2010 review & 2011 outlook

2010 has been a strange year. We've seen two Western economies go bust yet many investments are finishing the year on a high note. What does 2011 hold in store?.

2010 has been a year of very mixed fortunes. We've seen the Greek and Irish economies run out of cash (or, more accurately, the ability to continue borrowing at a reasonable price), requiring expensive bailouts from neighbours. Yet most stockmarkets and commodities have finished the year strongly - albeit with a rough ride along the way.

But in many ways the global outlook is little unchanged from a year ago. Western economies are stagnated and have heavy debts, necessitating tax rises and spending cuts. While emerging economies continue to prosper, with growing domestic demand helping to offset falls in exports to cash-strapped Westerners.

There's little doubt that the gazillions of dollars pumped into the US economy by the Federal Reserve have helped markets, but we mustn't forget this is a last ditch attempt to get the US economy firing on all cylinders again and far from guaranteed to work.

Perhaps the saving grace has been low interest rates. If you've kept your job and have a variable rate mortgage then chances are you're better off than ever, thanks to low mortgage payments.

Anyway, here are my views on what happened in 2010 and what might happen in 2011.

Savings

2010

2011

The Bank of England Base Rate has been rooted at 0.5% all year. Bad news if you have a variable rate savings account - around 1/3rd of which now pay 0.1% or less a year, although 'best buy' variable accounts have remained around 2.5 - 3%. Fixed rates have fallen slightly, with the highest 5 year rates nudging back from about 5% to 4.5%. Rising inflation has been a big problem, leaving most savers worse off in real terms. But a rise in the FSCS safety net from £50,000 to £85,000 is good news.

Our economy remains on the brink of recession, providing a big disincentive for the Bank of England to raise interest rates. I'd therefore expect variable savings rates to stay more or less where they are. Fixed rates might improve if economic prospects pick up, as that increases the likelihood of future Bank of England interest rate rises. Inflation could remain a problem, though it might subside later in the year.

Mortgages

2010

2011

Flat interest rates have meant little change to variable rate mortgages, with standard rates averaging about 4%. But while cheap, banks continued reluctance to lend and an uncertain housing market have meant few new mortgages being taken out. The best rates still require a deposit or equity of 20% - 40% of the property value, with the rates for a 10% deposit being around double - no change on 2008.

Rates are unlikely to change that much, as per savings. Lenders remain very cautious, but provided the economy continues to stabilise and bad debts don’t rise then we may start to see a reduction in the deposit or equity required to get a competitive rate by the end of the year. If you’re paying your lender’s standard variable rate then consider re-mortgaging to a lower rate now!

Stockmarkets

2010

2011

Stockmarkets have been up and down like a yo-yo, generally overreacting to any news, good or bad. They've finished the year strongly, seemingly due to improved global economic optimism and the US announcing a further $1 trillion injection into its economy. Depending on where you invested, the UK stockmarket generally rose about 10-30% and emerging markets 20%+. Dividends also continued to look positive, with more companies ether resuming or increasing their payouts to shareholders.

The rise towards the end of 2010 has surprised me and may not be sustainable unless we see more positive economic news in 2011 - far from certain. Nevertheless, dividends continue to look appealing versus other investments and the longer term prospects for emerging markets remain very convincing. I'd continue to favour well established companies that pay attractive dividends over anything too racy and consider the few 'absolute return' style funds that actually appear to work.

Gilts & Corporate Bonds

2010

2011

With the exception of Greece and Ireland, safer government and corporate bonds have had a fairly subdued year, returning around 5-6% in the UK. Higher yielding bonds have done better at around 12%+ thanks to increased confidence in those companies' financial health. The benefit of low interest rates has been offset by rising inflation, driven mostly by higher oil prices.

Interest rates will likely remain low and provided oil prices don't surge then inflation should fall later in the year. Both are helpful to bonds, especially government and blue-chip corporate. However, if economies struggle then so might companies, which could hurt confidence hence bond prices. I wouldn't be surprised if 2011 returns are similar to 2010, although higher yield bonds could suffer if stockmarkets tumble.

House Prices

2010	2011
Prices rose over the first half of the year due to nice property being in very short supply. This encouraged plenty of others to put their homes on the market, but generally at unrealistic prices which has led to the market stagnating. The rental market has picked up as a result.	House prices will very likely fall, perhaps by 10-20% over the next few years, but it'll be a gradual process. Buyers will want to factor this in to their offers, but as there are few serious sellers willing to oblige house sale volumes could fall further.

Commercial Property

2010	2011
Returns have been reasonable over the year, with prices recovering slightly and rental income stabilising. UK returns have been around 14% (about half income & half growth) and better still in some overseas markets. Industrial property has lagged retail and office, with London still the main driver for the latter.	Rental yields of around 6% continue to look attractive versus other investments, which should keep demand buoyant. However, as commercial property is so dependent on the economy prices and rents could suffer if the UK economy falters. I expect returns to be lower than 2010, but a significant drop is unlikely.

Gold

2010

2011

Started the year at $1,100 per ounce, which seemed high, but continued soaring to over $1,400 before falling back to around $1,350. High prices have been driven by investors seeking a safe haven during turbulent markets.

Despite the high current price I expect it to be fairly stable over 2011 unless stockmarkets and economies perform far better than expected, in which case some investors may sell-off their gold piles. When investor demand does eventually wane prices will probably fall, but I think longer term prospects are still reasonable thanks to growing demand from emerging economies such as India and China where increased prosperity should increase demand for gold jewellery.

Oil

2010	2011
The price per barrel has risen from about $78 at the start of the year to over $90 in December. This suggests demand picked up thanks to improving economic fortunes, but rising costs haven't helped global inflation which has been a thorn in the side of some economies.	The oil price is very sensitive to economic news, making predictions difficult. I think the price will likely remain more or less where it is, with the possibility of a small fall if economic news worsens. However, longer term prices will invariably rise as more of the world's developing population starts driving motor cars.

