More crisis to come?

Is Europe heading towards a major economic and political crisis?.

David Cameron has set the cat amongst the pigeons by vetoing changes to a European treaty that could have affected the regulation of UK financial services. It may well break up the coalition and impair our trade overseas. But even ignoring this latest headline, Europe is in a very strange and perilous position.

I was born at the end of the Second World War, which cost 50 million lives and ended with Germany being resurrected by the Allies. Now, the Europe that the Germans devastated begs, nay demands, that Germany should let the ECB print as many Euros as it takes to buy up the toxic debts of the likes of Greece and Italy, and – via some Eurobond mechanism – underwrite future borrowings. Germany has not forgotten what happened the last time inflation took hold, and is not going to play unless, in effect, it takes over the running of the indebted economies. The Italians and the Portuguese will have to do as they are told, and if they don’t, there will be sanctions. So goes the fairy tale.

What if the Governments that sign up to Eurozone hegemony get slung out by the voters, who elect a party that has promised to tell the Eurozone to get stuffed? What sanctions will be applied? Happily, probably not tanks, because only us and the French have spent any money on our armed forces.

And even if Merkozy et al manage to calm the bond markets for now, the underlying problem does not go away. The one size fits all Euro is a disaster. The convergence of economies that was supposed to happen simply hasn’t. Arguably, they have diverged. In the last couple of months some respected commentators have actually argued that The Eurozone members should face up to reality and start planning the break up.

This would all be pretty comical if it wasn’t so serious. When Lehman went belly up and the banks went to pot and the economy shrank sharply, I thought it would take us seven or eight years to restore equilibrium. We’ve had three, but now we have the Eurozone mess and, as Osborne has made clear, we have to set the clock back to nought.

But is it so awful if living standards fall back just a bit? I seem to remember managing without telly, foreign holidays, 3G mobile ‘phones and designer clothes. Come to think of it, I still do, aside from the telly. The woman interviewed on the box the other night to tell us how awful it was that she had to turn the heating down and wear a vest was artfully arranged behind a Christmas tree with obviously fancy and probably fairly pricey decorations. People will have to give things up. Guessing what they’ll give up is a great game for Christmas.

But spare a thought or more for the genuinely hard up. They’re down to the wire, and will be close to giving up what we have all come to think of as essentials.

And again

When HM Government came up with NEST (the new state provider of what will be, to all intents and purposes, personal pensions) they said that NEST would not take transfers from other schemes. That seemed unfair on the folks stuck in higher charging Stakeholder arrangements. Now, with the ghastly Child Trust Fund thrown out of the window, we have the junior ISA, which won’t take transfers from CTFs. Why?

At various times in these columns I have railed against structured products, bundling, and financial projections associated with Life and Pension products. The FSA has had a poke at all three in the last couple of months. The canals at Canary Wharf echo again, and again, and again to the unmistakeable sound of horses hooves following by the equally unmistakeable sound of stable doors clanging shut.

Read this article at http://www.candidmoney.com/articles/article249.aspx

Should investors stress about inflation?

Inflation is high, markets are erratic and the outlook very uncertain. Should you be bothered?.

I have been trying to catch up with the world following two weeks wandering about in the Scottish Highlands. Not much has changed.

We still do not know what the Eurozone mess is going to deliver, beyond, as everyone predicted, more grief for the UK economy. The best bet, made by a commentator yesterday on Bloomberg, is that we face a few more months lurching from one crisis to the next.

In the meantime, the Stock Market has been whizzing up and down like a fiddler’s elbow. How bad we feel about it depends, of course, on when we invested. I haven’t put new money in the market since investing my pension lump sum nine years ago, so my FTSE ‘marker’ is still 5000. I am unhappy. Anyone who invested at the top – approaching 7000 – is probably a good deal less happy. I take my hat off to those of you out there who bought gold at $300 an ounce and cashed in at $1,800. I bet that now you wish you’d bought more than two ounces.

We might believe that something is a surefire winner, and want to make a really decent bet. But when push comes to shove we have a fairly low tolerance for losses. So we make a small investment that does really well. Then we reflect that twice diddly squat isn’t much, so why didn’t we trust our judgement in the first place and boldly go for the much bigger gain?

Here is the rub for us mere mortals trying to make our life savings do something better than lying down passively while being ravished by inflation. We can do some sensible things, like making sure we use our ISA allowances, and filling our boots with NS&I Index Linked when they’re available. We can review our equity and bond funds at regular intervals and make sure we get out of the dogs. We can shop around for better interest rates on our cash reserves. We can shop at Lidl rather than Waitrose. We can turn the thermostat down and wear an extra vest. But to beat inflation we have to take some big risks, and most of us have trouble sleeping at night as it is.

So look on the bright side. You didn’t buy Japanese shares at their peak in 1989, so you haven’t lost 80% of that money. And you’re not overweight in US equities that are yielding about 2% and are clearly over-valued. The kids will just have to make do with what’s left, which may be less than they had hoped for. In the meantime, stay calm, and open a bottle.

On another note...

When NS&I call Premium Bonds an ‘investment’, I am reminded that my economics teacher told us that we should never lend money to the Government. But you can manage your Bonds on line, which is a boon. I suspect that there are lots of folk, like me, who sweep their current accounts on a regular basis and shift anything that isn’t needed right now into something that pays a bit of interest but doesn’t limit access.

The Premium Bond ‘fund’ is actually paying ‘interest’ at only 1.5%. But most instant access deposit accounts are paying 10 basis points (one tenth of one per cent, or 1p per annum per £10 held) on sums under around £10,000.

I’d much rather get a cheque for £25 now and again than a statement showing interest of two fifths of five eighths of very little, which sum is of course to be declared to Her Majesty’s Revenue. So I use Premium Bonds as my ‘sweep account’ and kid myself that I’m not lending money to the Government, merely having a little bet.

Read this article at http://www.candidmoney.com/articles/article248.aspx

Eurobust inevitable?

As a Greek default looms large, will the Euro bite the dust?.

There seems to be a consensus now that the sewage is coming perilously close to contact with the revolving air conditioning system. The doubters who fretted about a currency without a Government, and were ridiculed by the Europhile mob, were right all along. I still haven’t heard the LibDems, or the Europhiles from the other parties, admitting their mistake.

France and Germany are still making solidarity noises in public, while in private they work out how to inflict least damage with an orderly Greek default.

Greece is insolvent. Greece is going to default because there is no way they can carry the burden of the debts they now have. Loads of banks in Greece and elsewhere in Europe are sitting on Greek Government iou paper which they have tucked away in their assets column. Those assets will shrink by at least half, more likely three quarters. Some of these banks will then be, technically, bust and require injections of capital from somewhere.

A United States of Eurozone Europe could solve the problem, because aggregate public debt across the Eurozone is not especially high. But a United States of Europe isn’t going to happen because the voters won’t have it. And even if they did want it, it would take too long to bring about. Eurobonds that would be backed collectively by all the Eurozone countries would buy some time, but they aren’t going to happen either, because the Germans will not countenance the idea of taking on, in effect, several more East Germanys. The Italians made loads of promises in return for a loan, pocketed the loot, and reneged on many of the promises within weeks. Would you lend them your life savings?

Quite what happens when the proverbial does hit the fan is anybody’s guess, but it won’t be a pretty sight, which is why the politicians have been kicking the Eurozone can down the road for so long.

Then again, I was wrong about interest rates going up this year.

'Helpful' banking

A year or so back I had cause to natter to the local NatWest. They had a neat wheeze going. Use their ‘Accelerator’ Mastercard and get a bonus rate on your savings account. You had to spend pretty freely on the card, but you got another 2% on the savings account.

No more, it seems. They have written to say they “are making important changes to simplify our range of accounts”. The Accelerator Credit Card is going to be simplified. It will no longer accelerate. I can have a new one that will get me some M&S vouchers.

I don’t want this, so I’phoned the given number to tell them. A computer answered, and the deed was done, signing off with a polite message to confirm that my card “will not be upgraded”.

Too right it won’t. It’s in pieces in the bin, and when I get home my decelerated savings will have to find a new home, because Natwest are going to pay a princely one tenth of one per cent. There is a word that was invented for banks paying nowt on deposits and charging double digit numbers to borrowers: extortion. Or in regulatory speak, treating customers fairly.

The eejits who ran the thing into the ground in the first place must still be in charge.

Read this article at http://www.candidmoney.com/articles/article245.aspx

Will debt stifle growth?

Is growing our economy out of trouble realistic given high levels of personal and government debt?.

No-one commented on my last piece, but somewhere out there 30 people pressed a button to signify that they found it helpful. I think that’s my best score, but I do of course realise that ten may have pressed the wrong button and that the one person who really found it helpful decided to press the button twenty times to make me feel better, or for the sheer joy of messing up the numbers. Raw scores, as we used to call them in research, are unreliable chaps.

