Property and land bargains too good to be true?

I've received quite a few emails recently from companies suggesting they can help me buy property at up to 70% or more off current market valuations. Are these deals too good to miss or just balderdash?.

In case you don't feel like reading the whole article I'll give my conclusion first - in my view they're largely balderdash. The market value of any

asset is (in an efficient market) the price someone is prepared to pay for it, so notional 'discounts' are pretty meaningless. Even desperate sellers are

unlikely to sell property at a lower price than someone else will pay them.

But, for the sake of completeness, let's take a look at the types of deals the emails I've received are generally referring to:

Repossessions

If you see an advert for property at around 25% (UK) or 70% (US) below market value then we're almost certainly talking about repossessions. Lenders

often prefer to offload repossessed property at less than top dollar to ensure a quick sell and minimum hassle. And some homeowners, fearing

repossession, will try and offload their home before their lender does it for them, in the hope of getting a better price.

Now desperate sellers are music to buyers' ears. And, in a buoyant property market repossessions can, sometimes, make decent investments. A quick

refurb can see a property back on the market at a profitable price within months.

But we're in a depressed property market (especially in the US), with many buyers staying away due to difficulty getting finance and/or concerns that

prices will fall. So your 'bargain' repossession could end up sitting on an estate agent's shelf and leave you struggling to make a profit net of the

purchase price, fees and money you've spent making it presentable.

And, let's face it, why would a potential buyer pay extra for your property when they can buy a similar repossessed property themselves for less?

What about the valuations that are often mentioned in the ads?

Most UK property will be advertised at a percentage less than a recent 'RICS' valuation. RICS (Royal Institute of Chartered Surveyors) valuations are

produced after a basic property inspection, but while arguably more meaningful than an estate agent's guide price they're still a broad estimate. And

bear in mind it's very difficult to value property in the current climate because so little is selling.

The US property valuations mentioned are often more vague and might be little more than pre-credit crunch prices or asking prices on similar

properties that have no chance of selling at that price in this challenging climate.

Suffice to say, take any valuations with a massive pinch of salt and remember the only valuation that matters is the price someone is prepared to pay

now.

Off-plan property

Buying off plan means putting down a deposit on property that has yet to be completed. In rising housing markets this can be profitable as by the time

the property is finished it might be worth more than you've paid. But in the current climate forget it. Prices are more likely to fall than rise and

there's an increased risk of the developer going bust before the property is built.

Land without planning permission

The name of this game is to buy land in the hope planning permission to develop it will one day be granted. The potential rewards are very high - an

acre of land costing a few thousand pounds could be worth hundreds of thousands of pounds if planning permission to build homes is granted.

But, of course, it's not that easy. Planning permission can be very difficult to obtain and this type of investment tends to be highly speculative,

perhaps taking 20 years or more to come to fruition, if ever.

The three main categories of land are 'brownfield', 'greenfield' and 'greenbelt'. Brownfield sites are those that have previously been built on.

Planning permission may be more likely but you might incur demolition and/or decontamination costs. Greenfield land has never been built on and is

typically farmland. Planning permission will probably be a lot harder to attain, but the potential rewards much greater. Greenbelt land is protected by

government policy stipulating development must only occur in exceptional circumstances, so planning permission is very unlikely.

Location is key. Land on the outskirts of a growing town stands more chance of being developed (one day...) than a field in the middle of nowhere. And

it's important to understand the local long term planning policy to get a feel for the likelihood permission will ever be granted.

Both above factors will have a big influence on price. This is a well developed market with plenty of professional investors, so land where planning

permission is more likely will be priced accordingly - finding a bargain is rare.

Having said all this, provided you pay a sensible price for agricultural land it's unlikely to be a disastrous investment. If food prices continue to

rise then demand for agricultural land should remain robust, protecting prices. Just don't pay over the odds for a site assuming you'll get planning

permission.

To get a feel for land market prices (don't take a property adviser's word at face value) take a look at portal websites like www.uklandandfarms.co.uk and www.uklanddirectory.org.uk.

Land with planning permission

Someone else has already taken the risk and done the hard work of getting planning permission, but perhaps they can't afford to develop the land

themselves, or they just want to pocket some profit.

Given someone else has already made a juicy profit from attaining planning permission the aim here is simply to benefit from rising land and property

prices over time, unless you want to develop the land yourself. If house prices rise faster than the cost of building them then land with permission to

build should appreciate. Conversely, if house prices plunge then you'll probably struggle to find a buyer for your land, at least at an attractive

price.