Tax

2010	2011
The UK Government's colossal deficit meant lots of tax rise announcements. VAT rose from 15% to 17.5% on 1 Jan, a new 50% top rate of income tax was introduced in April and child trust funds scrapped from the end of the year, but the worst rises were deferred until 2011 and beyond.	VAT increases from 17.5% to 20% from 1 January and National Insurance contributions, both employer and employee will rise by 1% from April. The annual allowance for tax relief on pension contributions will fall from £255,000 to £50,000, also from April. Expect more future tax rise announcements if the Government struggles to meet its debt reduction targets.

Have a great festive season and (despite the above) let's hope for as prosperous New Year!

Read this article at http://www.candidmoney.com/articles/article183.aspx

Are coffee and orange juice good investments?

Question
Are orange juice and coffee a safe haven for financial investment? Answer
The price of orange juice and coffee depends, like all commodities, on supply and demand. And, if you're British, the dollar/pound exchange rate too as most commodities are traded in dollars.

Climate has the biggest impact on the short term supply of agricultural produce - bad weather is the main reason prices of crops including coffee, oranges and corn have soared this year.

Longer term supply tends to be influenced by price - if prices are high more farmers will be encouraged to switch crops, if feasible, to make more money.

Demand is largely a product of lifestyle. If coffee drinking becomes more fashionable, as it has done in emerging markets, the you'd expect demand to rise. Although some commodities have also benefitted from growing alternative use demand, e.g. corn being used for biofuels.

Are soft commodities a good long term investment? In general I think yes. Climate change, growing populations and greater affluence in emerging markets should all serve to boost prices over time if supply can't keep up with growing demand.

But are they a safe haven? I don't think so as short term prices can be very volatile, exacerbated by exchange rate movements. If better weather produces a bumper harvest next year then prices will probably fall from their current levels.

Playing the commodity markets short term is a gamble unless you can accurately predict global weather. And because there are a lot of commodity gamblers (sorry, speculators) their views can affect prices which further adds to potential volatility.

For example, if speculators expect bad weather they might buy up orange juice futures expecting the price to rise (futures allow you to buy or sell a commodity at an agreed future price). This in itself will increase demand for the futures and push up prices, but if the weather turns out to be fine the futures price will likely fall again. Given futures are the usual way to invest in agricultural commodities (as it's impractical to buy and store crops yourself) this means higher all round volatility for investors.

Top give you an idea of the volatility: the one month futures price of frozen orange juice concentrate moved from about $1.10 per pound in August 2008 to under 70 cents then back above $1.10 within the space of a year.

Read this Q and A at http://www.candidmoney.com/questions/question341.aspx

Higher savings compensation limit confirmed

The Financial Services Compensation Scheme (FSCS) has confirmed the savings compensation limit will rise from £50,000 to £85,000 per person per institution from 31 December 2010..

FSCS compensation is paid out in the event a bank or building society goes bust and is unable to return some, or all, of savers' money. It covers savings up to a set limit and applies per person per institution.

So if you have a joint account your overall cover will rise from £100,000 to £170,000. But if you have several accounts with the same institution then the £85,000 compensation applies to all those accounts combined, not per account.

Why is it changing?

For once the bureaucrats in Brussels have done us a favour. New EU legislation called the 'European Deposit Guarantee Scheme' has been introduced to harmonise protection for savers across all EU states. The compensation limit is €100,000, which the FSCS has converted to £85,000.

Any other changes?

Yes. If you're entitled to a payout the FSCS will try to make it within 7 days and in any case within the 20 days stipulated by the new rules. Note: this is from the date the bank or building society is declared in default.

And if you also have loans with the same institution they will no longer be deducted from any compensation payable. This doesn't mean you won't still owe the money, but it'll be treated separately.

Who's covered by FSCS compensation?

All private individuals and companies (excluding financial companies and public authorities).

Are foreign banks covered?

It depends. Provided the bank is regulated by the FSA and a member of the FSCS then you'll enjoy the same level of protection as a UK bank account - examples include ICICI and State Bank of India.

If the foreign bank is operating the account under the European Economic Area (EEA) 'Passport' scheme then you're covered by the compensation scheme in the bank's home country. If the foreign cover is lower than the FSCS level then the FSCS will make up the shortfall - although when the new €100,000/£85,000 limit takes affect then compensation limits should be the same across the EU. Examples include Anglo Irish Bank and Triodos Bank.

Otherwise you're simply covered by any compensation that might be available in the bank's home country.

What if 2 or more banks/building societies are owned by the same institution?

If you have accounts with banks or building societies owned by another institution then you're only covered by one lot of compensation for all those accounts combined.

For example, if you have £50,000 with Bank A and the same again with Bank B then you'll be fully covered if the banks are owned independently. But suppose Bank C owns banks A and B then you're only covered up to £50,000 in total (£85,000 from 31 December 2010), leaving £50,000 (£15,000 from 31/12/10) unprotected.

You can view a list of popular banks/building societies that count as one institution on our savings page (click the heading towards the bottom of that page).

Read this article at http://www.candidmoney.com/articles/article182.aspx

How much lump sum if I defer state pension?

Question
If one defers state pension for twelve months, at the present pension, what would be the lump sum prior to tax?

When would one receive the lump sum, at the date one defers or at the end of the twelve month period?

After the initial twelve months can one again defer for a year, and so on?Answer
If you defer your state pension there's the option of receiving a higher ongoing pension or a taxable lump sum.

Choose the higher ongoing pension and you'll receive an extra 0.2% for every week deferred, equal to 10.4% a year - you must defer for at least 5 weeks for this option.

Otherwise if you defer for at least a year you can instead opt for a the lump sum, calculated as the unclaimed pension plus interest at 2% above the Bank of England Base Rate, i.e. 2.5% at current rates. Your state pension will then be paid at the prevailing rate, so there's no extra pension as per above.

Assuming your unclaimed pension is the basic £97.65 per week (rising to £102.15 from 6 April 2011) and the interest paid remains 2.5% then you'd expect to receive around £5,311 if you delay your state pension by a year (calculated as £5,244 of unclaimed payments and about £67 of interest).