This point is not lost on the economists at the Bank for International Settlements, who are properly tentative about their conclusions, even though they are based on some quite robust evidence. Here is the abstract of a recent paper:

"At moderate levels, debt improves welfare and can enhance growth. But high levels can be damaging. When does the level of debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the threshold is in the range of 80 to 100% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Up to a point, corporate and household debt can be good for growth. But when corporate debt goes beyond 90% of GDP, our results suggest that it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated."

Phew! Our 2010 figure for public debt is 89. So that’s OK. ‘Fraid not. Our numbers for corporate and household are 126 and 106 respectively. At some point, we really are going to have to cut public spending, rather than attempt to slow down the increase, which is what we are doing now. Growth is not going to pull us out of this mess.

Or the BIS economists are off their trolleys. Take your pick.

Now you see it...

Between the fiscal years ending April 08 and April 10 personal pension contributions fell by £2,200,000,000, and a million people stopped contributing altogether. But the Office of National Statistics points out that the figures don’t include self invested personal pensions – SIPPs. Back of fag packet calculations suggest that SIPP business might well have made up the difference. As I said: raw scores are trouble.

I’ll huff and I’ll puff...

There is much time and energy being spent writing on blogs by financial advisers convinced that their clients would much rather have them earn commission than fees. The regulator plans to introduce this simple idea: if you call yourself an adviser you must tell people what your advice will cost them.

So here is the killer question for the next ‘adviser’: “how will you demonstrate that the value added to me by your advice will at least equal the cost?”

Higher rate tax

There is a broad academic consensus. The 50p tax bracket will raise no money and might even reduce the overall tax take.

There is broad chattering classes consensus. Getting rid of said tax band is too unpopular even to contemplate. The Tories daren’t go for it because they don’t want to be tarred with a class brush. The Lib Dems would go along with the abolition as long as they got, in return, mad Vince’s Mansion Tax. The Labour lot are presumably in favour of increasing taxes all round and thus strangling whatever vestigial growth prospects might survive the debt overhang (see above).

In truth, none of them are worth a vote. They are either stupid, or craven, or both. Depressing, isn’t it?

Read this article at http://www.candidmoney.com/articles/article244.aspx

Alternative energy investments?

Question
I'm looking for a unit trust (or maybe an ETF) with a focus on alternative energy investments. Too many in the energy field seem to have a focus or at least a strong bias towards "traditional" oil-based companies. Any ideas for funds which look at non-oil alternatives?Answer
The potential issue with alternative energy investments is that they tend to be heavily influenced by the oil price shorter term - when the oil price is high alternative energy looks attractive and vice versa.

Longer term alternative energy should deliver returns based on its own merits and the likelihood we'll all be compelled to use more of it - the UK government has committed to 15% of our total energy use being from renewable sources by 2020 (it's currently about 3%).

So well worth considering, but be prepared to invest for the long haul.

Funds investing in alternative energy companies include ETFX DAXglobal Alternative Energy ETF, Osmosis Climate Change ETF, Blackrock New Energy Investment Trust and the Guinness Alternative Energy Fund. Take at look at my article here for more details.

Read this Q and A at http://www.candidmoney.com/questions/question567.aspx

Investment grade or high yield bonds?

Question
I have a number of Strategic Bond Funds in my ISA. I created a considerable amount of liquidity selling equities recently. Would this be an appropriate time to also buy -

Corporate Bond Funds

High Yield Bond Funds

Index Linked Funds.

Answer
Strategic bond funds can choose from pretty much the whole fixed interest universe. That means they might hold investment grade bonds, higher yielding bonds and index-linked bonds. The relative split between these different types of bond will depend on the manager's views on where interest rates, inflation and markets are headed.

For example, investment grade bonds tend to be more sensitive to changes in interest rate and inflationary expectations than higher yielding bonds, while the latter tends to move more in-line with stock markets. Index-linked bonds are unsurprisingly very sensitive to changes in inflationary expectations - 5 year UK Index-Linked gilts are priced (at the time of writing) assuming average inflation of 2.66%, rising to 2.84% on gilts redeeming in 2024. If you expect average inflation to be higher than this you might profit from index-linking versus the equivalent conventional gilts.

Given you probably have a fair mix of the above via the strategic bond funds you already own, the main difference if buying specific investment grade, high yield and index-linked funds will be that you rather than a fund manager can decide the relative mix.

One thing I'd be wary of is having too much exposure to fixed interest in your overall portfolio. In these volatile times it's probably safer to be overweight in bonds than the stock market, but placing an excessive bet on bonds leaves you exposed if bond markets struggle. Having said that, the for as long as stock markets endure difficult times the safer end of the bond market should remain robust, with demand propped up by investors flocking to safety and interest rate rises unlikely.

On balance, if you're pessimistic about stock markets and want to increase bond exposure I'd focus on the safer end of the market, just don't expect exciting returns in the current climate.

Read this Q and A at http://www.candidmoney.com/questions/question566.aspx

Hargreaves Lansdown trail commisison rebates?

Question
I have just read a review on Cavendish Online and am interested in trail commision discounts. I deal with Hargreaves Lansdown and wondered whether they give a discount on their trail commision?Answer
Hargreaves Lansdown (HL) does give generally give trail commission rebates on funds held either directly or within ISAs, but not those held within its SIPP (i.e. pension).

The rebates are called a 'loyalty bonus' and typically amount to about half the annual trail commission. So if a fund pays trail commission equal to 0.5% of the fund value, HL would likely rebate 0.25%.

By comparison, Cavendish Online rebates all the trail commission, so 0.5% in our above example, in return for a one-off £25 fee if the funds are held via the Cofunds or FundNetwork fund supermarkets.

There's no doubt Cavendish Online is cheaper for the vast majority of investors, but they simply offer a no-frills transaction service. If you actively use HL's fund research and information you might feel it's worth the extra 0.25% a year but, there again, you might not (views seem to be divided based on feedback via this site).

You can view a comprehensive list of discount brokers in our Guide to ISA Discount Brokers, so take a look and try and gauge which blend of discounts and service would best suit you.

Personally I'd be very happy using Cavendish Online, as given my background I don't feel much need for fund research and marketing bumf (in any case, there's plenty of freely available fund information on the web - see my answer to this question). But if I were a novice investor I might feel differently and opt for a discount broker offering more information and hand-holding, albeit with lower discounts.

Read this Q and A at http://www.candidmoney.com/questions/question568.aspx

Do fund prices vary between brokers?

Question
In the recent stock market dips, I've made multiple investments and I've noticed that I seem to get better deals through some companies that others...

* Buying Unit Trusts through Hargreaves Lansdown, I always seem to buy at the lowest price of the day ( or lower! )

* Buying Investment Trusts through Halifax, sometimes I buy at a low price for the day, but sometimes it's near the high point for the day.

* Buying Unit Trusts through Cofunds seemes to get me near to the best price of the day.

Is there a difference between different companies trading policies, or is there a difference in the markets between ITs and UTs? They all seem to claim to get 'best price' but some seem to be better at doing so than others - or will it even out once I've made hundreds of transactions?Answer
Ignoring any initial charge discounts, unit trust prices shouldn't vary between brokers. That's because most are only priced once a day - the fund publishes its buying and selling prices, typically at a fixed time between 10am and 3pm, and these are the same for everyone. Trading is normally on a 'forward' basis, which means your trade will be carried out at the next published price, so you can't be certain of the price you'll get when you place the deal.

So buy a fund via Hargreaves Lansdown and Cofunds and the price should be the same, unless Hargreaves Lansdown gives a bigger initial charge discount on that fund, in which case you'd expect the buying price to be lower.

A quick example helps to explain this point. Suppose a fund has a buying price of 100p and a 5% initial charge, you'd expect the selling price to be 95p (in practice it'd be slightly less due to other costs such as stamp duty within the fund, but let's ignore these to keep things simple). If there's no initial charge discount you'd buy units at 100p, but assuming a full initial charge discount you'd buy the same units at 95p - much better!

Investment trusts are different as they're priced in real time, just like conventional shares, so the price can vary throughout the day. Stockbrokers are under an obligation to attain the best price they practically can when buying and selling shares.

In practice this means the prices of more popular investment trusts should be very similar, if not identical, across all stockbrokers. When it comes to less frequently traded investment trusts it can be harder to find buyers and sellers, potentially giving rise to a variance in prices - it may be that one stockbroker uses a market maker (basically a middle man) offering more favourable prices than another.

Read this Q and A at http://www.candidmoney.com/questions/question565.aspx

Good time to buy corporate bonds?

Question
As UK interest rates now look like they will remain at their current level for the next 6 to 12 months I wondered if you felt corporate bonds were worth considering as an alternative to the volatility of the stock market and the poor rates of interest paid by bank accounts ? I would intend to trade out of them when interest rates look like going up.Answer
Higher quality corporate bonds aren't a bad place to be during volatile stock markets and your approach sounds sensible. However, there are issues to be aware of:

Bond yields to redemption (i.e. annual equivalent income including interest payments and any gain/loss on the redemption price versus current price) are only around 2-5% for companies at the safer end of the scale. Given you can earn around 3% variable annual interest or 3.5% fixed for a year via 'best buy' savings accounts it begs the question are corporate bonds worth the extra risk when the extra return might be small?

