Tax refund unpaid?

Question
You have helped me before, but I would like to ask another question please.

I did a self assessment on line for the first time this year (January) and it told me I was due a tax refund. I then received a statement dated 3 March 2010 saying I was in credit. I have been expecting this cash ever since, but I recently went back onto their website and found a "request a repayment" box. I completed this and got the answer back with a reference number and this was dated 25 June 2010.

I can't get through on phone numbers and they do not phone back. How long roughly, will I have to wait or is there another hoop I have to jump through?Answer
Sounds like it would be easier squeezing blood out of a stone...

In fairness I’ve generally found HMRC pretty quick at sending a refund if you include your bank account details on a self-assessment tax return. I’ve just checked my bank statements and the refund from the return I completed near the end of January arrived about a week later.

Waiting over a month seems excessive so it’s likely there’s a glitch somewhere at HMRC. You could try logging into your online account (the same one you used to submit your tax return) and check whether the balance (credit) is still showing. If so the money has not been sent so you’ll need to contact HMRC somehow to chase it up. From your experience this sounds easier said than done, but the number for income tax enquiries (if you can get through) is 0135 535 9022.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question250.aspx

Join new employer pension?

Question
My employer has changed from Standard Life to Scottish Life - I pay just 2.5% of my salary and my employer pays 7%. I have been in Standard Life for 11 years and have a fund of £44000 as I transferred from previous pension with Norwich Union. Should I continue to pay into Scottish Life pension just to get the benefit from employer's contribution? I am 60 this year and hope to retire May 2011. Answer
Provided you can afford the 2.5% employee contribution and there’s no option to receive the employer’s 7% contribution in any other way (e.g. via higher pay) then I can’t think of a reason to say no.

There’s also a small tax benefit in that you’ll enjoy tax relief on your pension contribution and can then take a quarter of the pension fund as a tax-free sum when you retire.

Because you’re likely to retire within a year I’d suggest holding your money as cash within the pension so that you don’t risk losing money between now and retirement (consider doing this with your Standard Life pension too).

It would make sense to leave your Standard Life pension in situ, there’s no point in moving it across to Scottish Life when your retirement is imminent (and there’s probably little point moving it anyway).

Finally, when you do retire remember to shop around for the best annuity deal you can get, it’s likely to be time very well spent.

Enjoy your retirement when you get there!

Read this Q and A at http://www.candidmoney.com/questions/question247.aspx

Indecent (pension) proposals?

Recent government proposals could make for a tougher retirement. Will they affect you?.

Pensions have been in the news this week following the publication of a Government discussion paper on restricting pension tax relief. Frankly it’s old news as it simply tells us what we already knew from the emergency Budget – the Government proposes to remove tax relief on pension contributions above an annual allowance of between £30,000 and £45,000. But it’s quite an important move, so let’s look at the implications in more depth, along with a couple of other recent proposals.

Annual pension allowance of £30,000 - £45,000

The previous Government planned to reduce higher rate tax relief on pension contributions to basic rate for those earning £150,000 or more a year (including employer pension contributions), with a view to saving the public purse £3.6 billion a year by 2013-14.

While a fiscal necessity, the approach was complicated so replacing this with a simple annual contribution allowance makes far more sense.

The new Government’s proposal is to instead reduce the annual limit for pension contributions that enjoy tax relief from a current level of £255,000 (or annual earnings, whichever is lower) to between £30,000 and £45,000 – with £40,000 appearing the favoured level. Contributions above the allowance would suffer a tax charge that effectively removes the relief.

The Government also seems keen to cap the maximum rate of tax relief at 40%, bad news for 50% taxpayers but good news for public finances as it’ll net an estimated £500 million a year in savings.

Unless you make hefty pension contributions the changes are unlikely to affect you...unless you have a final salary pension.

This is where it gets a bit more complicated. If you’re in a final salary pension there’s no explicit annual contribution, so HMRC instead treats it as being £10 for every £1 your pension at retirement increases over the year. So if your pension entitlement increases by £2,000 your annual contribution is deemed to be £20,000 (for the purposes of the annual allowance).

The Government thinks a factor of 10 is too low and is keen to raise it to 15-20. So assuming a £40,000 annual allowance and factor of 20, annual pension increases above £2,000 could mean you losing some tax relief.

For example, if you have 30 years’ service in a 1/60th pension scheme and your salary increases from £45,000 to £48,000 your deemed annual contribution would be over the limit (30/60 x £45,000 = £22,500 pension. 31/60 x £48,000 = £24,800 pension. Pension increase = £2,300, so deemed annual contribution = £46,000).

There’s also a hint that the Lifetime Allowance, currently £1.8 million, might be reduced to £1.5 million, potentially affecting those with very large pension pots (or final salary pensions) at retirement.

We can expect final announcement by the end of September with any changes coming into force from 6 April 2011.

Final salary pensions to increase by CPI not RPI

The emergency Budget saw the Government announce that public sector pension increases would be linked to CPI rather than RPI from April 2011. And it confirmed the fate for private sector final salary schemes earlier this month.

This is a blow if you’re in one of these schemes, as CPI tends to be lower than RPI due to excluding housing costs such as mortgage payments and council tax. But with both government and private sector final salary schemes in financial dire straits it’s hardly a surprise.

How much could this affect you? Let’s assume long term CPI of 2%, RPI of 3% and a pension of £20,000 at age 65. Linked to RPI you’d have received total pension income of £688,529 by age 88. Linked to CPI it would be £608,437, about 10% less.

Scrapping the retirement age

The Government is also planning to scrap the default retirement age of 65, taking effect from October 2011. Don’t panic, it doesn’t affect your state pension; just means employers can no longer force you to retire at 65.

There’s little doubt that one way or another it’ll get tougher to enjoy a decent income during retirement – unless you keep working. While retirement planning is easy to delay or ignore, it really is a good idea to work how you’ll cope well in advance.

Read this article at http://www.candidmoney.com/articles/article133.aspx

Can I get out of a BMW PCP?

Question
I purchased a BMW on PCP in September 2007. I took out a 4 year agreement with a final optional balloon payment. I have never missed a payment.

The deposit of £1500 was dealer paid. I would like to hand the car back without it affecting my credit rating or inhibiting my ability to purchase another car. I dont have the official figure to hand but the approx purchase price was £28,000 and the monthly payments have been £441. The final payment was around £8500 but was optional.

Can you please give me some advice on what my options may be? Thanks
Answer
Because the total amount on the PCP agreement is over £25,000 it won’t be covered by the Consumer Credit Act, which I’m afraid limits your options.

On PCP agreements under £25,000 customers can return the car at any time provided they’ve made good any missed payments and paid at least half the total amount payable on the agreement.

In your case you’ll have to take a look at your BMW PCP agreement and check whether there’s an early termination clause. Chances are there is and BMW Finance will probably either give you a settlement figure and take the car back from you or give you a higher settlement figure and leave you to sell the car yourself. Provided you pay the settlement figure your credit rating should be unaffected. Note, you may also be liable for excess mileage and repair/renovation payments if they apply.

When you get a settlement figure you should compare the cost to that of running the agreement for the full four years (i.e. the remainder of your monthly payments), including an estimate of what the car will be worth at that time (September 2011) so you can judge whether you’ll be likely to hand the car back or keep it (possibly to sell) by paying the final £8,500.

If you want to buy another car the dealer may offer to roll the settlement figure into a new contract, but I'd be wary as this would then increase our borrowing costs.

Getting out early from PCP plans totalling £25,000 or more is rarely a good deal, but obtaining the above information from BMW should at least allow you to make a balanced decision.