So it's a bit like investing in property, but without the potential for rental income until you sell.

Warning! You've little protection

Property advisers are seldom authorised or regulated by the Financial Services Authority (FSA). And unless they are be extra wary - as if anything

untoward should happen you'll be on your own without the safety net of the FSA's consumer protection rules, the Financial Ombudsman Service (FOS) or

Financial Services Compensation Scheme (FSCS). Although consumer protection won't help if you buy an investment that simply falls in value.

Is there any money to be made?

Although the outlook for property and land prices is hardly rosy at present, they should be fine over 10-20 years. When buying in this uncertain

climate just be careful to pay a sensible price and be certain that you won't need to sell in a hurry. And, of course, if you're lucky enough to buy land

that does eventually get planning permission you could hit the jackpot.

And, if a deal looks too good to be true...

It almost certainly is. If the potential returns on offer are so amazing then why would a salesman waste their time trying to get others in on the

action...

Read this article at http://www.candidmoney.com/articles/article193.aspx

Buying an ISA?

Thinking of investing in a stocks & shares individual savings account (ISA) before the end of the tax year? If yes, what should you be thinking about?.

When buying an ISA there are are two key factors that will likely determine how successful your investment is: What you buy and how you buy it.

What you buy is by far the more important. Invest in the wrong market at the wrong time and you’ll incur painful losses. Get it right and you’ll reap nice profits.

Of course, this is also the hardest decision to make. Unless you have a crystal ball you’ll never get it right all the time, which suggests that making smaller bets within a good spread of investments is more sensible that betting your shirt on a single investment.

But, first:

Are the tax benefits worthwhile?

You can read a lot more about this, including examples, on our ISA page. But in summary:

• all taxpayers benefit from tax-free interest, e.g. income from corporate bonds.


• higher rate taxpayers benefit from having no further tax to pay on dividends, e.g. from equity income funds.


• everyone potentially benefits from tax-free gains, although careful use of annual capital gains tax allowances can achieve the same result for many investors.


• ISA income doesn't need to be declared on tax returns, hence it doesn't affect higher income tax age allowances.

Bottom line, if you're not paying for an ISA wrapper then it's better having than not.

When deciding what to buy I think there are five main issues to consider:

Look for gaps in your existing investments

In general it makes sense to invest across the main investment types: cash, fixed interest, stockmarkets, commercial property and commodities. And, where appropriate, to hold a mix of investments in each, e.g. global stockmarkets, not just the UK.

Rather than simply opt for whatever’s performed well in recent years, take some time to consider the best way to complement any investments you already own.

What do you want to achieve?

Ok, the obvious answer is to make money. But do you need an income? How long can you afford to tie up the money? And, if markets do fall, how much could you stomach losing?

Your answer to these questions will impact on the mix of investment types that is probably right for you. For example, fixed interest is more suited to income and usually less volatile than commodities. And while emerging stockmarkets hold more promise longer term than developed, there’s a greater risk of large losses along the way – I reckon it’s at least a 10 year bet.

Rather than cover all aspects here, I’ll point you to our investment pages that contain far more detail, including the pros and cons of each main investment type.

Funds or shares?

Once you’ve decided on where to invest, you’ll need to choose between using a fund(s) and buying directly, e.g. shares. In the case of commercial property you have little choice; you can’t buy an office block in an ISA, so you’ll need to use a fund. But you could buy individual gilts and corporate bonds for fixed interest exposure and shares for stockmarket and commodities exposure.

There’s no right or wrong answer here. If you’ve got the time to research investments then picking your own shares is likely to be cheaper than using a managed fund and you could outperform the professionals. On the downside, it’s unlikely you’ll be able to get as much diversity (most funds hold 50+ shares/investments) and you might fail miserably.

Active or passive?

If you opt for a fund you have a fundamental choice between an active fund manager, who’ll likely charge you between 1-2% a year, and a passive (i.e. tracker) fund, probably costing less than 0.5% a year.

Tracker funds tend to work well in some markets but are less successful in others – in practice you’ll probably want to hold a combination of both active and passive funds. Before deciding, I suggest reading our trackers page to find out more.

Choosing a fund

When choosing a tracker the main considerations are: the index being tracked (i.e. does it provide worthwhile exposure to the area where you want to invest), whether the fund accurately tracks the index and charges.

As for actively managed funds, they key question is whether the manager is likely to beat the index (else you might as well buy a tracker). Studying the manager’s credentials, including past form (look for consistency) and whether their management style (e.g. aggressive or cautious) suits the current outlook, can help. But ultimately you’ll be taking an (educated) leap of faith.