Let's look at a couple of example bonds issued by Severn Trent Water - which should be fairly safe in the scheme of things.

Their 5.25% 100p bond redeeming in December 2014 is trading at around 110p. This means an income yield of about 4.8% (you receive 5.25p on a 110p investment), but given you only receive 100p at redemption you'll lose 10p if you hold until then, which reduces the redemption yield to 2.2% - less appealing.

Severn Trent also has a 6.125% 100p bond redeeming in February 2024, trading at around 115p. This gives an income yield of 5.3% and a yield to redemption of 4.5%.

The income yields are fairly similar, but there's a big difference in redemption yields. That's because bonds with longer periods until redemption are more susceptible to high inflation and interest rates. If inflation is high long term you'd be more concerned over the impact it'll have on the 100p being redeemed in 2024 than in 2014 - so markets price such expectations into bonds accordingly.

The reason I mention this is that short term corporate bond investing is generally safer when bonds are redeeming sooner than later. But then the possible returns currently look lower. Suppose you buy the above 2014 bond at 110p. You collect the 5.25p annual interest, which is nice, and sell in a year's time. Assuming markets think little has changed, you might expect to sell for 110p. But as we're another year closer to the 2014 redemption it might be that markets are only willing to pay 107p to ensure the yield to redemption remains attractive. In that case you've received 5.25p of interest but lost 3p of capital, giving a total return of 2.25p on 110p, equal to about 2% annual interest - not great.

The long dated bond is less likely to suffer in this respect, but a sudden change in future inflationary or interest rate expectations will likely have a greater impact on price (for better or worse) than the short dated bond (it also depends on how much interest a bond is paying - a stat called 'duration' incorporates all this to predict sensitivity to interest rate movements). So if markets predict rising interest rates before you do you might end up having to sell at less than the 115p purchase price, hurting returns.

I don't want to talk you out of buying corporate bonds, but just bear in mind the above risks and be fairly confident you can predict when the tide turns re: interest rates before markets do, so you can (hopefully) get out with a nice profit.

Bonds issued by banks are trading at lower prices (which means higher yields) following the recent downturn, so worth a look if you're comfortable with the risk. But of course, if things really blow up then banks are likely to be on the receiving end which increases the likelihood they'll default on their bonds - which is why markets are currently pricing them lower.

A good place to look at bond prices and yields (aside from a copy of the FT) is www.bondscape.net - click on closing prices under features.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question564.aspx

Life cover payout less than expected?

Question
On 24th December 1985 My father took out a life insurance policy in his and my mum's name designed to pay out £100,000.00 on second death to assist with Inheritance Tax payments. Maturing after 29 years.

I believe it was a Trust Fund Policy in mine and my sister's name and so the payment made would not be part of his estate.

In January 2000 dad became unsure of the policy and asked for Death Claim illustration. This gave possible death claim value of £52,971.95.

He asked the company to reassure him of the value on death and he was sent a letter stating "this policy is designed to pay out a minimum sum of £99,000.00 until 24 December 2014".

My dad died in 2006 and mum died in March 2011, the company have only paid out £71,459.17.

We have queried this and have been told the policy had a temporary decreasing insurance element (not mentioned before) and final bonus rates have fallen in recent years.

My solicitor will argue this on my behalf but what is your advice please. We appear to have lost £30k in 10 years and none of this uncertainty was explained to dad when he asked the question for this reason.Answer
Apologies for the delay in replying, life's been hectic lately for various reasons.

I'm struggling to work out exactly what type of policy you father took out. The usual route for life insurance to cover inheritance tax is a whole of life policy - the reason being the policy lasts until the day you die (assuming you keep paying the premiums), so it's guaranteed to payout, even if you live for longer than expected.

Given his policy was due to mature after 29 years it was obviously not whole of life, so more likely to be some sort of 29 year plan paying a minimum agreed amount on death during that time, with the potential for more or a payment on maturity (if still alive) depending on investment performance. The money was likely invested in a 'with-profits' fund, which aims to smooth market ups and downs.

With profits investment performance has been poor over the last 10 years, so any extra amount over and above any minimum guaranteed payout will almost certainly have been less than originally expected. Whether or not the original projections were unrealistic is open to debate, but it's difficult to get compensation for poor investment performance unless the advice was inappropriate (e.g. a high risk investment is sold to a low risk investor).

Of more concern is the conflicting information given by the life insurance company regarding the level of cover. Having received a letter stating the minimum level of cover was £99,000 it's fair to assume this would be the minimum guaranteed payout on death during the policy's term. But this is at odds with the death claim value given in 2000 and eventual payout.

I'd start by looking at the original policy documents to find out exactly what the policy is and how much it promised to payout on death.

If the policy did include a decreasing element and did not have a £99,000 minimum guaranteed sum assured then the payout received may well have been correct. But you can certainly question the letter that mentions £99,000 and whether the original advice was appropriate (assuming your father received advice) as this type of policy doesn't sound especially sensible to cover an inheritance tax liability - especially if your father was not made aware of any decreasing element.

But if the policy document does confirm a £99,000 minimum guaranteed sum assured then you should have a valid claim. You may not even need a solicitor in that case as it should be black and white.

Good luck sorting this out and please feel free to ask any follow up questions below.

Read this Q and A at http://www.candidmoney.com/questions/question560.aspx

How does the LSE International Retail Service work?

Question
Please can you explain how the LSE's International Retail Service operates and how I can access it?Answer
The London Stock Exchange International Retail Service (IRS) provides access to around 350 large European and North American stocks as if they were listed on the London Stock Exchange. This means low cost UK dealing charges via stockbrokers and not having to mess around with buying stocks in foreign currencies, as they're traded in pounds sterling. Plus, any dividends are paid in pounds.

Of course, there'll still be currency risk (due to exchange rate movements) and foreign exchange costs, but the latter are absorbed into a share's bid/offer spread (difference between buying and selling price). Because it's a small market you might also expect slightly wider bid/offer spreads than if you purchased the same shares on their domestic markets, although I'd expect the difference to usually be minimal.

Most stock brokers offer access to IRS so using the service should be very straightforward - the same as buying a UK share. But as the companies listed on IRS are domiciled overseas you shouldn't have to pay any stamp duty when buying their shares.

Behind the scenes trading logistics are handled by the CREST settlement system, much like buying UK shares.

However, there's a difference as you don't physically own the shares themselves. CREST buys them and holds them in large 'pool' accounts in the countries where they're listed. You're (or more accurately, your stockbroker) is then given a CREST Depository Interest (CDI) - basically an electronic piece of paper that says you (technically your stockbroker's nominee account) have beneficial ownership of the shares.

Is this safe? Well not as safe as owning a physical share certificate, but probably safer than holding shares via a stockbroker nominee account which is the norm these days (and how you'd invariably hold the CDI's anyway).

Perhaps the only other thing to consider is trading times. You can only buy and sell IRS shares while the London Stock Exchange is open, which means periods of time when you can't trade the shares even though the underlying stock markets are open. For example, US shares traded on IRS can only be traded for a few hours in the afternoon. This might be a problem if you want to trade during periods of high volatility.

In summary, IRS is a good thing and makes trading in certain large foreign companies very straightforward. I can't think of a significant reason not to use it unless you plan to trade very actively, in which case limited trading times and wider bid offer spreads potentially reduce the appeal.

Read this Q and A at http://www.candidmoney.com/questions/question558.aspx

Ways to reduce tax bill via a limited company?

Question
I have changed to a limited company from being a sole trader to reduce tax(50%).I am the earner with my wife and 2 children(age 24 and 17)as additional shareholders and employees.What can I do to reduce tax?

I am very happy to pay my wife and children pensions(all three have SIPPwith Alliance Trusts) or any other contributions such as dividends.My wife is a 40% taxpayer and son not yet but will be in 2 years.

Can I pay my daughter any dividends to help with school fees and uni fees later? Me and my wife have NHS jobs and NHS pensions and SIPPs with Alliance Trust.Answer
Companies are generally subject to lower tax rates than individuals, for example companies with annual profits of up to £300,000 pay 20% corporation tax, much lower than the 50% you'd pay as a sole trader.

However, that's only of benefit if the money stays in your company. If you want to spend it personally you'll need to withdraw it (via a salary or dividends) and it then becomes subject to the usual rates of personal income tax, i.e. up to 50%. So, on the surface, there's not much tax benefit unless you plan to leave profits in the company - not very practical if you need the money to live on. And, in any case, unless the company will use the money to expand or invest it'll be of little use just sat there as cash (banks tend to pay low rates of interest on corporate deposits - see my answer to this earlier question).

You can avoid National Insurance Contributions by withdrawing money as dividends rather than salary, but the taxman will need to be convinced you're not trying to evade tax. This used to be a popular route with IT contractors - maybe they'd earn £100,000 a year, pay themselves a £20,000 salary and the rest as dividends, avoiding NICs on £80,000 of income. But HMRC has clamped down on this and general wisdom seems to be that you should pay yourself a salary that is commensurate with what you'd earn if you carried out the same job as an employee for another company. So perhaps the contractor might instead pay themselves £60,000 a year and take £40,000 as dividends.