Read this Q and A at http://www.candidmoney.com/questions/question246.aspx

CGT on the sale of our home?

Question
My wife and I bought a property in 1993 in the UK. In 2002 we moved to a rented property in the UK and rented out our only owned property. This property was sold in 2009. Do we still owe CGT even though this was our sole property?

Doesn't seem right to me.Answer
In order to avoid owing capital gains tax on any profit when selling a property you’ll need to qualify for ‘private residence relief’.

HMRC is very strict about this and states that in order to qualify the property must have been your only home or main residence AND you must have used it as your home and nothing else.

If you move out then the final 3 years will be treated as if you lived there for the purpose of private residence relief provided the property was your main home at some point during the time you owned it – but this obviously doesn’t help you given your 7 year absence.

Had you moved abroad to work you’d been ok, as this is allowed, but moving elsewhere in the UK for work is only allowed if you’ve been absent for less than 4 years – otherwise private residence relief doesn’t apply.

However, while it seems you don’t qualify for private residence relief, you should be able to clam ‘letting relief’. While limited to a fairly stingy £40,000, it should provide a little respite.

So you should be able to deduct £40,000 plus two annual capital gains tax exemptions (of £10,100 each if they're not used elsewhere) assuming the property was held jointly with your wife, a £60,200 exemption in total. Any remaining profit will be taxed at 18%, the prevailing capital gains tax rate at the time you sold the property.

I agree this seems a bit harsh in your situation, but sadly it’s the rules...

You can read more details about private residence and letting relief on the HMRC website.

Read this Q and A at http://www.candidmoney.com/questions/question244.aspx

How to invest my Sipp?

Question
Hi, I have recently moved a substantial sum (for me anyway) from a household name personal pension plan to a Low Cost SIPP platform. At present it's all in cash.

Since moving it I am better off because the funds it was in before have dropped 5% in value.

I have purchased advice but have become "frozen" on making the final decision. I understand the types of funds but I see no fundemental reason why equities should rise in value. I recognise that some companies are still strong despite any downturn in overall activity.

The advice I have comes from a very reputable company and offers a well balanced portfolio of equity funds in the UK and abroad with small proportion of bonds. The funds contain some high dividend paying stocks which together with the bonds would help fund some of the drawdown needs.

I need not take the drawdown element as of yet. This pension pot is less than 40% of my net cash available funds outside of my freehold house. I also have other "safe money".

The point is I can afford to take a risk, but I don't subscribe to 10 year growth in funds because I can't see 10 years into the future, by which time my risk profile will have changed. I have little or no income and hope to use cash and pensions to earn money. I'm comfortable with a 2 year view.

Returns can be either income or capital growth, so where would you invest? UK high dividend? Non UK equity? Emerging markets equity? Hedge funds? Special situations? or elsewhere?...It's a big question...Answer
You’re right, it is a big question and if I’m honest I don’t have an answer. If only I could accurately predict markets!

Investing is always a gamble so conventional wisdom is to spread your money across a range of investments types that are likely to beat cash over 5-10 years or more and are unlikely to all fall in value at the same time. This is what the vast majority of financial advisers and investment managers suggest and it’s hard to fault their logic.

Historically this approach has generally worked pretty well, but there are a couple of problems at present: Markets are exceptionally volatile, so investors must be prepared for the possibility of large losses shorter term, and the outlook for both the UK and world markets is as uncertain as I can remember.

In light of this I’d really suggest taking at least a 10 year view when investing in stockmarkets and commodities (such as gold, metals, crops and oil). Over this period I think it’s likely you’ll do better than cash, but appreciate it’s a long time in the context of your pension and retirement.

You could take advantage of the attractive dividends currently paid by many equity income funds, but then a flurry of negative economic news could see your investment fall in value by maybe 10% or more. And the outlook for emerging markets over the next 10+ years is very promising, but again any bad news shorter term could make a big dent in your pension fund.

My own pension fund is mostly invested in commodities and emerging markets but I’m taking a 20 year bet, which is ok as I have time on my side. In your situation you’ll probably want to be more cautious, especially as you may need to draw an income at some point.

If you’re not prepared to take the risk that stockmarkets and commodities will perform well over the next 10 years then I’d be inclined to stick to cash, government/corporate bonds and perhaps commercial property. Corporate bonds come in two flavours, investment grade and high yield. The former tends to be affected by inflation and interest rates while the latter tends to be more affected by stockmarkets. Commercial property is another possibility – the sector could still suffer if we experience a further economic slowdown, but can be a good source of income and tends to be less volatile than stockmarkets (provided you buy a fund that invests in physical commercial property and not property shares).

A potentially safer route to stockmarket investing is to use absolute return funds, which try to deliver positive returns during both rising and falling markets. But while a good idea, many absolute return funds have so far struggled to deliver what’s on the tin and costs can be high, so they’re not a miracle solution. I wouldn’t rule them out, but choose carefully and make sure you understand what you’re buying (this article might help).

Ultimately you’ll have to judge yourself how much risk you’re comfortable taking and how long you’re prepared to wait for the economic/stockmarket outlook to improve. But bear in mind that trying to time markets is a gamble in itself, by the time you feel comfortable investing in a certain market you might already have missed much of the upside (if there is one!).

Hope this at least points you in the right direction and good luck whatever you decide. If anyone has other views/suggestions please post them below.

Read this Q and A at http://www.candidmoney.com/questions/question243.aspx

Should I buy funds before they're ex-dividend?

Question
I have a number of equity income unit trusts some inside and some outside an ISA wrapper. Occasionally I may switch from one unit trust to another and I usually try to ensure that I sell after the fund becomes ex-dividend so that I manage to still receive the next payment of dividend income. I may also try to buy into a fund before the ex-dividend date for similar reasons but am I then buying in at a higher price in order to receive the dividend?

Forgetting fund performance and stock market levels for a moment,my question is,is the price of a fund affected in the same way as an ordinary stock holding when it becomes ex-dividend.Usually the price of a stock reduces but what generally happens to a unit trust holding of income shares,does it go down also?

Am I sensible to look at dividends in this way or does it just mean that what I gain in income I lose in the price when switching funds?

I am sure you will remind me that these should be looked at as long term holdings etc and it probably doesn't matter in the long term but I would be interested to know what thoughts you may have.Answer
Yes, the price of a unit trust should reflect the dividends that are due to be paid out, so you’d expect to price to fall on the ex-dividend date.

The fund will receive dividends from the stocks it owns at various times of year. Paying out dividends to investors every time they’re received would be inconvenient, so the fund manager puts them in the bank and then pays out the balance on set dates, for example every January and July. When a unit trust is priced each day the bank balance is included, so the dividends to be paid out are reflected in a fund’s unit price.

Once a fund goes ex-dividend, usually about two months before the dividend is due to be paid, then the money set aside for the dividend is no longer included when calculating the unit price, so it falls accordingly.
Note, if you purchase units before the ex-dividend date, your first income payment could include some income covering a period before you bought the units. This part of the income is called an equalisation payment. It's not subject to income tax and must be deducted from the price you paid for units when calculating capital gains tax.

Bottom line, you’re unlikely to gain overall from buying a fund before it goes ex-dividend (versus buying it ex-dividend) so I wouldn’t worry about making this part of your investment strategy.

Read this Q and A at http://www.candidmoney.com/questions/question241.aspx

Recovery...but for how long?

Figures published today by the Office for National Statistics estimate that the UK economy grew by 1.1% between April and the end of June, but will it last?.

1.1% quarterly growth might not seem like much to get excited about, but it’s almost twice the growth that was expected, so optimists might suggest this is proof we’re on the road to recovery. But is this likely?

What’s driving the growth?