The lump sum is only paid once, at the point you start taking your state pension. So if you defer for 5 years then you won't receive the lump sum for 5 years. Unfortunately there's no option to take the lump sum as you go along year by year.

Hope this helps, you might also find this article I wrote about delaying the state pension of interest.

Read this Q and A at http://www.candidmoney.com/questions/question342.aspx

Are foreign currency brokers safe?

Question
Crown Currency, the foreign exchange company, has gone bust seemingly taking customer's money with it thanks to inadequate regulation. Some reports also suggest they were defrauding their customers.

Now there is one company called Baydonhillfx who is listed on the London stock Exchange.They are not FSA regulated but are regulated by the LSE.

Are customers any safer in doing currency transactions with this company?Answer
Based on newspaper reports Crown Currency apparently suffered from the downturn in travel then started offering unprofitable exchange rates simply to attract cash flow and keep the wolves from the door. The business sadly, and somewhat inevitably, collapsed, potentially leaving thousands of customers out of pocket.

What's galling for customers is that the Financial Services Authority (FSA) logo was displayed on Crown Currency's website as it was 'registered' with the FSA. I think it's fair to say that most people would see a FSA logo and assume their money would be safe, with compensation payable if the company went bust. Unfortunately, they couldn't be more wrong.

Under the Payment Services Directive, effective from 1 November 2009, any business providing payment services (which includes foreign exchange brokers) must be authorised by or registered with the FSA.

Companies with payments averaging less than €3 million per month must be registered, otherwise they must be authorised (more complex and expensive than being registered). New brokers must be registered or authorised before they start trading, but those who were proving foreign exchange services on 25 December 2007 have until 25 December 2010 to become registered or 1 May 2011 to become authorised – as appropriate.

Of the two an authorised foreign exchange broker is far preferable, as they must, amongst other things, use safeguarded bank accounts when handling your money (so if they go bankrupt while exchanging your money you should be safe), hold a minimum amount of their capital in the business (reduces the risk of going bust), have a complaints procedure (allowing you to take your complaint to the Financial Ombudsman Scheme if not satisfactorily resolved) and demonstrate they’re fit and proper to run the business.

But, disappointingly, even if you use an FSA authorised firm your money is not covered by the Financial Services Compensation Scheme (FSCS). This is far from satisfactory and leaves customers vulnerable to foreign exchange brokers going bust. When using one I'd stick to authorised firms that have been around for a few years to minimise risk.

As for Baydonhillfx, they're neither registered nor authorised by the FSA as yet, although they do claim to 'follow all FSA guidelines', including the use of a separate client money account. The company is listed on AiM, but the criteria for this are far less rigorous than being listed on the main London Stock Market and pretty irrelevant as far as consumer protection goes. They may well be a reputable company, but I'd feel more comfortable using a broker authorised by the FSA. After all, if Baydonhillfx does follow FSA guidelines I can't see any reason for them not already being authorised...strange.

Read this Q and A at http://www.candidmoney.com/questions/question340.aspx

Will Eurozone property turn sour?

If you own a holiday or investment property in Europe, should you be panicking?.

One of my dearest friends spent some of his retirement capital on a plot of land in Spain. This was to be the site of the dream holiday home, plus a handy source of income from lettings. Ten years on, he has his house, but it has cost him a fortune. He has successfully sued the agent who set up what turned out to be a rather poor deal, but the trustee in bankruptcy still has not managed to secure funds to pay him what the court says he is owed.

He would take a big hit on his capital if he sold the place, always assuming he could find a buyer at any price. That hit could get bigger if the Eurozone falls apart, and Spain devalues to try to get out of the hole it is clearly in right now.

So what are the odds? Those of us who never believed in the currency without a Government, and who got very fed up by the intellectual arrogance of the Europhiles on all political fronts, might be tempted to shout “I told you so” from the rooftops. This would not be a good idea. We in the UK have been profoundly influenced for over 1,000 years by what happens on the mainland of Europe, and it ain’t about to change.

The Eurozone is between a rock and a hard place. No outcome looks great for us. But if you have property in the Eurozone, or if you are spending pounds to buy Euros to live there, I hope you have nerves of steel, because I think you’ll need them.

Pensions - RPI or CPI?

This Government appears to be just as bad as its predecessor when it comes to fiddling about with Pensions policy. It does not seem to be able to decide whether RPI or CPI should govern some, or all, pension increases. Either way, most occupational schemes limit increases to 5%, and inflation is tracking to go past that some time soon.

The answer, according to The Daily Telegraph, is for savers to pile into equities. I am not brave enough to make a big asset allocation bet, and I think it is irresponsible to suggest it. If you’re retired, and you have savings, and you have a strategy, you’re best advised to stick to it until an adviser can convince you that there is a better alternative.

The Treasury's simple dreamers...

Somewhere in HM Treasury is a unit of dreamers. They came up with Stakeholder Pensions. Failed. They came up with CAT marks. Failed. They came up with a new investment vehicle for personal pensions. Didn’t see the light of day so had no chance to fail. They came up with more Stakeholder products and a ‘basic advice’ regime. Failed and failed.

And now they think it would be a good thing if someone produced some simple products, so that untutored people could understand them and thus want to buy them. This is patronising tripe. Some poor people save. Some do not. Their decisions are very personal. No-one has demonstrated that the people who do not save would do so if one of these simple products suddenly appeared.

But daftest of all is the contention in the consultative paper that the industry should produce simple versions of income protection and critical illness insurance. These products are complicated, by definition, since they involve medical judgements. The dreamers do not tell how they think this little difficulty can be overcome.

Read this article at http://www.candidmoney.com/articles/article181.aspx

Outlook for the UK stockmarket

Should you think about investing or run to the hills?.

It's that time of year when most companies with a vested interest in stockmarkets punt out their predictions for 2011. From what I've seen so far, the consensus for the UK stockmarket seems to be more positive than negative, on the basis shares look reasonable value (especially versus other types of investment) and companies are running efficiently having shed excess fat (hence rising private sector unemployment in 2009).