Employing family members is another way to try and save tax if they're in a lower income tax bracket than you. Plus, you can pay them dividends if they're shareholders. However, you should again be careful you're not seen to be evading tax. You'd need to able to demonstrate that family members are bona fide employees carrying out work that justifies the salary you're paying them. For example, you can't just pay a spouse £20,000 a year for typing a handful of letters, they'd need to carry out a role in the company that justifies the salary. Again, a good benchmark is how much they'd earn if they carried out the same tasks for another company.

Paying dividends to family members who are shareholders is feasible, but bear in mind a dividend distribution must be applied across the board. So, if you decide to pay £40,000 of dividends then each shareholder will have to receive their share based on the number of shares owned. For this to be worthwhile the family members will need to own quite a large proportion of the company, which risks the taxman viewing this as tax evasion unless you can justify why they have such a large shareholding.

As ever with the taxman, the key is to do what would seen as reasonable. Try to push things too far and you could risk a tax investigation, demands for unpaid tax, fines and possibly even imprisonment. I'd strongly advise speaking to an accountant to gauge what they think would be allowable in your position, so that you can try to save tax without risk of upsetting the taxman.

Otherwise, allowable deductions for business expenditures are broadly similar for both companies and sole traders, as is the pension position. You can pay pension contributions on behalf of your wife and children regardless of whether they're employees of your company. However, tax relief will be subject to the usual rules, i.e. non-taxpayers get basic rate tax relief on annual contributions of up to £3,600 while taxpayers enjoy tax relief on the lower of their annual earnings and £50,000 (including any employer contributions).

If any readers know of other (legitimate) ways to avoid tax using a limited company please post below.

Read this Q and A at http://www.candidmoney.com/questions/question557.aspx

How safe is a SIPP?

Question
I have accumulated a significant pension pot spread accross multiple houselhold name providers and am approaching the point of taking benefits. I am in no doubt that a self invested SIPP based income drawdown pension suits my needs.

The low cost internet based options (such as SIPPdeal) look good value, compared with the household names (who won't speak to me unless I give an IFA £15k to tell me what I know already). However I can't help feeling concern about taking my life savings to a small relatively unknown organisation.

If they are just acting as a broker and adminstrator maybe there is nothing to worry about? Are their hidden couterparty risks in using such a service? Can I mitigate risks by using two SIPP providers in drawdown? Answer
Ignoring investment performance, the main risks when using a SIPP are someone illegally dipping their fingers into your pension fund and an underlying bank going bust if you hold cash. Both are small risks, but ones nevertheless to be aware of.

When you hold assets within a SIPP, the SIPP provider (e.g. Sippdeal) will hold them in trust for your benefit. This means your pension pot should be unaffected if the provider goes bust. However, if the provider has illegally taken money from your pension fund and can't afford to repay it, Financial Services Compensation Scheme (FSCS) cover would be limited to £50,000.

Any underlying investment funds also hold your money in trust for your benefit, so are ring fenced from the underlying fund providers going bust. Again, the FSCS would cover up to £50,000 per fund provider.

If you hold cash in your SIPP and the underlying bank or building society goes bust you'll normally be covered for up to £85,000 per institution - but check with the SIPP provider as in theory they might bundle everyone together so that the £85,000 applies to all SIPP clients combined - meaning the protection is effectively worthless.

The FSCS protection for SIPPs is different to that of conventional insurance based pensions (which invest in insurance company funds), where the compensation level is 90% of an unlimited amount. This causes much confusion, not helped by the FSCS failing to publish clear information on their website - under pensions they just say 'it's complex so contact us for details'.

Should you be unduly worried? I don't think so. The underlying investment risk is the same whichever SIPP provider you use. So the real issue is whether a specific SIPP provider is likely to commit fraud and steal your money. While we can never say never, I think the likelihood is very low provided you use an established company that's been running for a few years. So I'd be fairly relaxed about using one provider for your pension fund. In any case, to ensure full FSCS protection you'd need to use a different SIPP provider for each £50,000 invested, which would be rather impractical in your case.

Best wishes for a happy retirement.

Read this Q and A at http://www.candidmoney.com/questions/question555.aspx

Tax on UK investments if I move abroad?

Question
I have some unit trusts in a portfolio that I don't want to sell at the moment. I am considering moving abroad for a job opportunity and this would be a permanent move with no intention to return to the UK.

If I keep my unit trusts, what tax would I pay on the "income" amounts that appear on my statements and are reinvested into the plan?

Also, would I be able to make changes to the funds (switches) without having to pay UK capital gains tax on any gains that selling the old funds makes?Answer
Assuming you become non UK tax resident (more details in my answer to http://www.candidmoney.com/questions/question95.aspx this question) then you won't be liable to UK tax on dividends or interest paid out by your funds.

However, dividends can never be truly tax-free as they're paid out of taxed company profits. As a concession basic rate taxpayers don't have to pay any further tax on the dividends they receive, but non-taxpayers (or those holding the shares/funds in an ISA or pension) can't reclaim any tax (Gordon Brown stopped this back in 2004). But becoming non resident would mean no longer having to pay any extra UK tax on dividends if you're a higher rate taxpayer.

If you have funds that pay interest rather than dividends (e.g. corporate bonds) then complete HMRC Form R105 (AUT.1) to ensure no UK tax is deducted in future.

As for capital gains tax, you'll still be liable until you've been non resident for five full tax years, although as your usual annual allowance (currently £10,600) will still be available this may not be a problem.

If any of the funds are held within an ISA they can remain there which makes life simpler (as no income or capital gains tax will be deducted), although you can't add to these holdings while non resident. If you haven't used this year's ISA allowance (£10,680) consider transferring some of your existing funds into it.

Finally, bear in mind that you might be liable to tax in your new country of residence instead, so I'd seek advice locally as appropriate if you end up moving.

Read this Q and A at http://www.candidmoney.com/questions/question556.aspx

Bet on stock market recovery?

Question
Like most poeple my funds have lost money at present, as the index is down I was thinking of getting a tracker fund which will hopefully go up when the index improves. Do you think this is a good idea, and if so could you suggest a fund. I normally go through Hargreaves Landsdown.Answer
It's very difficult gauging when stock markets will stabilise and subsequently rise (so that we all start making some money again!). My concern is that the root causes - worries over debt and sluggish economies - won't vanish overnight and could be here to stay for several years.

By all means consider betting on a recovery, but just be prepared for lots more volatility over coming months and potentially well into next year and beyond. I think you'll probably be fine if you can invest for 5-10 years and, of course, there's always the chance you'll turn a decent profit far more quickly. But, as you can probably tell, I'd be inclined to err on the side of caution.

Trackers would be a cost effective way to bet on a recovery, just bear in mind that around 20% of the FTSE 100 is accounted for by the oil/gas sector and about the same again by financials, so big movements in these sectors will have a large impact on the index. Given financial stocks have borne the brunt of recent falls this may be no bad thing when markets do pick up.

Alternatively, you could consider investing in an aggressively run actively managed fund on the basis they've probably been harder hit by the recent downturn hence may have more upside during recovery - albeit this is obviously a higher risk route and you may well hold such funds already.

Or, if you'd rather be more cautious, consider high yielding equity income funds. You might not benefit as fully from any upturn (versus the index or more aggressive growth funds), but the dividends and nature of the underlying investments (probably fairly dull cash rich companies) might help better weather any shorter term storms.

While Hargreaves Lansdown have their merits they don't cater that well for trackers, because most trackers don't pay trail commission meaning HL will charge you 0.5% a year (capped at £200). Nevertheless, according to their website you can invest in HSBC trackers (which charge 0.25% a year) without having to stump up the extra 0.5%, so this could prove a viable option.

Read this Q and A at http://www.candidmoney.com/questions/question554.aspx

Whatever next?

Do recent market falls and the economic outlook leave investors with nowhere to run and nowhere to hide?.

Like many others, I suspect, I am inclined to despair at the Stock Market, which has gone precisely nowhere in the ten years since I shuffled off the employment scene and topped up my equity holdings with my tax free cash. Desperate for any sort of good news, I hung on every word from a chap on Bloomberg, who said that the 20 years up to 1990 had been really good, and that after this long pause equity returns would revert to their longer term trend: six or seven per cent per annum.

All well and good, except that some of us won’t be here in the long term. And, of course, the future may not be like the past. In any event, if you come out of the equity market, where do you put the cash? If we’d all bought gold at under $400 an ounce we’d be sitting pretty, but we didn’t and we aren’t.

The economic outlook, globally and domestically, is not very sunny, and many of the problems seem to be associated with a striking weakness in our western democracies. Voters want better public services, and they don’t want to pay more tax. Politicians get elected by promising the people what they want.