The estimate shows a 1.1% rise in UK Gross Domestic Product (GDP) over the second quarter of the year (GDP is basically the value of all the goods and services produced by the various sectors of the economy). The main contributors to the rise in output have been the construction, financial/business services and government sectors, so we need to consider whether growth in these sectors is sustainable.

Construction

Output rose by 6.6% over the quarter, but a big driver appears to have been public sector and infrastructure projects – the two areas most at threat from government spending cuts. Private sector output has also increased, but this may slow (especially housing) once tax rises and spending cuts take their toll. So overall I’d be surprised if construction output continues to grow at this pace.

Financial/Business Services

Output grew by 1.3%, but as financial/business services are a much greater part of our economy their overall GDP contribution was only slightly below construction. Following the credit crunch financial and business services seem to be riding reasonably high again and maybe this will continue. The Government is certainly hoping so as its relying on business tax cuts to stimulate sufficient growth (i.e. job creation, pay rises etc.) to mitigate public spending cuts and higher personal taxes. But it’s by no means certain this will happen and there’s certainly scope for a downturn.

Government

Quarterly output rose by 0.9%, with the health sector being the largest contributor. Given the plans for ongoing government spending cuts the output from this sector is probably heading one way...down.

So we’re heading back into recession then?

Part of me worries that we will, as the Government faces an almost impossible balancing act between tightening its purse strings and maintaining economic growth. Much of the estimated growth over the last quarter is probably due to the previous government’s spending splurge, so it’s too soon to be confident of a sustained recovery. Nevertheless, if things don’t get too bad there is a chance the financial/business services sector could pull us through.

Will interest rates rise?

Economic growth always prompts speculation that the Bank of England will raise interest rates to put a brake on inflation, but I can’t see this happening for quite some time. Firstly there’s a fair chance this recent growth is temporary and secondly inflation is currently propped up by higher oil prices and VAT, not us all deciding to spend more. So I remain depressed over the outlook for my savings, but grateful that I have a tracker mortgage.

Read this article at http://www.candidmoney.com/articles/article132.aspx

When am I entitled to dividends?

Question
How long do you have to have held a share for to be entitled to receive the dividend?Answer
In theory it could be as little as a couple of days, but as the price you pay will almost certainly reflect the expected dividend it’s unlikely you’ll make a quick buck.

When a company announces its dividend it also announces an 'ex-dividend' date, typically a few months before the dividend is actually paid. Dividends are paid to whoever owns the shares on that date, so to be eligible for dividends you’ll need to buy a share at least one day before it goes ex-dividend. If you sell on or after the ex-dividend date you’ll still receive the dividend.

However, the share price normally falls by the dividend amount on the ex-dividend date as investors buying then won't receive the imminent dividend. So if you buy the day before a share goes ex-dividend then sell the next day, you’re unlikely to profit.

Read this Q and A at http://www.candidmoney.com/questions/question240.aspx

Will child tax credit changes affect us?

Question
Hi, we currently receive child tax credits for our three children, my eldest receives high rate disability living/mobility allowance and our twins are almost 11 months. I am trying to work out how our child tax credits will be affected with the new budget but cannot find the answer as nowhere seems to mention the disability element.

I realise the baby element will end in August this year anyway and that our award will naturally decrease then but it's mainly from the new tax year (2011) and April 2012 that I have concerns.

My husband earned 29.5k last year and I receive carer's allowance for our disabled son currently £2800 per year making our joint income £32300. I would like to know what our new awards will be in the next two years (if any)? Many thanks.Answer
Good news in that with the exception of the baby element it looks likely you’ll be very slightly better off following changes to child tax credits over the next couple of years. I’ve ignored working tax credit from my calculations (as it makes things very complex), but this should make little, if any difference.

For the current tax year you’re entitled to the family element of £545, plus two new born payments of £545 for your twins and three child elements of £2,300 each. In addition you’re entitled to the disabled child element of £2,715 for your eldest (plus an extra £1,095 if he’s eligible for the severely disabled child element).

The child elements, including the additional disabled element, are added together to calculate an overall entitlement, which is then reduced by 39p for every £1 your joint income (including carer’s allowance) exceeds £16,190. On an income of £32,300 this means your overall child element entitlement will be reduced by £6,283. If we assume child elements of 3 x £2,300 + £2,715 + £1,095 = £10,710, you’ll receive £4,427.

The family and baby elements reduce when household income exceeds £50,000, so you’re entitled to the full amount of £545 x 3 = £1,635 – making a total £6,062 for the year. Although, as you point out the baby element will cease when your twins are one next month (it’s disappearing altogether from next April).

There are three main changes that will affect you from next April:

1. Your entitlement to the child element will reduce by 41p per £1 your income exceeds the lower limit (currently £16,190).
2. The allowances and payments will be linked to the Consumer Price Index (CPI) rather than the Retail Price Index (RPI). Bad news as CPI tends to be lower (as it excludes housing costs).
3. The child element will increase by £150 above inflation (measured by CPI).

Ignoring inflation this means your child elements will increase from £2,300 to £2,450. The disability elements are unaffected; they’ll simply increase by CPI. So your overall entitlement to elements will increase to £11,160. Assuming income of £32,300 and an income limit of £16,190 (again, I’m ignoring inflation) your entitlement will be reduced by £6,605, so you’ll receive £4,555 plus the £545 family element.

From April 2012 the child element is due to increase by £60 above inflation, which should boost the amount you receive slightly.
Obviously if your household income rises above inflation (measured by CPI) then you could end up worse off. But for the time being it looks like you’ll escaped the worst of the Chancellor’s child tax credit cuts.

Read this Q and A at http://www.candidmoney.com/questions/question239.aspx

Can I get out of a PCP agreement?

Question
I have an HP agreement for my car over 4 years with a balloon payment at the end, I have not missed a payment in three and a half years and I would now like to hand the car back but the HP company told me I have to wait untill the end of the 4 years, is this correct? And is there a way round it if so?Answer
Provided the hire purchase/personal contract purchase (PCP) agreement is under £25,000 then you should be covered by the Consumer Credit Act which means you can give back the car at any time provided you make good any missed payments (not an issue in your case) and bring your payments up to half the total amount payable on the agreement. The car will have to be in good condition, as specified by the terms of your agreement, else you might have to pay a penalty.

However, if you’ve already paid more than half the total agreement costs you won’t get a refund, so be careful you don’t lose out by taking this route.

If the agreement is for £25,000 or more you won’t be covered by the Consumer Credit Act, so your only option to exit early is likely to be paying off the loan in full, if the lender allows this. You could then recoup some money by selling the car. This is a lot more hassle and may leave you out of pocket, especially if the lender imposes a stiff penalty for early redemption, but it would allow you to end the agreement.

I’d suggest checking your PCP agreement for an early termination clause which should confirm which of the above options are available to you.

Hope things works out ok.

Read this Q and A at http://www.candidmoney.com/questions/question238.aspx

What are gilt strips?

Question
Thanks so much for your helpful response to my previous question about investment in gilts. It helps me to understand so much more about gilts.

I still have a couple more questions to ask:

1. I went on UK Debit Management Office website, I found another type of gilts. Well, I am not sure if it is gilts.
For example: Treasury Coupon Strip 07Jun2016 and Treasury Principal Strip 07Sep2016. Are they gilts?

As you mentioned before, inflation and interest rate can influence the Conventional and Index-linked gilts.
But what about Gilt Strips? Those type of gilts seem do not pay any coupon. If the price of it now is 87 pounds, at redemption I will get 100 pounds back which means I get 100-87=13 pounds profit. Are these types of gilts safer compare to the other types of gilts in terms of inflation and interest fluctuation?