I'm not wholly convinced that the outlook is rosy, in fact I've been surprised by the recent surge in share prices given the problems our economy is facing. So I thought I'd start by trying to work out how cheap or expensive shares look right now.

While rudimentary, a company's price to earnings (P/E) ratio is a good measure when comparing the relative price of its shares both over time and to other companies. It shows how many times greater the share price is than annual earnings per share, i.e. if a company's share price is 100p and its earnings are £10,000 with 100,000 shares issued, its P/E would be 10 (1 / 10,000/100,000).

So let's compare current average P/E ratios for the main UK stockmarket (FTSE) sectors with those at the beginning of 2007, before the credit crunch hit.

Sector	Includes	P/E Ratio 3 Jan 2007	Current P/E Ratio	Current Dividend Yield
Basic Materials	mining & chemicals	10.2	11.7	1.2%
Consumer Goods	car makers, drink/food producers & tobacco	14.7	15.0	3.3%
Financials	banks & insurers	13.9	19.2	2.8%
Industrials	construction, engineering & defence	20.7	19.2	2.5%
Oil & Gas	oil/gas producers	10.4	8.8	2.8%
Technology	software & hardware	24.2	23.0	1.2
Telecommunications	fixed line & mobile	22.7	8.4	4.8%
Utilities	electricity, gas & water	18.3	10.2	5.3%
Source: FT (FTSE Actuaries Share Indices UK Series). Current figures as at 14 December 2010.

Some sectors, including consumer services, telecommunications and utilities are noticeably cheaper, while financials are more expensive. But there's not a great difference in the remaining sectors, suggesting a number of companies are valued more or less the same as they were pre-crash.

Now you have to take these figures with a pinch of salt. The earnings used in the above P/E ratios are as reported over the previous year, whereas markets price shares based on expected future earnings. So if you believe earnings will rise then forward looking P/E ratios would be lower than those shown, suggesting there might be some value. But if you think companies will generally struggle to grow earnings then in broad terms the UK stockmarket hardly looks a compelling buy based on P/E ratios.

Another measure of value is dividend yield, i.e. dividends divided by share price. A high yield means high dividends relative to the share price, suggesting the shares might be good value provided the company is sound overall (and remember, dividends are always shown net of basic rate tax). In this low interest rate climate a decent dividend yield holds additional appeal, particularly in sectors that tend not to be excessively volatile - like utilities.

So if you can earn more from dividends (after tax) than cash or gilts and believe the share price will be fairly steady, then maybe certain companies/stockmarket sectors still hold some appeal. But if you're pessimistic about stockmarket prospects then even the lure of attractive dividends is probably not enough to compensate for the risk of losses.

As the for the outlook, I think my views are largely unchanged compared to a year ago - not very optimistic. The economic backdrop is gloomy, with the impact of tax rises and spending cuts yet to bite in earnest, and although companies are generally leaner I don't hold out much hope for meaningful growth over the next year. If you want to invest in UK stockmarkets I'd be inclined to steer towards large, dull, well established companies that pay handsome dividends and tend to be more resilient in a downturn - for example, utility, tobacco and healthcare companies.

Of course, we shouldn't neglect the global nature of the UK stockmarket, around two thirds of earnings come from overseas. But with most Western economies seemingly in a mess I don't think globalisation will be our saviour over the next year or two.

Read this article at http://www.candidmoney.com/articles/article180.aspx

How do I change agency on funds?

Question
Following on from your answer to my last question can you confirm where I would get a letter to change the agent on my investments please - is this something I compose or obtain from somewhere?

Does this mean the investments remain with Fundsnetwork but the trail commsion gets paid to someone else? - I was going to use the Share Centre for my future dealings.Answer
The financial adviser or discount broker that you change the 'agency' to will almost always supply an appropriate letter or form for you to sign. It simply needs to include your details and be addressed to the fund/platform provider, stating that you want to the new adviser/broker to become the agent for the investment, allowing them to request relevant information and receive any commissions payable. The investments are unaffected.

So in your case, moving the agency on your FundsNetwork investments from broker A to broker B means that broker B will receive any ongoing trail commission in future. The investments will remain unchanged with FundsNetwork. The usual reason for changing agency is to either switch to a better financial adviser or use a discount broker who rebates trail commission, saving you money.

If you want to use Share Centre then due to FundsNetwork's unfair practice (covered in your last question) you'll have to sell the investments then repurchase new ones with the proceeds. As an alternative to Share Centre take a look at Alliance Trust Savings (read my review here) who look very competitive if you want to hold both funds and shares as they rebate trail commissions.

If you want to cut costs and are happy to remain with FundsNetwork then consider changing agency to a discount broker like Cavendish Online who rebates all trail commission in exchange for a small admin fee. It's a simple way to cut costs if you don't need the research and guidance provided by Bestinvest.

Read this Q and A at http://www.candidmoney.com/questions/question339.aspx

Do state benefits affect the age-allowance?

Question
If someone over 65 is claiming Attendance Allowance, does this non-taxable income still get included in total income when assessing whether they breach the £22,900 limit for the claiming the full rate of Age Allowance for income tax?Answer
No, thankfully the Attendance Allowance doesn't affect age-related personal income tax allowances. Neither does the winter fuel payment.

There's a useful list showing the tax status of state benefits on the Directgov website, those benefits listed as tax-free do not count towards the age allowance.

Read this Q and A at http://www.candidmoney.com/questions/question338.aspx

Withholding tax on German shares?

Question
Do you know the tax rates for holding German shares?

What would happen to shares bought in Euros (German), if the Germans were to dump the Euro?

What could happen with the international share account if Britain goes bust?

Is it wise to open a Swiss or German bank account?Answer
Dividends paid by German companies are subject to a withholding tax of 26.375%, regardless of whether you're as German or overseas resident.