So the politicians get power, spend the proceeds of the taxes, find that they’d like to spend more, and borrow so that they can, as Gordon Brown was fond of saying “invest in our public services”. The growing public debt doesn’t matter, because it won’t hit the hustings at the next election. But the public finances become less resilient.

In theory, faced with an economic shock, Governments can use monetary policy. They can lower interest rates. Or they can use fiscal policy. They can lower taxes. Or they can spend big on public works. They have to borrow a bit to tide them over, but the increased spending power in the economy creates the growth that increases the tax take that pays off the extra borrowing. Or they can grit their teeth and actually cut public spending.

Even before the last election, it was fairly clear that none of these options was a runner. Interest rates were at rock bottom and public borrowing was already sky high. And you couldn’t get elected even if you promised to maintain the funding of the three so called National Health Services (or is it four, I’m not sure how it works in Northern Ireland).

So public spending continues to increase, in nominal terms. Public debt therefore continues to increase. With a fair wind, in four years’ time, the budget will balance, but only if you exclude interest payments on debt. In other words, it still won’t balance. And the debt will still be rising.

The Tories, the Labour Party and the Liberal Democrats all know that the Government has precious little room for manoeuvre. They also all agree that it is right to use inflation to redistribute wealth from the prudent to the profligate. They all know, but don’t appear to care, that inflation will also demolish whatever advantage we may have gained from devaluation. There are no dissenting voices, doubtless because the voting public actually want to continue to inhabit a dream world. No wonder the Chinese aren’t that impressed with democracy.

I believe that we can only spend what we earn. Put it another way: the budget has to balance over the economic cycle, and national debt shouldn’t exceed 40% of GDP. Right wing nonsense? Maybe, but it’s where Gordon Brown started from. I never did understand why he changed his mind.

The bottom line is that I wrote here earlier this year that interest rates would have to rise before we saw 2012. I was wrong. I thought enough of the suits in power would remember what inflation did to us in the 70s and 80s. I was wrong. We’ll have to get used to 5% inflation.

Does that mean that we should change our approach to managing our money? Probably not. Real assets are usually a better bet than financial assets when inflation is running high, but remember that housing is still almost certainly overpriced.

Should we be sucked into really big risks to try to beat the inflation rate? I don’t think so. Some gamblers win. Most lose.

So perhaps we should just hang on to the equities, try not to be upset by the current volatility, and remember that there are plenty of people in the world who would swap their lifestyle for ours.

Read this article at http://www.candidmoney.com/articles/article242.aspx

Good equity income fund for depressed markets?

Question
If the stock market falls to a realistic level it might be worth buying for income again. Can you recommend a fund that specialises in stocks with good yields and solid prospects for maintaining dividends?Answer
This is a good question, as equity income fund management styles do vary, with some funds more focussed on maintaining high dividend yields than others (which might look more at the big picture and growth).

Newton Higher Income is a good example of a fund that has very strict income constraints to ensure yields remain high - it only holds stocks with dividend yields 15% above the FTSE All Share average. This naturally steers the fund towards holding large, established companies that generate lots of cash and pay reliable dividends - current largest holdings include Glaxosmithkline, Royal Dutch Shell, HSBC, BP, BAT, Astrazenenca, Tesco and Vodafone.
While this rigid approach tends to underperform in fast rising markets, it may bode well during more difficult times.

Schroder Income Maximiser is interesting because the manager sells away some future potential upside to boost income, via what are called covered call options. This means the fund will probably lag rising markets but perform relatively well during flat periods. It invests in FTSE 100 stocks, currently with a bias towards the financials and healthcare sectors.

Looking at investment trusts, Murray Income might meet your criteria. It's a conservatively run portfolio that focuses on companies able to grow revenue, cash flow and dividends - over two thirds invested in FTSE 100 companies. The fund tends to trade in a narrow discount (to net asset value) band, which helps reduce the volatility that this aspect of investment trust investing can add. The TER is just over 1%.

If you prefer the concept of tracking then perhaps look at the iShares FTSE UK Dividend Plus ETF, which tracks the 50 highest yielding stocks (based on a 1 year forecast) within the FTSE 350 index (excluding investment trusts). The TER is just 0.4%. Because weightings are based on dividend yield rather than market cap there's usually a bias towards medium sized companies - around half the fund is currently invested in financials and utilities companies.

If anyone has other suggestions please post below, good luck making your decision.

Read this Q and A at http://www.candidmoney.com/questions/question551.aspx

Cavendish SIPP charges vs HL?

Question
In the guide to choosing a personal pension you say that with more than £50,000 of trail commission paying funds the Cavendish SIPP is cheaper than HL. How is that amount arrived at?

With a trail rate of 0.5% £50k of funds would incur a fee of £250 whereas the annual fee for the Cavendish product is only £60 in the first year and £10 thereafter. Surely those with much smaller value funds would also find this SIPP cheaper.Answer
The answer is because you'll also pay underlying SIPP provider (i.e. FundsNetwork) charges via Cavendish Online. My calculations are as follows, assuming a fund charging 1.5% a year:

Hargreaves Lansdown Vantage SIPP
No annual SIPP fee (assuming trail commission paying investments). No trail commission rebates, so annual charges total 1.5%.

£40,000 invested, annual charges = £40,000 x 1.5% = £600
£50,000 invested = £750
£60,000 invested = £900

Fidelity FundsNetwork SPP via Cavendish Online
Fidelity charges a £108 SIPP setup fee and £269 annual administration charge.

In addition Cavendish Online charges a £50 initial fee then £10 a year, but rebates 0.5% trail commission, effectively reducing the annual fund charge to 1%.

First Year
£40,000 invested, annual charges = £40,000 x 1% + £108 + £269 + £50 + £10 = £837
£50,000 invested = £50,000 x 1% + £108 + £269 + £50 + £10 = £937
£60,000 invested = £60,000 x 1% + £108 + £269 + £50 + £10 = £1,037

Thereafter
£40,000 invested, annual charges = £40,000 x 1% + £269 + £10 = £529
£50,000 invested = £50,000 x 1% + £269 + £10 = £779
£60,000 invested = £60,000 x 1% + £269 + £10 = £879

Ok, the breakeven in this example is actually nearer £55,000 (after the first year), hence I mentioned c£50,000 in the guide. The exact breakeven will obviously depend on funds held and the associated trail commission rebates.

Hope this makes more sense now.

Read this Q and A at http://www.candidmoney.com/questions/question552.aspx

Tax on gift from my late father?

Question
Hello, my father paid off a loan for me 4 years ago a sum of £37,000. He has recently died, will I have to pay income tax on this amount as it's under the 7 year rule? If so, at what % of tax will i have to pay?Answer
I'm sorry to hear about your loss.

When your father repaid the loan this would be treated as a gift for inheritance tax purposes. There's no income tax to pay from your point of view, as gifts aren't taxable, but your father's estate might have to pay inheritance tax on the gift at a rate of 40%.

Gifts are normally deemed to remain in someone's estate for 7 years after being made. If the gift (when added to any other gifts) exceeds the nil rate band (currently £325,000) then it can benefit from 'taper' relief, which progressively reduces the amount of gift subject to inheritance tax before becoming exempt after 7 years.

So, in simple terms, if your father's estate (i.e. house, possessions, other assets and gifts made within the last 7 years) exceeds £325,000 then the amount above that will be subject to 40% inheritance tax. However, if your Mother is still alive your father's assets can be passed across to her free of inheritance tax, along with any unused nil rate band (which can then be added to her nil rate band for use in future).

Read this Q and A at http://www.candidmoney.com/questions/question549.aspx

Fund discounts with monthly saving?

Question
I want to invest a monthly amount into an ISA. I am thinking of the Marlborough Special Situations Fund which has a good performance but 5% initial charges. I have read of discount brokers where this can be avoided altogether. However, I can't see how this can be avoided with a monthly plan. I probably want to invest about £200 per month. If the initial charge can't be avoided through a discount broker or money supermarket with monthly investment I would probably be better going for a lower performing fund that does offer 0% initial charges on monthly contributions.

i am happy to go for a higher risk fund like this one as I am looking long term - I am fairly familiar with investments types but am a little out of touch with what is available in terms of charges etc but I am currently re-mortgaging so need to up my monthly saving for paying off the mortgage.

Many thanks in anticipation!Answer
Discount brokers should be able to reduce or wipe out a fund initial charge and a few will also reduce the annual charge via trail commission rebates. It doesn't normally matter whether the money is invested as a lump sum or monthly unless the broker charges a dealing fee when buying funds (e.g. Alliance Trust).

So a monthly saving into Marlborough Special Situations via discount brokers like Cavendish Online, Club Finance and Hargreaves Lansdown should ensure no initial charge and trail commission rebates - take a look at our Guide to ISA Discount Brokers for more details.

Marlborough Special Situations is a higher risk fund investing in smaller companies, including those listed on AiM. This gives some cause for concern in the current climate, but manager Giles Hargreave has an exceptional track record so provided you're comfortable investing for 5-10 years (and riding out the inevitable storms along the way) it should hopefully prove to be a profitable long term investment. A monthly saving is no bad thing for this type of fund as it can help smooth volatility.