2. I am wondering if there is something called pledge loan in the UK or similar financial product. For instance, If I have an amount of investment in gilts, say 500,000, could I get some loans from the bank for helping me buy a property?

I really appreciate your help and time.Answer
You’re welcome. Gilts strips were introduced in 1997 and basically incorporate coupons (i.e. income) into the gilt’s maturity price rather than paying it out.

For example, suppose we have a gilt paying 4% over two years. Normally you’d invest 100p, receive income of 2p twice a year and get back the 100p at maturity. This could instead be split into five strips. The first strip would mature after 6 months and cost about 98p, so that the 100p you receive on maturity reflects the 2p coupon. The second strip pays out after 12 months and will likely cost less than 98p, as you’ll have to wait 12 months and not six to get the 2p coupon (i.e. the price is calculated using what called ‘discounted cash flow’) and so on. The final strip reflects the return of your 100p investment.

So what you’re effectively buying is a ‘zero coupon bond’, which is an investment that pays no income and has a certain value at a future date. The value the market places on these investments still depends on interest rate and inflationary expectations, just like conventional gilts. If interest rates are low then the opportunity cost of having your money tied up in a strip is low, so you wouldn’t expect a strip to trade at a big discount to its 100p maturity value. But if interest rates rise then having your money tied up in a strip becomes less attractive, so the price is likely to fall. Nevertheless, it will still revert to 100p on maturity. High inflation makes them less attractive as the 100p at maturity will be worth less in real terms.

Because there’s no opportunity to benefit from income meanwhile you’d expect strips to be more sensitive to interest rate and inflationary expectations/movements than conventional gilts, so they’re arguably more risky unless you plan to hold until redemption.

Because income is converted into a gain at maturity you might think strips are very tax efficient (gilts are exempt from capital gains tax), but sadly HMRC taxes these gains as income on an annual basis so there’s no loophole.

Five year strip yields are currently around 2.3% gross, very slightly higher than comparable conventional gilts.

While you might find a bank willing to lend you money secured against a gilt investment, the banks have become far more cautious post credit crunch, so you may have your work cut out. And if you can find one the interest rate charged is likely to be higher than the gilt yield (especially after tax), so might be counterproductive.

If you want a mortgage you could consider using an offset mortgage, which offsets your savings against the loan outstanding. This is very tax efficient as it effectively means you’re earning tax-free interest at the rate charged on the mortgage and very flexible as you can dip in and out of your savings as required.

Read this Q and A at http://www.candidmoney.com/questions/question237.aspx

Which gilt to buy?

Question
I want to make an investment in government bonds(gilts) maybe next month and keep the investment for 5 years.
What are your opinions on such an investment in the gilts market?

There seems to be quite a few kinds of gilts. Could you recommend which types of gilts are the most suitable for investment at the moment and keep for 5 years?

In addition, what would be the rough profit out of the investment? For example, if I invest 100,000 pounds, how much profit can I get?
Answer
Unless you hold a gilt until redemption you’re at risk of losing money due to movements in interest rates and inflation.

This is because a gilt’s original 100p purchase price can fluctuate between issue and redemption depending on what the market is prepared to pay for it. The ‘coupon’ (i.e. income) on conventional gilts is fixed so they become less attractive when interest rates rise, pushing down their price. Rising inflation also makes gilts less attractive because the value of both future income and your original investment falls in real terms (i.e. they’ll buy less in future due to rising prices).

The sensitivity of a gilt’s price to interest rates and inflation is related to its coupon and length of time until redemption. In general terms the lower the coupon and the longer the period until redemption, the more sensitive the gilt will be to interest rate and inflationary movements.

So when buying gilts there are three main features to look out:

1. The date when the gilt will redeem.
2. The gilt’s ‘coupon’, i.e. how much interest it’s paying.
3. Whether the gilt is linked to inflation.

You can get all this information from a gilt’s name. For example, the 8% Treasury Stock 2015 returns the original 100p loan in 2015 (7 December 2015) and pays 8p annual income meanwhile. When a gilt mentions index-linked in its name, then both the income and the original loan increase with inflation until redemption.

Provided you hold a gilt until redemption it’s possible to calculate how much money you’ll make. In the case of the 8% Treasury Stock 2015 the purchase price is currently about 129p with an annual coupon of 8p. An 8p annual income on 129p sounds good until you remember that you’ll only get back 100p in December 2015 at redemption. What we need to do is calculate a ‘redemption yield’, which shows the equivalent annual return including the loss. In this case it’s 2.24% before tax (you can use our Redemption Yield Calculator to work these out).

The return doesn’t look very attractive versus the best buy bank and building society five year fixed rate savings accounts currently available (e.g. 4.75% gross), but reflects the additional perceived safety of giving your money to the Government rather than a bank.

If you buy £100,000 worth of the above gilt you’d expect to receive annual income of about £6,200 (for 5 years and 5 months) plus the return of £77,520 at redemption.

Of course, there are plenty of other gilts with differing coupons and redemption dates, I just used the above as an example, but hopefully this gives you an idea of what to expect.

Index-linked gilts are more complicated because both your income and redemption value depend on inflation, so you can’t be certain of how much you’ll receive. Suffice to say if you think inflation will remain high they’re worth considering, but avoid if you think inflation will fall.

Hope this helps and please remember that the only way you can be certain of the return on a gilt (excluding index-linked) is to hold it until redemption.

Read this Q and A at http://www.candidmoney.com/questions/question236.aspx

CGT on foreign investment?

Question
I am French and bought some French bonds in 2003 using euros I had earned in France before coming to live in the UK in 2000. I am on an taxed on an 'arising' basis. I sold the bonds in Jan 2009 and wish to calculate my capital gains.

If I take the sterling value in 2003 and the sterling value in Jan 2009, there is a huge currency gain (because the euro strengthened) from which i didn't benefit as it was 'French' money. Were it not for that currrency gain I would not be taxable because the real capital gain is below the threshold taxable.

Can I legitimately avoid paying tax on the gains?Answer
Please bear in mind I’m not a tax specialist, so you may want to seek advice from an accountant, but based on my understanding of the tax rules I’m afraid you can’t avoid capital gains tax in this situation.

Under the arising basis you’re liable to UK tax on gains made overseas regardless of whether you bring the money into the UK. And although ‘qualifying’ corporate bonds are exempt from capital gains tax, bonds that are not denominated in sterling do not sadly qualify.

If you were instead taxed under the remittance basis then provided you are not UK domiciled (unlikely if you were born in France and intend to return there at some point) then you’ll normally only be liable to UK tax on gains if you bring them into the UK. However, you’ll also have to pay a £30,000 annual remittance charge unless the gains/income are below £2,000 or you haven’t been resident in the UK for at least seven out of the last nine years (in which case you’ll then lose your UK personal tax allowances).

Although you purchased the bonds with money originally earned in France, I don’t think this makes any difference in the eyes of HMRC. They’ll take the view that you were UK tax resident when you both purchased and sold the bonds, so you’re liable to capital gains tax.

For future reference, had you sold the bonds over two tax years (i.e. sold half by 5 April 2009 and the other half afterwards) you could have offset gains against two annual capital gains allowances, helping avoid tax.

Sorry my answer doesn’t contain any good news. If any readers have any bright ideas that could help ‘pisto’ please let us know below.

P.S. If you sold the bonds in January 2009, i.e. during the 2008/09 tax year, the tax return relating to this gain would have been by 31 January 2010.

Read this Q and A at http://www.candidmoney.com/questions/question235.aspx

Is Santander's £100 bank account switching offer worthwhile?