Under the UK -Germany double taxation agreement a UK resident can offset up to 15% of the tax withheld against their UK tax liability. For a basic rate taxpayer this means that although there's no further UK tax to pay (as the 15% that can be offset more than covers the UK liability) you'll be 11.375% out of pocket unless you can reclaim that part of the withholding tax from the German tax authorities.

Your stockbroker should be able to do this for you and, if not, you can do so yourself from the German Federal Central Tax Office, although I've no idea of the success rate and how long refunds take.

If you're a higher rate taxpayer you can also try and reclaim the overpaid11.375%, but you'll have to pay some extra UK tax regardless.

Let's suppose the German dividend is £900 including the German withholding tax, i.e. you receive £662 (£900 - 26.375%). HMRC will divide this by 0.9 to get £1,000 then calculate your higher rate liability at 32.5%, equal to £325. You can then deduct 15% of the withholding tax, i.e. £900 x 15% = £135 and a 10% UK tax credit of £100 to leave you with a UK tax bill of £90.

In the unlikely event Germany ditches the Euro I imagine the shares would instead be traded in the new currency that Germany would adopt. The exchange rate with British sterling would obviously affect the value of your investment.

Although I think the UK economy is in a potentially perilous state, I really can't see Britain going bust. And, in any case, your German shares are as safe as the company you've bought them in. Your stockbroker share account should be fine provided you either own the certificates or the stockbroker nominee account in which they're held is ring-fenced from their business (it should be!) - as even if the stockbroker goes bust you should still be entitled to the shares.

I think the only reason for holding an overseas bank account is if you think the pound will crash against other currencies. If things really were that bad I guess you argue the Financial Services Compensation Scheme would not have enough money to pay in full if a series of banks went bust, but even I'm not that pessimistic.

Read this Q and A at http://www.candidmoney.com/questions/question335.aspx

Opinion on Cavendish Moore?

Question
I had a cold call from Cavendish Moore. Normally I give cold callers short thrift, especially when they are not regulated, but their pitch was quite convincing. Do you have an opinion about them and their product?Answer
I haven't heard of them before, so can only go by what's on their website. They appear to be property advisers who'll supposedly help you find and buy property/land at knock down prices.

Regardless of their merits, I'd be very wary given they're not authorised or regulated by the Financial Services Authority - if anything untoward happens then you'll be on your own.

A quick look on the Companies House website suggests Cavendish Moore Limited was incorporated on 19 March 2009, so not much scope for a track record as yet. A director called Michael Moore was appointed on 24 June 2009 then terminated within 2 months...odd...but perhaps there's an innocent reason for this.

Anyway, their websites suggests they can help you buy UK properties at 25% - 35% less than a recent RICS (Royal Institute of Chartered Surveyors) valuation and US properties at 70% - 85% off current market valuations. And there are also services to help you buy and develop land. No details of their charges or exactly how they operate.

At face value this all sounds quite attractive, after all, who doesn't want to buy bargain property? However, I suspect it's too good to be true.

My view is that an asset is only ever worth whatever someone will pay for it. That is, you might be able to buy a property for £75,000 that's theoretically valued at £100,000, but it's only worth £100,000 if someone will pay you that much for it - and in the current climate I suspect you'll struggle. After all, if someone's happy to pay £100,000 then why would the seller accept £75,000? Ok, I accept distressed sellers might take a lower price for a quick sale, but that type of investment only tends to make sense in buoyant property markets when you can be confident of selling on at a profit - in the current market I'd be nervous.

The same is even more true of US property. Prices have tanked because there are way more sellers than buyers. So don't be fooled into thinking you're getting a 70%+ discount. Whatever you end up paying is arguably the current market price for the property, so any other valuations are probably pie in the sky.

Buying land with a view to developing can be very profitable, if you can get planning permission and build something that someone wants to buy. But it's not easy. Most landowners who think they can get planning permission without too much hassle will do so, as the price of their land will soar, so finding untapped opportunities is difficult. And with the economic outlook still uncertain I'd avoid property development if you're hoping to make a short term profit.

If you can drive a hard bargain and sit tight for 5-10 years then buying property over the next year or two may turn out to be a decent investment. But it's by no means a sure thing.

Even if you disagree with my above views, ask yourself why any company, including Cavendish Moore, would spend a lot of time cold-calling to drum up investors if they really do have a hot investment proposition? Surely they'd be more interested in borrowing money to invest themselves and make a fortune?

Read this Q and A at http://www.candidmoney.com/questions/question334.aspx

When best to take tax-free cash from my pension?

Question
I need an income now. My SIPP pension has a value of approx. £500k. Is it a good option to take the 25% tax free over a period of time to be used as an income and draw a pension when the 25% lump sum has been cashed in? Or would it be a better option to start drawing a pension now and keep the 25% tax free option as a reserve for the future?Answer
When you take the tax-free cash lump sum from a pension it must be taken as a single one-off payment when you start taking benefits - i.e. when you buy an annuity or start drawing an income from your fund (often called 'income drawdown').

It is possible to stagger the payments over time if your pension is split up into many identical policies (called 'segmentation'). As each policy is effectively treated as a separate pension you can take benefits, hence the tax-free cash, from each policy at different times.

For example, suppose your pension fund is £100,000. You could take £25,000 tax-free cash and use the remaining £75,000 to buy an annuity or leave it invested and draw an income. If the pension were instead split into 100 identical policies you could take benefits from individual £1,000 segments (i.e. £250 tax-free cash with the balance used to buy an annuity) as you wish.

However, while flexible, segmentation is not very helpful if you need most or all of the income now, as you'll end up taking benefits (hence tax-free cash) from most/all of the segments straight away.

Given you need income now, then you'll have to take the tax-free cash now. I think your bigger decision is whether to buy an annuity with the balance or leave the fund invested and draw an income.

I won't cover all the pros and cons of each here (take a look at our annuities page for more info) but it's basically a gamble on whether future investment performance will leave you better off versus buying an income for life at a prevailing rate now.

Read this Q and A at http://www.candidmoney.com/questions/question333.aspx

Changes to pension rules at 75

From next April you'll have greater freedom over what to do with your pension at age 75 if you haven't already bought an annuity. Should you be bothered?.