Read this Q and A at http://www.candidmoney.com/questions/question548.aspx

Difference between limit and stop loss orders?

Question
What is a Limit Order and how is it different from a Stop Loss Order?Answer
Stop loss and limit orders are broadly similar in that they instruct your stockbroker to buy or sell shares in a company when they hit a pre-determined 'trigger' price. But there is a fundamental difference in how they work, as follows:

A stop loss order instructs the broker to place a buy or sell order when the shares hit an agreed price. But as the subsequent order will be placed in the market the actual price you buy or sell at might be different to the stop price you specified - especially if the price is rising or falling fast.

For example, you place a stop loss to sell shares you own in company X at 50p. The share price, currently 70p, suddenly plunges and the order is triggered as the price passes through 50p. By the time the trade is placed the share price might have fallen below 50p, so although sold you receive less than 50p per share - the difference is often referred to as 'slippage'.

A limit order is similar but the broker must sell at the limit price (or better) else not all. So in the above example, unless the broker can sell at 50p or more (once the price hits 50p) they won't trade. This means there's no guarantee a deal will be executed, but if it is you won't suffer from slippage.

Perhaps the simplest way to think of the difference is that a limit trade must be placed at the stated price or better else not at all, while a stop loss will be placed at the stated price or worse guaranteed.

For popular shares in large companies a stop loss order should work fine unless volatility is especially high.

Read this Q and A at http://www.candidmoney.com/questions/question546.aspx

Fund platform changes could help customers

The Financial Services Authority (FSA) has published more details regarding its plans for fund platforms/supermarkets as part of its overall Retail Distribution Review (RDR). Good news for customers?.

For the uninitiated, RDR is the FSA's attempt at cleaning up financial services and reduce the likelihood that customers get taken for a ride by financial advisers and the industry in general. The main proposal is that commission payments to financial advisers will be banned and the rules are due to affect from 31 December 2012. You can read more details in my http://www.candidmoney.com/articles/article84.aspx previous article.

The recent announcement concerns fund platforms (also referred to as fund 'supermarkets'), such as Cofunds, FundsNetwork, Skandia and Hargreaves Lansdown. On the whole platforms are a good thing, they provide plenty of investment choice (especially useful for ISAs and SIPPs) and simplify paperwork and administration.

However, there are a few potential issues the FSA is keen to address. They've been highlighted before, but the latest FSA update puts more flesh on the bones.

Payments by fund providers to fund platforms

Fund providers pay platforms to include their funds. The charge, thought to be around 0.25% or more a year, is normally paid out a fund's annual management charge, so customers indirectly pay the platform fees.

The problem with this is that it's not transparent, customers don't know how much a platform is getting paid so there's little incentive for platforms to complete on price. Plus those platforms who promote funds via 'best buy' type lists might be biased towards the funds that pay them the most money - customers have no way of knowing as things currently stand.

The FSA has said it wants to ban these payments, which I hope means funds will be priced at institutional rates for all investors then we'll be free to shop around for the best platform deal that suits our needs. However, the wheels of our financial regulator turn slowly and we're told any changes won't be implemented by the time RDR is initially introduced. Meanwhile it seems platforms will have to disclose how much they receive from fund pro0viders from 31 December 2012 - a positive start.

This won't please many fund platforms - Hargreaves Lansdown's share price fell over 12% today in response. But it should be a result for customers. (incidentally, Citigroup reckons Hargreaves Lansdown's average margin for Vantage clients is currently 0.68%).

Payments by fund platforms to customers

Fund platforms can pay cash rebates to customers, potentially helping to offset charges for financial advice (i.e. the customer might pay for some/all of the advice via product charges even after commissions are banned). The FSA doesn't like this as it muddies the waters on how much a customer is actually paying for advice and smells too much like commission in disguise. It plans to ban them, but again a final decision has been deferred until after 31 December 2012 - not very helpful...

Re-registering investments between platforms

As previously announced, fund platforms will have to allow customers to re-register their investments (i.e. transfer 'as is') between all platforms and nominee accounts by 31 December 2012. Good news, but why some platforms still refuse to offer this already is beyond me (must be protectionism...).

Advice and independence

Advisers will not be able to use one platform exclusively and call themselves independent. In practice they might have a preferred platform for the majority of the customers, but they'll need to consider and use other options when it's in their customer's best interests. Sound's sensible to me.

Conclusion

The FSA seems to be inching towards introducing some long overdue rule changes. I hate to think how much time and money they've taken to conclude something that would take the rest of us 10 minutes, but at least they're getting there...

And if all this sounds a bit boring and tedious, I sympathise , it's not a riveting read. But take it from me, this is important stuff that could potentially make a big difference over years to come.

Read this article at http://www.candidmoney.com/articles/article240.aspx

Choosing funds and financial planning?

Question
Your website is very informative and I really do get a lot out of it so first off thank you for setting it up.

I'm a qualified accountant and work in financial services, but even myself at times I get very confused with a lot of the jargon and investment rules out there.

I currently have a portfolio comprising of a property, some shares, some NSI index linked certs and also wanted to diversify by looking into commodities fund and also some other funds to invest in such as (invesco high income, small companies UK). I'm also keen to start investing into the BRIC countries, particuarly Brazil and China.

I have a execution only account with TD waterhouse, but im trying to understand how I can start investing in these funds and how to avoid the layers and layers of management fees (which ultimately erode any investment money I put through).

Finally and most importantly Im keen on finding out how to setup my will having recently got married and expecting my first child. im 31 and keen on getting all my financial affairs sorted but everytime I contact an IFA (paid or unpaid) im getting sold lots of waste of time insurances and assurances.

Any tips on decent reading I can perform other than on your website?Answer
Glad you like the site.

Let's start with fund charges. Fund providers normally build sales commissions (typically 3% initially and 0.5% annually) into fund costs, so if you buy directly from a fund group or via a commission based financial adviser then you'll likely pay fund charges of up to 5% initially and about 1.5% annually.

If you buy via a discount broker, you can get some, or all, of these commissions rebated, potentially cutting costs to zero initial charge and about 1% annually (note: if all sales commissions rebated expect to pay a small admin charge).

So using a discount broker can be significantly cheaper, the main drawback being they won't provide advice.

Whether or not you need advice is down to you - it can be worthwhile, but equally, it's not that hard to pick some sensible funds (either actively managed or tracker). If you opt for advice then bear in mind the majority of IFAs are not investment specialists, so choose carefully.

Rather than cover discounts in detail here, take a look at our Guide to Discount Brokers for a comprehensive list of brokers and levels of discount/service offered.

When choosing funds your first decision is whether to opt for active or passive management, i.e. whether to buy a tracker. Tracker funds are usually cheap (they seldom pay much, if any sales commission - annual management charges typically 0.5% or less), and generally fare well versus active in certain areas (notably the UK and US stock markets). The downside is that they're not practical in certain areas (e.g. physical commercial property) and the very best active managers generally (but not always) outperform longer term.

If you want to invest in tracker funds you could consider buying exchange traded funds (ETFs) via your existing TD Waterhouse account.

As for researching actively managed funds, there are a number of good websites with detailed performance and holdings information - see my answer to this previous question for a list. My answer to this question discusses the factors to consider when analysing past performance.

You could also take a look at the fund research published by discount brokers like Bestinvest, Hargreaves Lansdown and Chelsea Financial. Bear in mind they also sell the product, so might have a vested interest to sell certain funds - but from experience they seem to be fairly impartial.

As for a will, the main priority is that it's straightforward and ensures your assets and possessions are handled according to your wishes in the very unlikely event the worst happens before your child becomes financial dependent.

Assuming your situation is straightforward then a low cost DIY or online option will probably suffice (there are plenty to choose from via quick search on the web). Just remember that both you and your husband will need one.

If you and your husband's combined assets exceed £650,000 (i.e. 2 x £325,000 nil rate bands) then you might want to consider some inheritance tax planning, although for the vast majority early thirties is probably too young to be worrying about such things.

When starting a family it's usual to review insurances, although whether you want any is obviously a personal choice.

If you don't have any life insurance (e.g. via your employer) and want some, then take a look at low cost term assurance policies. They're very straightforward and generally cheap. Buying through a discount broker will cut costs - see our Guide to Buying Life Insurance for more details.

You can buy income protection policies to protect against long term illness, but they're expensive and generally unaffordable for many.

Other than the above, I'd review your pension provision (i.e. check what you have and how it's invested) as well as your savings to ensure you're getting a good deal.

As for more reading, hopefully the above links will help re: fund research. You might find magazines like Money Observer and Moneywise helpful for more general personal financial guidance, while Investors Chronicle is usually a good read for specialist investment content.

Hope your pregnancy goes well.

Read this Q and A at http://www.candidmoney.com/questions/question544.aspx

Junior ISA rules confirmed

The Government has today confirmed final details for Junior ISAs, to be launched on 1 November 2011. How will they work and will they be worthwhile? .