Wherever you look these days there seems to be a Santander advert promising £100 and 5% annual interest if you switch your current account to them. Is this a deal too good to miss or is Santander simply trying to bribe you into moving to a mediocre current account?

Let’s start by taking a look at the offer.

The £100 bonus for switching your current account to Santander is paid within three months of opening the account provided you pay in at least £1,000 a month and set up at least one active direct debit (which makes a payment) within 11 weeks. To qualify you must not hold, or have held in the last three months, any current accounts from Santander, Alliance & Leicester, Cahoot or Cater Allen.

The 5% gross annual interest, paid on balances of up to £2,500, is fixed for the first year before falling to 1%. Interest on amounts over £2,500 or, if you pay in less than £1,000 per month, is just 0.1% and this will fall to 0% from 5 October 2010.

This means if you’re lucky enough to maintain a balance of £2,500 over the first year you’ll earn interest worth £125 before tax. Nice. Hold a more realistic average balance of £500 and you’ll earn £25 – ok but not very enticing. Add in the £100 bonus and the maximum upside from opening the account is £225 over the first year. Thereafter the rate of 1% is reasonable for a current account but nothing to write home about.

So the offer to switch looks good over the first year. But what about the current accounts?

There’s a choice of the ‘Preferred In-Credit Rate’, Zero and Reward accounts. The Reward account offers benefits including travel insurance and breakdown cover for £10 a month, an indifferent deal, while the Zero account is competitive but only available to existing Santander mortgage or investment customers. So the Preferred In-Credit Rate account is likely to be the default option for most customers taking advantage of this offer.

Santander reduces the authorised overdraft rate to 0% over the first four months, but it reverts to a hefty 19.9% on this account thereafter. Unauthorised overdrafts are charged at 28.7% with a £25 monthly fee. And try to pay for something when there’s not enough money in your account and you’ll be slapped with a fee of up to £35. The associated debit card charges a currency fee of 2.75% on overseas transactions and you’ll be charged 1.5% (minimum £1.99) when withdrawing cash from a machines or a bank overseas.

All in all, the Preferred In-Credit Rate account is not a very attractive current account if you’re likely to go overdrawn or spend overseas. The fees are quite high and better deals can be had elsewhere. The Zero account is a better bet, If you qualify, as the overdraft rate is 12.9% and there are no fees for unauthorised overdrafts/payments or foreign transactions.

If you qualify for a Santander Zero Account then this is a pretty decent offer to switch across. Otherwise it’s likely you’ll end up in the Preferred In-Credit Rate or Reward accounts. Neither is particularly attractive, reducing the appeal of the switching deal.

Read the full review at http://www.candidmoney.com/candidreviews/review38.aspx

FSA and the With Profits farce

Is the FSA missing the point re: with profits funds?.

I am not a fan of the Financial Services Authority. It has been a more or less dismal failure from the start, and has always worked on the basis that when something goes wrong and there’s a stink, they’ll try to change the rules retrospectively and argue for the employment of even more civil servants to stop it happening again. The list of things they failed to prevent runs through mis-selling of personal pensions, to geared split cap investment trusts, to sub prime mortgages. Politeness alone prevents any mention of the prime snafu – the regulation of the Banks.

A couple of weeks ago they delivered yet another tome on the subject of With Profits. Of the £330 billion that we have in these funds, the bulk of it presumably in Pension Plans and With Profit Bonds, some £110 million is in funds that are closed ie they are not taking on new customers. The bulk of these funds perform less well than funds that are open. The charges to the policy holders, who have invested unknowingly in a sort of quasi-equity, are clothed in knitted smoke.

The FSA relies a lot in this tome on some ‘customer stakeholders’ without telling us who they are. To save you reading the report, here is a summary. With Profits are complex but communications to customers must be clear, fair, and not misleading. Yep, that’s about it. Oh, and Life companies ought to toughen up the With Profits Committees that the FSA invented to do the job that the directors were already legally obliged to do. Plus it isn’t fair if a With Profits fund holds on to a big surplus for safety’s sake, and it isn’t fair if it doesn’t hold on to a big surplus because it wants its performance to look good.

So, having identified the issue – that millions of us are stuck in closed funds, the FSA has no solutions. This is scandalous.

When Fred took out his policy with the Rockcake and General there was a mutual commitment. Fred would pay the premiums and the R & G would keep its promise. Now the R&G has sidestepped its obligations by selling out to some entrepreneur, why should Fred keep his part of the bargain? Because, the FSA would argue, the entrepreneur has satisfied the Court that he will keep the R&G’s promises. It is thus, in the eyes of the regulator, OK for Fred to be parked in a fund that is likely to underperform.

I have an alternative proposition. When a Life Company is sold, the With Profits policy holders should be given a straight choice. Stay put, or take your share of the assets and put them somewhere else. This works for Bonds, Pension Plans, and all forms of Savings Plan: every Life company can calculate asset share at the level of the individual policy. It doesn’t work for Life Insurance policies, which might have to stay where they are.

This might hasten the end of with profits altogether, which is what the FSA should be aiming to achieve but isn’t. There is nothing that a With Profits fund can do that can’t be done some other way. It’s a relic, an antiquity going back to the days when the early mutual insurers felt embarrassed by how much money they were making and quite sensibly found ways to share the profits with the members. It will always be opaque because it is about judgement, and nowadays we don’t care for opaque, nor for a proposition that boils down to “trust me, I’m an actuary”.

Anyone up for a serious lobby on this one?

Read this article at http://www.candidmoney.com/articles/article130.aspx

Do it yourself probate

Handling probate on behalf of a friend or relative could save their estate thousands of pounds. Is it hard? Read on to find out about my experience. .

I have been absent from the site these past six weeks. We have had a complicated and mucky building project that made my study uninhabitable, plus the deaths of two elderly relatives, plus a broadband failure. All is now more or less back in order.

My late mother’s sister was three months short of her 100th birthday when she died. I had been trying to make sense of her modest means since she went into care a year ago, and I am her executor. The solicitor engaged to conduct the formalities around the sale of the flat in Sunderland gave me some great advice. “If the estate is simple, and especially if there is no question of an IHT liability, don’t waste your money and my time asking me to do Probate. Do it yourself.”

So I did. And Her Majesty’s Court Service, as it is somewhat inelegantly named, won all the prizes. The website is navigable, the notes and forms are well designed and well executed, my customer expectations were managed, and the reception at the hearing was courteous and businesslike. There should also be an honourable mention for HM Revenue and Customs, because their form was also out of the top drawer.

Downhill from there I’m afraid. The Department of Work & Pensions form was awful, I couldn’t get answers from the people running my Aunt’s occupational pension, the care home still hasn’t refunded the overpayment promised a month ago, and Northumbrian Water told me two days ago that the cheque I had been chasing for five weeks was in the post.

But NS&I took the biscuit. The brochure says that where there’s a Will, they will need a copy of the Death Certificate, the original Will or a certified copy, plus the Grant of Probate.

Why, thought I, do they need the Death Certificate and the Grant, given that the latter specifies the date of death, which information is of course gleaned from the Death Certificate in the first place? Come to that, If you’ve applied for Probate the Court now has the Will and you can’t get it back to copy it.

So I ‘phoned. “No”, explained the helpful adviser, “all we need is the Grant”. “Not what the brochure says”, I replied. From the tone of voice at t’other end I doubt I was the first caller on this topic. It really isn’t hard to get this right, so I assume they just don’t try.

Look on the bright side: if I’d used the lawyer I would have paid his hourly rate for all the faffing about.

Read this article at http://www.candidmoney.com/articles/article129.aspx

Majority of absolute return funds failing?

A quick look at the IMA Absolute Return fund sector shows that 20 of 38 funds have lost money over the year to date (at the time of writing). What’s going wrong?.