Today's draft 2011 Finance Bill lays out some of the changes we can expect to financial rules and regulations from April next year. On the whole it's a pretty dull affair, but there are proposed changes to pensions that might affect some of you.

The main change concerns not having to buy an annuity with your pension fund at age 75.

Don't existing rules allow you to avoid buying an annuity with your pension at 75?

Yes they do, via what's called an Alternatively Secured Pension (ASP). Instead of buying an annuity at age 75 you can instead draw an income from your pension fund, provided it's between 55% - 90% of an equivalent annuity (well, approximate annuity value based on a Government calculation).

In the unlikely event there's still money left in your pension pot when you die it can be used to provide income for financial dependents, or passed as a lump sum to beneficiaries (although taxes of 82% could apply to the latter - a 70% pension 'charge' followed by 40% inheritance tax).

So how are the new rules different?

While broadly similar, they provide a bit more flexibility. There'll no longer be a minimum withdrawal limit from 75. And no maximum limit either provided you receive at least £20,000 annual income for life (via state and other pensions), else withdrawals will be limited to an equivalent annuity (to reduce the risk of your pension fund running dry before you die).

If you pass any remaining pension fund as a lump sum to beneficiaries on your death inheritance tax will no longer apply and the 70% pension charge will be reduced to 55%. While 55% tax is obviously better than 82%, it's still a hefty disincentive to pass your pension onto future generations.

What if I start taking my pension before 75?

Then it's business as usual. You can either buy an annuity or draw an income of between 0-120% of an equivalent annuity. If you're drawing income then the new rules will kick in when you reach 75.

The only change is that if you die before 75 having drawn an income then any lump-sum passed to beneficiaries will be taxed 55% and not the current 35%.

To what extent will these changes affect me?

Unless you're rather wealthy then probably not much - most of us will not be able to afford the luxury of passing a pension fund onto beneficiaries rather than living off it throughout retirement. However, if you prefer the idea of leaving your pension invested and drawing an income instead of swapping the fund for an income for life (by buying an annuity) then these new rules will provide a bit more flexibility from age 75.

Any other changes of note?

Just re-confirmation that the annual allowance for tax relief on pension contributions will fall from £255,000 to £50,000 from 6 April 2011 and that the pension lifetime allowance will fall from £1.8 million to £1.5 million from 6 April 2012.

Oh...and the taxman will get more clout when requesting data from third parties - worrying given the public sector track record on data security and if you're evading tax.

Read this article at http://www.candidmoney.com/articles/article179.aspx

Cutting the cost of Christmas shopping

If you've still to do some Christmas shopping these tips could help you save money. And if you've already done your shopping, well, maybe they'll help you save money in future. .

Ok, not my usual subject matter, but as an avid bargain hunter I thought you might find some of the following tips I've picked up over the years helpful. And, even better, maybe you have some tips of your own to share.

Of course, the simplest way to cut the cost of Christmas shopping is not to do any...but that would make for a very short article, so let's assume you're not a bah humbug and look at some ideas for saving money.

Use deal websites

The Internet makes it very easy to share news of a bargain and many websites have sprung up to facilitate this. I find www.hotukdeals.com the quickest and simplest to use - if you're not careful you'll end up making lots of impulse buys, but it's a good source of bargains, both online and on the high street.

Use discount vouchers

The humble discount voucher has moved into the 21st century with lots of websites now offering free vouchers and codes to use on both the high street and online. They're often aimed towards higher margin items such as clothes and meals out, but if you can find a voucher for your purchase it'll cut your bill. Hotukdeals has a reasonable discount code section, while www.vouchercodes.co.uk and www.save.co.uk both offer a good selection of online and printable discount vouchers.

How do these sites make money? They usually receive a commission from the retailer if you shop online via their sites or use one of their printed vouchers, which brings me nicely onto my next tip.

Use cashback websites

If you click on a link to an online store there's a good chance it's a paid 'affiliate link' (note: I don't include any such links on this site). This means the website providing the link will receive some commission from the retailer if you buy. Wouldn't it be good if you could pocket the commission yourself? Well, thanks to 'cashback' websites you can.

Lots of cashback websites have sprung up, two that I've used for some time now which appear to be reliable are www.quidco.com and www.topcashback.com. Quidco takes a £5 annual admin fee while Topcashback is free - commission rates sometimes vary between sites so it's often worth checking more than one. You basically visit the retailer via a link on their site then make your purchase as normal. Provided the transaction 'tracks' ok you should normally receive the cashback in your bank account within a month or two.

The cashback system seems to work well (I've received about £600 over the last 3 years), but as it's never guaranteed treat cashback as a bonus rather than the reason for buying something.

Use shopping comparison sites

These websites use automated web surfing to compare the price of items on a number of different websites and make their money via affiliated links, as mentioned above. While they can be useful in helping find the cheapest place to buy an item, they'll claim the commission if you buy via them.

But there's nothing stopping you from using these sites to find a cheap retailer, then visiting that retailer via a cashback website to ensure you pocket the commission.

Of the many shopping price comparison sites I find www.google.co.uk/products the quickest to use.

Cut out the middle man and import directly

Much of what we buy these days comes from China, so why not buy direct? It might not be practical or safe for larger items, but if you like small gadgets you'll have a field day at sites like http://www.dealextreme.com/ and http://www.priceangels.com/. Prices are low and include delivery, although this usually takes 2-3 weeks or more - so probably too late for this Christmas.

90% of what they sell is cheap disposable tat and this irks me somewhat, as it's not good for our planet. But search and you'll unearth some genuinely useful, well-made, bargain items.

Ebay outlets

A recent trend among big retailers such as Tesco and Argos is to open an ebay outlet store - which they use to shift surplus stock and returns at discount prices. More often than not the prices are still a bit on the high side, but there are sometimes bargains up for grabs, so worth a look. You can view a list of outlets here deals.ebay.co.uk/outlet/.