Once you’ve decided what to buy then seek out the best deal. If you opt for shares then consider a stockbroker with low dealing charges that doesn’t charge for an ISA wrapper. See my answer to this question for more details.

When investing in a fund decide whether or not you need advice. If you do, then seek help from an independent financial adviser (IFA). But if you’re happy making your own decision (perhaps with the help of useful research and guidance) then using a discount broker, who’ll refund some of the commissions normally paid to an adviser, can save you money. Read our ISA Discounts Action Plan to find out more.

Good luck,whatever you decide!

Read this article at http://www.candidmoney.com/articles/article192.aspx

BM Savings Inflation Bond review

With National Savings Index-Linked Certificates currently unavailable BM Savings must be hoping its new Inflation Rate Bond will plug the gap.

It's a 5 year savings bond paying 0.25% plus inflation (measured by the Retail Price Index) each year before tax. Interest is paid annually, on 28 March, with the inflation figure calculated over the year to the prior January.

While the Inflation Rate Bond is similar to Index-Linked Certificates, there are two major differences: returns are taxable and you can't withdraw your money before maturity. These points will obviously make the bond a non-starter for some.

But if you are happy to tie up your money for 5 years is the BM Savings Inflation Rate Bond a good deal?

Given the 'best buy' 5 year fixed rate savings account (Coventry Building Society) is currently paying 4.75% a year, then for the Inflation Rate Bond to deliver a higher return average inflation would need to exceed 4.5% over that period.

Is this likely? I'm not convinced. The last published RPI figures show an annual increase of 4.8% to December 2010. But the majority of this was due to higher oil/food prices and the VAT rise, all of which might not rise by as much in future (see our article for more info). If it's any help, markets seem to be predicting average RPI of 2.8% over the next 5 years based on index-linked gilt prices at the time of writing.

You also need to bear in mind that the current 4.8% RPI figure relates to price rises over the last year, whereas what matters with this bond is the extent that prices rise in future.

But if you do believe inflation (RPI) will average more than 4.5% over the next five years then the Inflation Rate Bond looks appealing versus fixed rate accounts and could be worth considering.

Taxpayers will be disappointed this bond isn't available within a cash ISA, as they'll almost certainly lag inflation after the taxman's taken his cut. Higher rate taxpayers in particular might do better opting for a conventional variable or fixed rate cash ISA (unless they wish to save more than the annual ISA allowance).

The bond is available by phone or post until 10th March 2011. The minimum investment is £500 and maximum £1 million.

BM Savings deserves a pat on the back for giving savers the option to protect their savings from inflation. It remains to be seen whether linking your savings to inflation over the next 5 years actually turns out to be worthwhile, but at least you now have the choice.

Read the full review at http://www.candidmoney.com/candidreviews/review50.aspx

Fundsmith Equity Fund a good idea?

Question
Do you have any opinion about this new Fundsmith organisation? They seem to be very upfront about their aims and the fact that Terry has put so much of his own money into it shows commitment.

I am 63 and looking for investment that will provide income rather than long-term commitments. However do you think they may be worth a punt for up to 5-7 years on perhaps 5% of available capital that would not cause disaster if the worst happenrd?Answer
I've mixed views on Fundsmith.

Terry Smith has a successful record of making money and it's always good to see fund managers putting a decent chunk of their personal wealth into their fund - it certainly helps to focus their mind. Plus I like Fundsmith's straightforward and transparent approach.

However, I don't feel Fundsmith is quite as revolutionary as they'd like you to believe.

Although they've made a fanfare over their 1% annual management charge, Fundsmith's margins are probably similar to most other fund managers because they're not paying trail commission (typically 0.5%) to advisers. Use a discount broker that rebates trail commission in full (see our list here) and most actively managed stockmarket funds will cost around the same as the Fundsmith Equity Fund.

In fact the Fundsmith Equity Fund total expense ratio (TER) is a little high at 1.25% (equivalent to 1.75% were trail commission being paid), probably because the relatively small current fund size means running costs are disproportionately high - the TER should fall as the fund grows.

What's most important is the fund itself and whether it's likely to perform well.

It's a focussed fund, holding 20-30 stocks, that invests long-term globally in high quality businesses. When selecting investments greater emphasis is given to analysing stats than meeting company management. The other investment selection criteria sound similar to many funds of this ilk, that is companies in markets with barriers to entry, growth potential, avoiding excessive debt, attractive valuations etc - the usual sensible stuff.