While it’s harsh to judge funds on short term performance, it’s nevertheless pretty shocking when you consider the aim of these funds is to make money regardless of whether markets go up or down.

Why have the majority of absolute return funds lost money during the recent market falls and very recent recovery?

The simple answer is that the judgement of quite a few managers appears to have been off, i.e. their bets on sectors and/or stocks rising or falling didn’t pay off.

We’ll look at a few popular funds to try and work out what’s gone wrong, but first a quick recap on how these types of funds work.

Most absolute return funds use a long/short strategy, which means they can profit from bets on both rising (long) and falling (short) markets – read the hedge funds section on our specialist investments page for more details.

The relative balance between a manager’s long and short bets is pretty fundamental, as it will largely determine whether their overall position will benefit from rising or falling markets. Of course, it’s more complicated than that, as they might bet on specific stocks/sectors to buck the general market trend or ‘pair’ stocks in the same sector to try and remove market risk (see the market neutral explanation in our hedge fund section), but in general terms a net long fund will lose money in falling markets while a net short fund will make money.

You can find out a fund’s long/short position by looking at the fund manager’s factsheet. For example, a fund might be +140% long and -60% short, giving a net long exposure of 80%. This means for every £100 invested the manager has shorted £60 of shares (giving them an extra £60 to invest) and bought £140 of shares, which leaves £20 in cash. In simple terms a net long exposure of 80% means if markets fell by 10% you’d expect to make a 8% loss (although if the manager chose their stocks/sectors well you might lose a lot less or even profit).

The returns and net market exposures for some popular Absolute return funds have been:

Fund	Return Year to Date	Net market exposure on 31 May 2010*
CF Octopus Absolute UK Equity	-17.9%	+80%
Cazenove UK Absolute Target	-4.1%	+31%
Gartmore European Absolute Return	-2.9%	+20%
Blackrock UK Absolute Alpha	-1.5%	+20%
Jupiter Absolute Return	+0.3%	-20%
* from latest available fund factsheet.

The FTSE All Share Index returned about -0.2% over the period, so it seems some of the above managers must have made some bad sector and/or stock bets. The CF Octopus Absolute UK Equity fund had a high long exposure to BP, which obviously hasn’t helped. With the others it’s harder to spot, especially as their net long exposure is quite low. But looking through the fund data suggests Cazenove has lost money this year via its software and energy exposure while some of Blackrock’s ‘paired’ trades have lost money.

Overall I think it’s still too soon to judge many of these funds, but it’s vital you understand what you’re buying. Absolute return is a great concept, but you’re especially reliant on a fund manager’s judgement for success. Not only must they be good stockpickers (history suggests the majority of conventional fund managers aren’t) but they must also be good at anticipating market movements – a tall order!

Before investing check a fund’s net market exposure to get a feel for how exposed you might be to market movements and look at the manager’s track record to see whether they have any previous success running this type of fund.

Finally, there are other types of absolute return fund. Some invest in corporate bonds (along similar lines to long/short funds) while others invest in a wide mix of different assets. The latter makes sense if you want a one-stop fund, but less so if you already have a well diversified portfolio.

If you want to bet on falling stockmarkets yourself you can do so using an exchange traded fund (ETF) that shorts the market or via spread betting (but beware, this has its own set of risks).

Read this article at http://www.candidmoney.com/articles/article128.aspx

Tax on US ETFs?

Question
Hi Justin, I have read a couple of articles in the FT recently stating that gains on some ETFs are liable to Income Tax rather than CGT, i know this is all to do with whether it has distributor status however do you know what the rules are with regard to US listed ETFs? I appreciate these woudl not have distributor status in the UK but would have something similar in the US so I would expect them to treated like any normal US share for tax purposes as I understood the issues on ETFs the papers are referring to is more foreign domiciled funds listed on the UK but would appreciate any insight you can offer.

Regards
CraigAnswer
First, a quick recap. If you own an offshore fund you’ll need to declare and pay UK tax on income, even if it’s re-invested into the fund. Gains are subject to capital gains tax in the usual way unless the fund has ‘non-distributor’ or ‘non-reporting’ status, in which case gains are taxed as income. The reason for this is to prevent a tax loophole from investing in funds that convert income into gains (which enjoy a more favourable tax treatment than income in the UK).

Exchange traded funds (ETFs), including those domiciled in the US, are no different, so it’s important to check their status. It can get confusing as ETFs listed on the London Stock Exchange are invariably domiciled (i.e. based) overseas, meaning they are treated as offshore funds. ETFs listed on US stock exchanges tend to be domiciled in the US so will also be classed as offshore funds and subject to UK distributor/reporting rules in the hands of a UK taxpayer, as well as any applicable US withholding taxes on dividends.

However, checking an ETF’s distributor or reporting status (under UK tax rules) can prove a headache, as it’s seldom clearly shown in literature. You could look for confirmation in a fund’s ‘simplified prospectus’, although this is pretty tedious and sometimes inconclusive for a UK investor. Alternatively there are lists of offshore funds (including ETFs) with distributor and reporting status on the HMRC website (you’ll need to scroll down to the relevant sections to find links to these lists).

On a separate issue, US shares and funds normally pay dividends after deducting a 30% withholding tax, of which only 15% can be reclaimed by a UK taxpayer. However, you should be able to reduce the withholding tax to 15% by completing US tax form W-8BEN if your stockbroker is agreeable (as they’ll have to process the form).

It’s a shame ETFs are being caught by these potentially complicated tax rules as they provide a great way to access certain markets. We really need ETF providers to start highlighting the status of their funds more clearly - most currently fail dismally in this respect.

Read this Q and A at http://www.candidmoney.com/questions/question234.aspx

Why public sector pensions are a problem

One of the most unpopular, but essential, cuts the coalition Government will probably make is trimming back public sector pensions to an affordable level..

If you work in the public sector you have my sympathy if your pension benefits end up being cut, but the harsh reality is that without action the cost to taxpayers will continue soaring to unsustainable levels.

Why is the cost of public sector pensions rising?

It’s a combination of demographics and pension schemes being too generous to employees.

Public sector pensions paid to retired workers are funded by those still working, just like the state pension. That means public sector employee and employer pension contributions go straight towards paying someone else’s pension now, rather than being tucked away for the future.

This approach is fine if the number of workers and retirees is constant, but it’s not. The proportion of workers to pensioners is shrinking - projections suggest that while there are currently four workers to support every person over age 65, this could shrink to two workers by 2050 (because we’re generally having fewer children). With fewer workers to support those in retirement the shortfall will grow, costing taxpayers more and more.

Public sector pensions are also too generous. A typical civil servant has a total employer/employee pension contribution of about 20% of salary, yet receives benefits equal to around 40% of salary according to a report this week by the Public Sector Pensions Committee. This difference must be funded by taxpayers and/or government borrowing – neither an attractive option at present.

Worker Type	Employee Contribution	Employer Contribution	Total Contribution	Estimated Value
Civil Service	3.5%	17.1-26.5%	20.6-30.0%	41%
Teachers	6.4%	14.1%	20.5%	41%
NHS	5.0-8.5%	14.0%	19.0-22.5%	41%
Police	9.5%	24.2%	33.7%	71%
Firefighters	8.5%	14.2%	22.7%	71%
Note: the Public Sector Pensions Committee figures differ from government figures due to a lower, more realistic, ‘discount rate’ being used. The discount rate is an assumed annual growth rate used to work out the value of a future pension in today’s terms.

What is the cost?