However, while you should be ok with large retailers, bear in mind ebay's appalling terms and conditions for faulty/incorrect items that state buyers are responsible for return postage (see my article < ahref="">here).

Warehouse clubs

Aside from grocery shopping, one of the few times I venture into a store and put up with crowds and queues is a trip to Costco - a members warehouse. It's not hard to be seduced, there's a very wide range of high quality items (from electrical goods to homeware and clothes) and food at very competitive prices. The membership criteria is so wide ranging almost anyone can join, subject to an annual fee (about £25 from memory). Makro is also be quite good, although less accessible as they only accept trade members.

Haggle!

Maybe it's a dying art form, but don't be afraid to haggle - even if it's just using a price match policy in stores like John Lewis (i.e. enjoy the price charged by a shabby shop down the road with John Lewis service and backup). It really is as simple as asking. OK, you probably won't get money off your weekly supermarket shop, but when buying larger items or in bulk always ask for some money off - you'll be surprised how often it works.

Don't pile up expensive debt

It's stating the obvious, but little point hunting down bargains if you'll buy with borrowed money that ends up costing you a fortune. If you can't avoid borrowing at least try to get a zero percent credit card or repay the money as quickly as you can in the New Year.

Right, I think that's all for now. Happy shopping and please post any tips of your own below...

Read this article at http://www.candidmoney.com/articles/article178.aspx

Capital gains tax on overseas shares?

Question
I should be grateful if you could comment on CGT liability on foreign shares.

If I buy foreign shares using a UK broker, and later sell making a gain, do I pay Capital Gains tax in the countries in which the shares are based? Or does my liability rest solely in the UK? I am thinking of the US and Jersey.Answer
If you are a UK resident then you are liable to UK capital gains tax on your worldwide assets. The only exception is if you're a non-UK domicile (possible if, for example, you were born overseas) in which case you can choose to only be taxed on overseas gains you bring into the UK - but you'll have to pay an annual £30,000 tax charge for the privilege (introduced by the Government to discourage tax avoidance/evasion).

Given you'll be taxed in the UK, the key is to avoid paying additional tax on gains in those countries where you hold investments.

Fortunately, most overseas countries don't hit UK resident investors with capital gains tax thanks to reciprocal tax agreements. So this is seldom a problem for most investors.

In your case the US doesn't deduct any gains tax for UK resident investors and there's no capital gains tax system in Jersey.

However, if you did end up being taxed on gains by an overseas country then you should be able to offset this against any UK capital gains tax owed. For example, suppose you make a £20,000 gain overseas on which £2,000 of tax has been deducted. You can offsetany unused UK annual gains allowance (currently £10,100), which in this example means a UK tax bill of £1,782 if you're a basic rate taxpayer (20,000 - 10,100 x 18%) and £2,772 if you're a higher rate taxpayer (28% CGT rate).

If a basic rate taxpayer you'll have no further UK tax to pay, although you can't reclaim the extra £218 overseas tax paid (in the UK at least). If a higher rate taxpayer you'll have a further £772 of UK tax to pay.

Read this Q and A at http://www.candidmoney.com/questions/question332.aspx

Which SIPP should I choose?

Question
I have c. £90,000 to transfer into a modern, low cost pension arrangement. I have been in touch with an adviser, who has suggested using a platform solution, such as Skandia or Transact. Alternatively, I have been looking at setting up a low cost SIPP, such as Hargreaves Lansdown Vantage or Fidelity FundsNetwork (through Cavendish Online), both featured on this website. Platforms seem to be adviser accessed - if this is this the main difference between the two, then presumably they are more expensive?

Whereas SIPP costs are unbundled and transparent, as far as I can make out platform costs are bundled, so how do I compare the two? Also, reading the 2012 Retail Distibution Review summary, it seems that the rules for Platforms are being tidied up at present, with concern about IFAs holding shares and the ability to transfer away, so my hunch would be to go down the SIPP route at the moment. Would you agree?

On the choice of SIPP product, suitability seems to depend on predominance of investment type ie funds or shares etc, with Hargreaves Lansdown/Fidelity being best for funds and Sippdeal etc for shares. While at the moment my investment will be fund based, I intend to diversify in the future. Are there any SIPP products that are good value for funds and shares?Answer
I wouldn't worry too much about the distinction between 'platforms' and SIPPs, as these days they're often much the same thing. But you are right to focus on charges - the investment choice available on the various offerings tends to be similar, so how much you'll end up paying is a key differentiator.

I think your first decision should be whether you need or want advice. Obviously this comes at a cost, which will usually be reflected by higher platform/SIPP charges (to pay the adviser commission or fees) unless the adviser charges their fees independently. Any adviser should clearly disclose how much their fees will be, so you can ascertain how much the advice will cost, even if it's 'hidden' via higher platform/SIPP charges.

For example: the Skandia Collective Retirement Account charges £52.32 a year as a platform charge. Financial advisers can take up to 4.5% initial commission, which is effectively a direct charge to you and taken from your investment (i.e. up to £3,825 on £90,000) as well ongoing annual 'trail' commission of up to 1.5%. About 0.5% trail commission is usually built into the cost of the underlying funds, if the adviser takes more this will again be a further direct charge to you.

If you use an adviser or discount broker who takes no commission then you'll just pay Skandia's £52.32 annual fee and standard fund charges (less any trail commission, which should be rebated to you), along with any fees paid directly to the adviser/discount broker.

I've yet to see a 'perfect' SIPP for investors wanting to hold funds and shares, but the Alliance Trust Savings Select SIPP is well worth considering. Because it's offered via their i.nvest platform (you can read my review here) there's generally no initial fund charges and you enjoy discounts on annual fund charges, typically reducing the cost of a fund charging 1.5% a year to 0.75% - 1%. Despite an annual SIPP charge of £75 plus VAT and online dealing fees of £12.50 per trade (funds and shares), this is probably the cheapest option currently if you wish to hold both funds and shares and don't plan to make small regular contributions (in which case the £12.50 dealing fee could be prohibitive). Just bear in mind that Alliance Trust doesn't presently offer as wide a fund choice as most rivals - this may not be a problem but I'd definitely check whether your preferred funds are available if considering this route.

