflation over the period has been 2.5%, what comes out is, in real terms, more or less what went in. In other words, it simply isn’t worth taking the risk.

Taxes have to rise, even though any tax rise will weaken demand in the economy and so prejudice growth prospects. Then again, savage public spending cuts will weaken demand in the economy, and so prejudice growth prospects. Savers have already been hammered by an awful ten year run on the stock market, and rotten interest rates. Hammering them again with CGT is perverse, and it won’t work, because we’ll only incur the tax in extremis.

Common sense might yet prevail, but I wouldn’t count on it.

Read this article at http://www.candidmoney.com/articles/article114.aspx