Figures from the recent emergency Budget estimate net public sector pension costs to be £4 billion for 2010/11, rising to £10.3 billion by 2015/16. However, these don’t tell the full story because employer pension contributions are excluded – and being public employers their bill is ultimately footed by taxpayers.

Adding in employer contributions the Public Sector Pensions Committee report estimates the total cost at £17.9 billion for this year, equal to about £700 per household. Factor in the above Budget estimates and the bill could well hit £25 billion by 2015/16 – a 40% increase.

What can be done?

There are a number of viable options to put a lid on costs to taxpayers (all estimates taken from the Public Sector Pensions Committee report).

• Increase the retirement age
  
  Increasing the retirement age from 65 to 70 would reduce the value of a typical pension from about 40% of salary to 34%. Clearly this helps, but still leaves a big funding gap as this figure needs to be nearer 20% (before we even take the ageing population into account).


• Move the pensionable salary calculation to a career average
  
  Rather than base a pension on salary at retirement it could be based on a career average. This could reduce a typical pension to 29% of salary. Again, not enough on its own, but it would make a significant difference.


• Introduce salary ceilings
  
  Placing a cap on the amount of salary that can be eligible for pension benefits would be politically popular as it targets the rich. But in practice it would make very little difference – a £50,000 cap would only reduce costs by 2.3%.


• Reduce accrual rates
  
  Final salary pensions are calculated as a percentage of salary at retiement, typically 1/60th or 1/80th, for each year worked. Increasing this 'accrual' rate to 1/100th could reduce the typical pension to around 22% of salary at retirement.


• Remove index-linking
  
  This could save a lot of money longer term, but would probably be too unpopular to ever implement. Although the Government has announced that rises will be linked to the CPI measure of inflation, rather than RPI from next April (CPI tends to lower than RPI as it excludes housing costs).


• Increase employee contributions
  
  An obvious solution would be to require employees to put their hands in their pockets to make good the shortfall. But then asking public workers to contribute an extra 20% of their salary into their pension is probably a non-starter.


• Move to defined contribution pensions
  
  The best long term solution would be to close final salary pensions for public sector workers and replace with money purchase pensions – just as is happening in the private sector. This removes the problem of funding shortfalls in one fell swoop. However, it would be a massively unpopular move, hence difficult to implement.

What Next?

The Government has asked John Hutton, the former Secretary for Work & Pensions, to study the options and come up with recommendations for the 2011 Budget next March. I suspect they’ll include a combination of increased retirement age, salary ceilings, higher accrual rates and possibly a move to career average salary calculations.

Whatever ultimately happens, public sector workers will undoubtedly be worse off, which I doubt they’ll take lying down. So expect protests and strikes...

Read this article at http://www.candidmoney.com/articles/article127.aspx

Zopa - does it work?

Fed up with earning next to nothing on your savings? Or tired of lenders charging you an arm and a leg for borrowing money? Well Zopa, a web-based marketplace that brings together private lenders and borrowers, reckons it can come to your rescue by cutting out the middleman (i.e. banks) to leave everyone better off. Sounds a nifty idea, but does it work?

Let’s start by taking a quick look at what’s involved for each party.

Lenders

You can lend from £10 upwards and provided you lend £500 or more your money will be split between at least 50 borrowers to reduce the impact of any bad debts. You can choose how much interest to charge each of five groups of lenders, categorised by their credit rating, and whether to lend for three of five years. In practice you’ll need to set your rates at about the average if you’re to stand a chance of borrowers wanting your money.

Once your money is lent out you’ll receive monthly repayments unless the borrower defaults, in which case Zopa will chase the money, using a collection agency if necessary. However, bad debts are possible and Zopa also charges a 1% annual lenders fee, so you’ll need to factor these into the rates you request.

Interest is paid gross so you’ll need to declare it, less any bad debts, on your tax return. If a borrower dies then the debt will be passed onto their estate, so you should get back outstanding monies if there’s enough money in the estate.

So lending via Zopa is a bit like using a fixed interest savings account, except your return could be affected by bad debts, which are not covered by the Financial Services Compensation Scheme (FSCS).

Borrowers

You can borrow between £1,000 and £15,000 over three or five years. Once registered Zopa will carry out ID and credit checks then give you a credit rating (ranging from A* to C, or Y if you’re aged 20-25), which influences the rate you’ll be offered (based on the rates demanded by lenders). Rates offered can change on a daily basis, but once you apply for a loan your rate will be locked in provided you’re accepted and pay a £124.50 transaction fee.

Unlike most banks, you can overpay or repay your loan early without penalty. But fail to make your monthly payments and you can expect to be hounded by a debt collections agency.

Does it work?

To find out I took the following statistics from the Zopa website for a three year £5,000 loan:

Credit Rating	Average annual rate offered (based on last 5 loans)	Expected annual bad debt rate	Anticipated lender annual return net of bad debts and annual fee
A*	7.37%	0.5%	5.87%
A	8.14%	1.0%	6.14%
B	9.45%	2.9%	5.55%
C	11.95%	5.2%	5.75%
Y	11.61%	5.0%	5.61%
All rates taken from the Zopa website on 8 July 2010.

These rates compare to a current ‘best buy’ three year fixed rate savings rate of 4.15% gross (ICICI Bank) and personal loan rate of 8.8% (Sainsbury’s Bank).

So, on the surface, Zopa does seem to offer a good deal for both lenders and borrowers. But, if bad debts are higher than expected (certainly a possibility in the current climate) then lenders could see their returns dwindle, or even lose money - be warned! And borrowers should always compare rates to conventional personal loans to see whether they’re competitive (as rates can vary widely depending on your credit rating).

Zopa is a good idea that seems to work in this low savings rate climate. But if interest rates rise and/or bad debts increase in future then its appeal could start to diminish with both lenders and borrowers getting better deals elsewhere. And lenders should ensure they fully understand the risk of bad debts.

Read the full review at http://www.candidmoney.com/candidreviews/review37.aspx

Do financial adviser business models compromise advice?

The nature of the company a financial adviser works for could have a big impact on the quality of advice and service they give. Find out what you should look out for..

Companies providing financial advice tend to fall into two camps. The first employs advisers, usually on a basic salary with bonuses dependent on hitting sales targets. The second provides support and marketing for self-employed advisers, taking a cut of the adviser’s earnings in the process.

As I’ll explain below, neither is entirely satisfactory from a customer’s point of view.

A number of the privately owned medium to larger sized companies employing advisers usually have one goal in mind: grow profits as quickly as possible with a view to selling or floating the business in the medium term. Now, nothing wrong with this per se, sounds like a sensible commercial strategy. But customers of such companies could end holding the short straw.

In order to maximise profits (and, hence, the value of the company) the focus will usually be on maximising sales and minimising costs. To do this the company will probably pay its advisers a low basic salary with healthy bonuses linked to hitting steep sales targets. So the advisers will be under pressure to sell as much as possible and maximise revenue from each of their customers. This is unlikely to bode well for you, especially as the adviser’s focus will more likely be on the next few years ahead of selling the business rather than looking after your financial interest’s long term.

Once the business is sold, the adviser may well decide to leave, especially if they were lucky to enough to own shares in the business – so you may find yourself being passed from pillar to post.

The self-employed advisers who use a company (or ‘network’) to look after their compliance, administration and marketing pose another set of potential risks to customers.

These advisers work for themselves and pay a cut of their earnings to the network for the services provided. Given advisers tend to keep the bulk of what they earn by way of commissions or fees, their incentive might also be to earn as much out of each customer as they can, potentially compromising the quality of advice given.

Some networks are also too generous to their advisers, which runs the risk of going bust. From the adviser’s point of view this doesn’t matter too much, provided they’ve been paid what’s owed, as they can simply move to another network, taking their customers with them. Trouble is, on reaching the new network an adviser might be tempted to switch their customers’ investments/policies to earn some new commissions – I’ve seen this happen countless times in the past.