The concept is the same as conventional ISAs - they're a tax wrapper that can surround cash or investments, making interest tax-free and ensuring no further tax is deducted on dividends.

What's different with Junior ISAs?

There are three key differences compared to conventional ISAs:

• The annual contribution limit is £3,600 (not £10,680) until 5 April 2013, after which it'll increase annually with inflation (CPI).


• There is no restriction how contributions are split between cash and stocks & shares (in a conventional ISA the cash contribution is capped at half the total annual allowance).


• Children will only be able to hold one cash and one stocks & shares account at any time. So, unlike adults, they won't be able to potentially use a new ISA provider each year.

Which children are eligible?

All UK resident children under 18 who don't already have a Child Trust Fund will be eligible to open a Junior ISA - which basically means children born before 1 September 2002 or after 31 December January 2010.

When can the child get their hands on the money?

A child will be able to take responsibility for their Junior ISA from their 16th birthday, but will not be allowed to make any withdrawals until they reach 18. The only exceptions are on death or if the child is diagnosed with a terminal illness.

Assuming the child doesn't fully withdraw the money at 18 then the Junior ISA will be converted into a conventional one - after the ISA provider obtains the child's national insurance number and confirms they're still a UK resident.

Who can contribute?

Anyone can contribute into a child's Junior ISA, subject to total contributions not exceeding the annual limit. A Junior ISA can be opened by someone who has parental responsibility for the child and it'll be their job to manage it until the child reaches 16.

Will the government make any contributions?

No. It's too strapped for cash, which is why it stopped child trust funds (where the government did contribute some money on behalf of the child).

Will transfers be allowed?

Yes, but the child must stick to the rule of having only one cash ISA and one stocks & shares ISA account at any time (i.e. no more than one provider for each). However, it will be possible to transfer a Junior cash ISA into a Junior stocks & shares ISA and vice-versa.

What sort of choice will be available?

Too soon to tell. There are only a handful of child trust fund providers so Junior ISAs might suffer the same fate. Expect a few of the larger banks and some building societies to offer Junior Cash ISAs and hopefully at least one fund supermarket will offer a stocks & shares Junior ISA to ensure decent, cost effective, investment choice - child trust funds generally only offered overpriced trackers and a handful of expensive actively managed funds.

The rules covering what types of investments will be allowed within a Junior stocks & shares ISA will be the same as conventional ISAs - in broad terms most investments excluding shares traded on AiM (see our ISAs page for more details).

Can child trust funds be transferred into Junior ISAs?

No plans to allow this at present (although assuming Junior ISAs don't flop I'm sure it'll be allowed in future). The annual top-up limit for child trust funds will however be raised from £1,200 to £3,600, in line with Junior ISAs.

How much might a child build up by the time they're 18?

Here's a table with a few estimates and use our Junior ISA Calculator to get a clearer idea of how much your child might accumulate by the time they're 18.

Monthly Saving	3% Annual Return	6% Annual Return
£25	£7,138	£9,570
£50	£14,276	£19,140
£100	£28,552	£38,280
£200	£57,104	£76,560
£250	£71,380	£95,703
£300	£85,656	£114,844
Assumes monthly saving over 18 and annual returns are after charges.

Will Junior ISAs be worthwhile?

The cynic in me says what's the point? Most of the population can't afford to save enough for their own comfortable retirement, let alone save money for children or grandchildren.

However, there are probably sufficient numbers of parents and grandparents who can afford to save for children to ensure that Junior ISAs are viable. In that case their appeal will largely depend on choice, rates offered (on cash) and charges.

It's already possible to save tax efficiently for a child using a 'bare' trust (see our < ahref="http://www.candidmoney.com/kids/default.aspx">child savings page for more details). However, it's a bit of hassle and there are restrictions on how much interest a child can earn on gifts from parents before it's taxed as the parent's (£100 per parent per child).

So while Junior ISAs are unlikely to offer anything new, they should make tax efficient saving for a child more straightforward for some. And there might be some juicy interest rates on Junior cash ISAs at launch that could be worth taking advantage of.

Read this article at http://www.candidmoney.com/articles/article239.aspx

How to find value of US stock certificates?

Question
I am trying to sort out a series of US stock certificates that I believe are part of a boiler room fraud scam: is there a register of shares or companies that i can access to quickly ascertain if these are worthless?Answer
If the stocks concerned are traded on a mainstream stock market then getting their value should be as easy as a quick search on the web - sites such as google or yahoo finance should display current trading prices.

But if they're listed on an obscure stock exchange then getting a share price could prove harder. I'd start by checking the US Securities Exchange Commission (SEC) EDGAR database, where all listed companies must regularly file certain documents. It won't give you a share price, but should confirm whether the company still exists and on what exchange it's listed. You could then contact that stock exchange for further details.

If the company is not listed on an exchange then getting hold of a price might prove nigh on impossible, because this depends on finding interested buyers and seeing what price they'll offer. It's also far harder to get access to US company information and accounts than in the UK because companies are incorporated at a state level in the US, I don't believe there's a single equivalent of Companies House. If you can determine which state the companies were incorporated in you can then potentially get more information from the state concerned, there's a list of links on the Companies House website.

Good luck and I hope the shares are worth something.

Read this Q and A at http://www.candidmoney.com/questions/question543.aspx

Should my wife top up her state pension?

Question
My wife worked for 12 years, was at home looking after our children for the last 12 years, and has most recently been back in employment for 2 years; what can we do about voluntary contributions to her state pension; does she qualify for HRP?Answer
Home Responsibilities Protection (HRP) was scrapped on 6 April 2010 in favour of giving national insurance credits to parents who receive child benefit for a child/children under age 12.

However, your wife would have looked after your children while HRP was still in force, so she should have automatically built up an entitlement under that scheme. HRP worked by reducing the number of years of national insurance contributions required to enjoy a full state pension by one year for every year child benefit was received for a child under 16, subject to not reducing the qualifying contributions required below 20 years.

Her HRP benefits will be converted into qualifying years under the new system (up to a maximum of 22 years), likely to be 12 years in her case. This leaves a further 18 years of national insurance contributions needed to reach the required 30 years for a full basic state pension. It sounds like she has 14 of these, so provided she works a further 4 years before retirement she should receive the full basic pension.

However, rather than rely on my guesstimates, much better to get an accurate projection via the State Pension Forecast. It's not unknown for forecasts to sometimes omit HRP (converted into a national insurance contribution credit), if so then contact HMRC (ideally with her child benefit number) and they should correct this.

As for paying extra contributions, this usually makes sense when due to retire with less than 30 years of service. Extra service can be purchased via class 3 national insurance contributions, currently at a rate of £12.60 per week of service, i.e. £655.20 for a year. Given each £655.20 buys 1/30th of the full basic state pension for life, £177.06 a year rising by the higher of earnings, prices (CPI) and 2.5%, it's likely to end up a good deal.

Read this Q and A at http://www.candidmoney.com/questions/question542.aspx

Question
I'm hoping you may be able to advise me as I'm in a difficult situation at present after losing my long standing job due to ongoing illness. I was given a small payout (7k) and want to try and need to live on some of it and save some, hopefully to make as much on it as possible. I already have an ISA with 3k in it on a 3% deal with Halifax from 2010- transferred over to the latest deal they have for 3.2% (I think).

I need my finances to be secure, so cant invest in anything too risky, however I need to maximise interest/money made on it as this money is to live on. I know about ISA's and was thinking of perhaps opening a new ISA for this year as I believe I can do that as the Halifax one is a transfer from 2010, so is 2010's fund. I was thinking of the Santander one of around 3%. Is there something that would make me more money, such as shares/tracker funds?

Any advice would be a great help.Answer
I'm sorry to hear about your situation. I think investing in the stock market is probably the last thing you should do - far too risky given you can't afford to lose money - so you're right to focus on savings accounts.

Cash ISAs can be beneficial as the interest is tax-free. I assume you're a taxpayer for the current tax year (runs from 6 April 2011 until 5 April 2012) due to your earnings from when you were working, so a cash ISA would be of benefit. And, in any case, the rates tend to be competitive so there's really no downside to using a cash ISA over a conventional savings account.

The Santander Flexible Cash ISA currently pays the highest variable rate at 3.30%, which includes a 2.8% bonus over the first year. On the maximum £5,340 allowed contribution this would pay annual interest of £176 - hardly worth getting excited about, but it's the best rate you can currently get on cash without tying up your money.

Opting to tie up your money on a fixed rate will give slightly better rates, up to 4.65% fixed for 5 years within a cash ISA with Birmingham Midshires, but I think this could prove too inflexible given your uncertain situation.

Outside of a cash ISA the current 'best buy' instant access savings accounts are the Derbyshire BS NetSaver at 3.11% and Coventry BS Poppy Online Saver at 3.10%. Like Santander, they both include temporary bonuses so be prepared to shop around when the rates come off the boil.

I'm sorry I can't offer you a more profitable solution, but I don't think there is one that'd be appropriate. You could earn annual dividend income of around 5-6% (net of basic rate tax) by investing in some stock market income funds (e.g. Schroder Income Maximiser), but then stock market falls of around 10% - 20% are not out of the question and I really don't think it's worth you taking such risks (as mentioned above).