Hope this helps and that you find a solution you're happy with.

Read this Q and A at http://www.candidmoney.com/questions/question330.aspx

Tax situation on non-reporting fund losses?

Question
You recently replied to someone's question concerning UK tax on disposal of an offshore etf which does not have reporting/distributing status, saying that any loss could be written off against any other capital gains (eg stock gains). Is this correct?

I thought that since gains/losses on selling offshore etfs are treated as income, any loss could not be offset against capital gains and, even worse, the loss cannot be offset against income from selling another offshore etf.

If you could agree or disagree I'd appreciate it, thanks for help.Answer
If an offshore fund does not have reporting/distributor status then gains are taxed as income. Losses cannot be offset against income tax, but can be offset against capital gains you may have made elsewhere for the purposes of capital gains tax.

I know this sounds illogical, but it is correct. It's confirmed on page 82 of the HMRC Offshore Funds Manual (see 'losses' paragraph). There's also a good summary of offshore fund taxation in this Grant Thornton factsheet (losses are covered at the bottom of the left hand column on the first page).

I suppose the reason HMRC doesn't allow losses to be offset against income tax is that it could be open to abuse and assist income tax avoidance. Offering no relief for losses would be unfair, so it's given via capital gains tax as a token gesture.

Read this Q and A at http://www.candidmoney.com/questions/question331.aspx

Are RBS Exchange Traded Bonds worthwhile?

Question
Justin, do you think the RBS Exchange Traded Bonds being advertised at the moment are attractive compared with fixed interest savings products?

I am looking after the savings of a 97 year old lady, and constantly moving money from one bank to another to get reasonable rates is becoming troublesome.Answer
On the surface they look attractive compared to savings accounts, with interest rates of 3.9% a year being quoted and the potential to rise with either interest rates or inflation in future.

However, there is a fundamental difference, RBS Exchange Traded Bonds are effectively corporate bonds issued by RBS with a 12 year term. This means 3 major differences to a conventional savings account:

1. Whether you receive the interest payments and your money back at maturity depends on whether RBS can afford to pay you (you'll be behind savings account holders in the queue).

2. If RBS can't afford to pay you and you lose money you won't be covered by the Financial Services Compensation Scheme (FSCS).

3. If you sell the bonds on the open market at any point before maturity you may get back more or less than your initial investment, depending on their price.

The bonds themselves are interesting in that the rate of interest is not fixed. There are 2 variations: the Floating Rate Bond promises to pay the higher of 3.9% and the 3 month LIBOR rate (usually similar to the Bank of England Base Rate) a year, while the Index-Linked Bond pays the higher of 3.9% and inflation measured by the Retail Price Index (RPI).

A link to interest rates or inflation is appealing as it removes one of the big influences on bond prices, which should help reduce risk. But whether you choose the floating rate or index-linked bond, you'll still be vulnerable to higher inflation and interest rates respectively. Plus RBS's financial position, which remains volatile, is likely to have a heavy influence on bond prices between now and maturity.

I'll try and take a closer look at these bonds later this week and write a full review. But to answer your question regarding their suitability as a savings account alternative for a 97 year old, I'd say no, not very suitable.

If she needs to access the money in an emergency she might end up having to sell at a loss if the price at that time is lower than the one she paid. And should she pass away before maturity then the shares may have to be sold, again, possibly at a loss depending on prices at that time.

I know rates paid on savings accounts generally look rather unappealing in this low interest rate climate, but they're probably the most appropriate home for a 97 year old's money as it's not the time in life to be taking any risk. To avoid the hassle of having to periodically move money between banks to ensure a competitive rate you could consider a 4 or 5 year fixed rate account, where rates of around 4 - 4.5% a year are currently on offer. There may be penalties for withdrawals before maturity, but these wouldn't normally apply in the event of death - it's worth checking the relevant terms and conditions re: both before opening an account.

Hope this helps.

Read this Q and A at http://www.candidmoney.com/questions/question329.aspx

Which type of corporate bond fund to buy?

Question
I have several Bond Funds in my ISA. They have done well this year.

Which type of Bond fund should I be invested in now interest rates are recovering and inflation pending?Answer
If you believe both interest rates and inflation will rise moving forwards then I'd be inclined to generally steer clear of corporate bonds as in such circumstances they'll likely fall in price.

However, it's not quite that simple. Even assuming a sustained rise in interest rates and inflation (I'm not convinced that either will rise by much, if at all, over the next year or two) then not all bonds will react to the same extent. Low yielding bonds (i.e. those paying a low income) and those with many years until redemption are likely to be more affected than higher yielding bonds and those nearing redemption.

The price of higher yielding bonds is usually more influenced by the financial strength of the company issuing them, which in practice means performance tends to more correlated to stockmarkets than interest rate and inflationary movements.

So if interest rates/inflation do rise then high yield bonds with shorter redemption dates would appear to make more sense - but you'd need to be fairly confident about economic/stockmarket prospects, which are very debateable at the moment.

And even if interest rates/inflation rise there's still a chance the price of the 'safest' government bonds could rise if investors seek a safe haven due to turmoil in economies and stockmarklets.

To complicate matters further some corporate bond fund managers also look to make money from currency movements and/or use various types of financial instruments (e.g. 'credit default swaps') that allow them to reduce credit risk (i.e. the risk of company not paying interest or capital at redemption) or the impact of interest rate/inflationary movements.

So, to answer your question. If you're convinced interest rates/inflation will rise then consider higher yielding bonds unless you're also worried about the economy and stockmarket.

If you're less sure what will happen then maybe look at a 'strategic bond' type fund where the manager can freely alter exposure between different types of bonds and also use financial instruments like those mentioned above. Just bear in mind that you're then relying on the fund manager's predictions of what will happen in future and they're not always right! So maybe spread the money across several funds to reduce risk.

Read this Q and A at http://www.candidmoney.com/questions/question327.aspx