Of course, there are exceptions. I’m sure some advisers working through networks provide excellent advice and service. And not all financial adviser companies are looking to sell-out.

But I would suggest that whenever you take financial advice, always try to work out the adviser’s main motivation. If the bulk of their earnings are linked to hitting targets or earning commissions I’d be very wary. And if you follow your adviser to another company, be very suspicious if they quickly recommend costly changes to your investments and policies.

Read this article at http://www.candidmoney.com/articles/article126.aspx

How to find an ethical mortgage?

Question
My partner and I have decided to buy our first home and looking for an ethical repayment plan that screens activities such as human rights, armaments and labour relationships. Our friend suggested we contact an Ethical Financial Advisor since we will also need to set up life insurance and some providers lend to big corporations involved in areas we may not approve of?
Answer
There are currently only three mortgage lenders that potentially meet your criteria: the Co-operative Bank, its subsidiary Smile and the Ecology Building Society. Given the Ecology Building Society restricts its lending to specialist properties, such as renovations and new build eco-homes, your choice is realistically limited to the Co-Op and Smile.

Both effectively offer the same range of mortgages, which are reasonably competitive, but if they decide not to lend, or you want a wider range of mortgages to choose from, you’ll have to consider lenders who make some effort towards being green, but don’t necessarily screen the activities you mention.

You might find www.yourethicalmoney.org/mortgages/ useful, as it summarises the efforts the larger banks and building societies make towards running an ethical business.

By all means take advice, but try to use an adviser who won’t charge you extra fees. Most lenders pay mortgage advisers a fee of around 0.35% for introducing a new customer, which should be enough to cover their advice. I’ve no experience of using them, but www.ethicalinvestors.co.uk/ is a well established ethical financial adviser that doesn’t charge extra fees for mortgage advice.

As for life cover, Co-operative Insurance is the only insurer I know of that probably meets your criteria. Make sure you opt for term assurance and compare your quote to conventional insurers, allowing you to judge whether the extra cost of being ethical (if there is one) is worthwhile from your point of view.

Happy house hunting.

Read this Q and A at http://www.candidmoney.com/questions/question82.aspx

How are corporate bond experts investing?

Should you be investing in, or altering existing exposure to, corporate bonds? And, if so, how? Let's take a look at what the experts are doing..

The outlook for government and corporate bonds has been a tough one to call over the last year due to major uncertainty over the main factors that affect performance: interest rates, inflation and financial robustness of the governments and companies issuing bonds.

Rising inflation and/or interest rates tend to push down bond prices as does a perceived weakening in a government’s or company’s financial strength – and, of course, vice-versa (to find out why read our fixed interest page).

But bonds issued by higher risk governments and companies (called 'high yield') tend to be less influenced by the above factors and move more in line with stockmarkets. And safer bonds (called 'investment grade') also tend to benefit when stockmarkets are troubled as they’re seen as a safer haven.

The outlook

At the moment there are mixed views on what will happen to interest rates, inflation and stockmarkets. I’m in the camp that believes things are quite bleak, hence interest rates will remain low and inflation/stockmarkets will fall – reason to prefer safer high quality bonds. But you might feel differently.

If things become sufficiently bad that governments inject more money into their economies (called 'quantitative easing'), then stockmarkets might react favourably which could boost higher yield bonds at that time.

We also shouldn’t forget currency movements, which affect the value of overseas bonds in the hands of a UK investor. If you believe the pound will weaken versus the US dollar then holding US Government treasury bills seems more sensible than UK gilts.

What do the experts think?

I’ve taken a look at a few successful strategic bond funds, where managers can invest in investment grade and high yield bonds however they wish. Data is only currently available as at the end of May, but it still gives a good feel for how those who invest in fixed interest for a living are thinking.

Fund	% Investment Grade/Cash	% High Yield	Largest Holding
Aegon Strategic Bond	69%	31%	Canadian Government bonds
Artemis Strategic Bond	52%	48%	Lloyds Bank bonds
Fidelity Strategic Bond	75%	25%	US Treasury bills
Henderson Preference & Bond	67%	33%	Barclays Bank bonds
Jupiter Strategic Bond	51%	49%	Canadian Government bonds
L&G Dynamic Bond	65%	35%	Groupama SA bonds
M&G Optimal Income	66%	34%	US Treasury bills

The overall trend seems to be caution with a bias towards investment grade bonds. Although when looking at underlying holdings the managers are generally favouring decent quality corporate bonds over government bonds (I suspect they believe them to be better value).

Should you take any action?

If your portfolio has exposure to high yield bonds then now might be a sensible time to trim it back, if you agree with the above outlook. As for putting new money into bonds I’d be inclined to focus on the higher quality end of the scale.

Read this article at http://www.candidmoney.com/articles/article125.aspx

Investing in currency a good idea?

Question
As you have been mentioned all about different types of investment but there is one thing missing on your website. Forex! Have you ever experience this before? It is safe to invest money in forex? I know there is some risk in it but it may be worth to explore this type of investment. Many thanks.Answer
Sorry for not replying sooner, was on hols last week.

I’ve not directly traded in foreign exchange (forex), but like most investors I have some exposure to currency movements through my overseas stockmarket investments.

For example, a fund investing in US shares will increase in value for a UK investor if the US dollar strengthens against the pound (because it will be worth more when converted from dollars to pounds). Of course the same investors would lose out if the dollar weakened against the pound.

You could also argue that currency movements affect UK stockmarket investors too, as around two thirds of the revenues earned by UK stockmarket listed companies come from overseas – although the impact on investment performance is less direct.

Of course, some investors like to invest in currency itself, rather than via other types of investment. Whether they make or lose money depends entirely on currency movements. In its simplest form you might buy £1,000 worth of US dollars at £1 = $1.50 (i.e. $1,500) expecting the pound to weaken against the dollar. If the exchange rate moves to £1 = $1.40 then your $1,500 would be worth £1071 – a £71 profit. But had the exchange rate moved to £1 = $1.60 you’d have lost £62.

Is speculating on currency movements a good idea? Like any investing it really depends on whether you fancy your chances of successfully guessing future movements. While easier said than done, some investors have been very successful doing so (e.g. George Soros). But it’s not without risk and there are plenty of investors who’ve lost money on currency bets.

When trying to guess future movements you need to take a view on future demand for a specific currency. Factors that affect demand are many, but common ones include:

• Interest rates – high rates relative to other countries can attract demand.
• Inflation – high inflation usually makes a currency less attractive.
• International trade – if a country exports more than it imports demand for its currency is likely to increase.
• International investment – investment money coming from overseas will probably push up demand.
• Political and economic stability – if other countries believe a particular country is weak they probably won’t want to own its currency.

Money supply also matters. If a country’s central bank prints lots of extra money then it might diminish its worth versus other currencies.

To make money you’ll need to successfully guess which currencies are going to be in demand and which aren’t. Those where demand increases should appreciate relative to those out of favour, good news if you own the popular currency.

Also bear in mind that currency prices reflect the market’s future expectations. So usually it’s changes to those expectations, not what’s happening today, which have the biggest impact.

In practice it’s more practical to use exchange traded currency funds (ETF Securities has a range) or spread betting to try and profit from currency movements rather than buying and selling the currency (as foreign exchange brokers often build in a sizeable margin between buying and selling prices). Spread betting has the advantage of gains being free from tax, but it’s potentially higher risk as you could lose more than your initial stake.

Read this Q and A at http://www.candidmoney.com/questions/question230.aspx