As an aside, I'd suggest checking which state benefits you're entitled to (if you haven't already). There's a helpful tool on the http://www.direct.gov.uk/en/diol1/doitonline/doitonlinebycategory/dg_172666 Direct Gov website - may as well try and get some benefit from all the tax you've paid over the years!

I hope things work out.

Read this Q and A at http://www.candidmoney.com/questions/question540.aspx

Good account for short term savings?

Question
Do you have any thoughts on the Saga Telephone Saver I've just be told about?

I'll shortly be having some National Savings Certificates mature and am thinking of putting the money into this Saga account for future use to buy a car, new kitchen and bathroom and am told this would be a good place to hold it whilst deciding on best deals on all these items.Answer
The Saga Telephone Saver account is a straightforward instant access savings account provided by Birmingham Midshires. The interest rate is currently 2.75% (before tax), which includes a 1% bonus during the first year - such bonuses being usual for most 'best buy' accounts these days.

When you open the account it's linked to one of your existing accounts (e.g. current account) so when you request withdrawals (by telephone) the money is sent straight over (usually arriving within 3 days). There are no restrictions on withdrawals, so it sounds like it'll suit your needs.

My only suggestion is that there are other similar accounts on the market paying more interest and if you're a taxpayer who hasn't used their ISA allowance this year then a cash ISA would be advantageous as interest is tax-free.

For example, at the time of writing the Derbyshire Building Society NetSaver account pays 3.11% (including a 2.11% bonus until November 2012) and allows withdrawals to a linked account via the Internet.

And Santander pays 3.30% on its Flexible Cash ISA, including a 2.80% bonus for the first year. Instant access withdrawals are allowed by Internet, phone or branch.

The only downside with accounts such as these paying bonuses is that you can more or less guarantee the rate will become uncompetitive when the bonus ends. So just be prepared to shop around and move the money elsewhere in future if there's any money left in the account when the bonus expires.

As to how much difference the various rates above would make, here's a quick example showing the annual interest, after tax, per £10,000 of savings. I've assumed the rates don't change from current levels:

Account	non-taxpayer	basic rate taxpayer	higher rate taxpayer
Saga	£275	£220	£165
Derbyshire	£311	£249	£187
Santander	£330	£330	£330

You obviously have the option to roll-over the maturing Savings Certificates into another issue, but since you'll need to the leave the money untouched for at least a year to stand a chance of getting a return it sounds too inflexible for your needs.

Good luck bargain hunting on your car, kitchen and bathroom, there should be lots of good deals around in the current climate!

Read this Q and A at http://www.candidmoney.com/questions/question539.aspx

Good value will service?

Question
I and my husband are on the point of making a second will as the first one we made 25 or so years ago is now not fit for purpose. As there is so much choice for us in the world today, I do like to do a little research before making up my mind who I would like to give my business to.

Last week we attended a seminar called Universal Asset Protection which was very informative but the one thing I forgot to ask was if they were a regulated company. As you have been extremely helpful to me in the past, I thought you may be able to help me out on my query and have any advice you can give me in my quest to get a good price deal as some solicitors are charging extortionist fees!

I have also been quoted package deals which include:-

Will including Discretionary Will Trust,
Lasting Power of Attorney - property and affairs
Lasting Power of Attorney - health and welfare
Severance of Tenancy (Tennants in Common) if applicable
Letter of Wishes

The total price is £995 plus VAT for a couple.

Would you consider this as a good price for the package?

I look forward to hearing from you and once again, Justin, many thanks for your previous responses - most helpful - better than having a bank manager in your wardrobe!Answer
The biggest rip-off when it comes to will writing is the companies concerned appointing themselves as executor of the will and subsequently charging extortionate fees to carry out these duties when you pass away. The executor's job is to ensure the correct amount of inheritance tax, if any, is paid and that everyone named in the will gets their share of your estate – a process called ‘probate'. In my view it's better to nominate a trusted relative or friend, who can either carry the task themselves or appoint a reasonably priced professional when the time comes.

Anyway, back to the present. Based on typical solicitor prices the amount being charged doesn't look horrendous, but equally it's not cheap. Universal Asset Protection's website contains little information, but I get the impression they're a marketing company that passes on the work to other professionals. As this inavariably involves sales commisison type arrangenments it might bloat costs, but hard for me to comment as I don't know their business.

Discretionary will trusts are less useful than they once were. These used to be popular to ensure that the first partner to pass away could use their full nil rate band (e.g. passing assets to children/grandchildren while ensuring the trust kept control), but rule changes in 2007 mean that any unused nil rate band on first death can now be passed to the surviving partner. Where discretionary will trusts can potentially still be worthwhile is if you want the flexibility to include as yet unknown beneficiaries (e.g. grandchildren not yet born), you're concerned that the value of assets will rise faster than the nil rate band after the first death or you want to remove assets from the estate over concerns the surviving spouse may have to use them to fund long term care (e.g. your home might be held as 'tenants in common').

However, bear in mind that if the value of assets placed into the discretionary exceeds the nil rate band a 20% 'lifetime chargeable transfer' tax will apply, followed by a further tax of 6% every 10 years.

Assuming you would benefit from such a will then the going rate for a straightforward scenario seems to be around £300-£600 inc VAT (for a couple).

Lasting Powers of Attorney can be helpful if concerned that you might one day be unable to make sensible decisions on your finances and welfare, perhaps due to suffering from Alzheimer's. Solicitors tend to charge around £100 - £200 per power of attorney (so £400+ to write each for both you and your husband).

But there's a further cost charged by the Office of the Public Guardian (OPG), the government department responsible for lasting powers of attorney, of £120 per power of attorney registered, so £480 in this instance. I doubt your quote includes this - it's good value if it does!

Tenancy in common tends to be a good thing (it means a husband or wife can pass their share of a property to beneficiaries on their death, making use of their nil rate and getting the assets out of the survivor's estate) so I'm not sure you'd want to sever any existing arrangements, but this will obviously depend on your situation and requirements.

Letters of wishes are not legal documents, but can be used to inform executors of your assets and any special wishes, e.g. burial/creation plans and how you'd like any trusts to be managed. There's little reason not to simply write this yourself, but a solicitor would typically charge £100+.

I'd also check whether the quote includes compulsory storage costs, as these can become significant over time. If you'd prefer not to keep a will at home (there's no reason not to provided you're confident it'll be safe) there are companies offering storage services from around £15 per year.

In terms of cheaper options, I recently stumbled across a company called Beneficient Law - interesting as they're run as a not-for-profit community interest company. I've not used them (so can't vouch for the quality of their work or service), but they seem to have favourable feedback on the web and charge very sensible fees. For example, their fee for two wills is £50 and £70 for two lasting powers of attorney.

Do any readers have experience of this company or feedback on will writing prices?

Read this Q and A at http://www.candidmoney.com/questions/question536.aspx

How best to buy gold?

Question
I would like to take out a long-term investment. Maybe about 5 - 10 years.

I have £70,000 to invest.

I'm thinking about buying gold.

I can't afford to buy a gold bar, so I was thinking about buying gold coins.

How would I go about this ?

The only gold company I know of is Johnson Matthey.. I believe they are a bona fide company, so I've thought of buying through them.

What would you advise?Answer
If the £70,000 will represent most of all of your investment pot then I'd be very wary about putting it all into one type of investment. Spreading it across a range of investments should reduce risk, as if one investment bombs you won't lose your shirt.

As for gold, with global turmoil more likely to increase than decrease there is an argument that the price will rise further still. However, bear in mind that much of the recent price rise has been due to higher demand from investors rather than for jewellery (which normally accounts for the majority of demand). Jewellery demand will likely rise longer term as emerging markets grow, but if investors sell off shorter term then the price could fall quite sharply. The latter is unlikely to happen while markets are struggling, but is very likely once global economies are more settled again (which could be some years away). More info in my article here.

As for how to invest, buying physical gold coins or bars (they come in various sizes) is one route. Smaller coins and bars tend to sell for a premium to the actual gold price, plus you'll need to factor in costs for storage and insurance (it's generally not a good idea to store lots of gold at home). Nevertheless, it's a straightforward way to invest and provided you buy from an established dealer who certifies their coins/bars you should be fine. Or you could consider services like Bullionvault that store the gold for you (see my answer to this question).

A convenient alternative is to track the gold 'spot' price using exchange traded funds such as ETFS Physical Gold and Gold Bullion Securities (cost is about 0.4% a year plus stockbroker dealing fees to buy and sell (£10 or less online). These funds back your investment with gold bars, so should theoretically be safe. Or you could look at the Perth Mint Gold Certificate Program (see my review here).

A further option is to buy shares in gold mining companies, either directly or via an investment fund. Share prices tend to exacerbate gold price movements and there's operational risk too (e.g. the company might suffer production problems at one of its mines), so the risks tend to be higher.

Good luck whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question533.aspx