Terry Smith is managing the fund, assisted by Julian Robins, a US-based analyst. While Smith has a successful track record in the City, he doesn't have a track record of running a retail investment fund, so investing does require something of a leap of faith in his reputation and abilities.

Overall the fund seems pretty sensible and I'd give it a greater chance of success than failure. But whether you'd want to opt for this fund over a more proven fund manager elsewhere is a personal choice.

Given you're looking for income without a long term commitment then you might want to consider equity income funds instead. The Fundsmith Equity Fund currently has a 2.5% dividend yield but is orientated towards growth, not income. Plus its buy and hold investment strategy (which could do well overall - it works for Warren Buffett) means it should probably be viewed as a longer term portfolio holding as you'd expect this style of fund to sometimes struggle during periods when its stocks are out of style/favour with markets.

Read this Q and A at http://www.candidmoney.com/questions/question367.aspx

How safe are fund supermarkets?

Question
Fund Supermarkets have been discussed here on this site recently.

One drawback is that they offer a lot of choice but the investor protection is still set at the level of "one provider" rather than being multiplied by the number of funds they offer ! (I wish!!) .They offer so much but "investor protect" so little !!

To mitigate this I tried a bit of investor "exploration" in January last year and tried some new fund supermaket "vehicles": one of which a Fund Supermarket called JP Morgan Wealthmanager Plus. I think I pay £3 a month fee: so far I have only made a small investment to see how it works. So far it seems OK.

Do investors really need to worry about investor protection limits with fund supermarkets and diversify like this ?. Is the kind of "small scale" diversification that I have been doing a bit of a waste of time? How many fund supermakets does one investor need?

The word "platform" leaves room for the idea of a "super station" where all the "investor protected" platforms can be parked in one place : Is this possible yet?.

The idea of all investments in one place is used a powerful advertisement by the providers to draw in business but ultimately it is undone by the miserly investor protection offered by each. Are fund supermarkets still in an early stage of development or will these "investor protection" aspects improve in the future?Answer
Let's start by answering your main question: the extent you're protected when using a fund supermarket versus holding your investments directly with fund providers.

Two elements of protection apply when using fund supermarkets:

1. The fund supermarket platform itself should be covered by the Financial Services Compensation Scheme (FSCS), giving you 100% protection on the first £50,000 invested.

2. The funds that you hold within the fund supermarket should also be covered by the FSCS, giving £50,000 of protection per fund management company.

[While fund supermarkets and onshore funds are invariably covered by the FSCS, it's always worth double checking in the relevant 'key features document' if unsure.]

The fund supermarket protection relates to the investment platform itself, not the underlying funds. Is there a risk a platform could vanish with your money? Very little.

When you hand over a cheque to a fund supermarket they place the money in their nominee account, then use it to buy units in your chosen fund(s) in their name with you as the beneficial owner. The nominee account must be held separately from the platform's own business and supervised by a 'custodian' to ensure it adheres to FSA rules.

If a fund supermarket goes bust then the nominee account should be unaffected and your underlying funds can be re-assigned to you. In the unlikely event that an insolvent fund supermarket has dipped its fingers into the nominee account then the FSCS would step in and pay compensation.

Provided you use a reputable fund supermarket/platform then I wouldn't lose sleep over having more than £50,000 (the amount covered by the FSCS) invested. Although, of course, you can never say never.

The situation is similar for the funds themselves too. Unit trusts must hold your money in trust, which effectively ring-fences it from the fund management company. So if the fund manager goes bust your fund investment should be unaffected. If anything untoward did happen then the FSCS would apply.

So to summarise. Fund investments covered by the FSCS are eligible for up to £50,000 compensation per fund management company. And the fund supermarket in which they're held is covered for up to £50,000 overall, but for failings at the platform level and not the underlying funds.

In an ideal world you'd use just one fund platform, as the benefit of simplifying administration is lost somewhat if you use several platforms. Much easier to hold everything on one place.

If you're holding more than £50,000 on a platform and don't fully trust it then by all means diversify. But personally I prefer to use just one or two platforms whom I trust not to dip their fingers into my pocket. The same goes for funds too, although you'd have to have a pretty large portfolio to justify holding more than £50,000 per fund group in any case.

It's quite straightforward to view holdings from several platforms on one screen (Bestinvest, for example, has long done this), but switching funds from one platform to another is less straightforward, especially until platforms are forced to allow 're-registration' of funds between each other (due by 2013). So I think there's currently little incentive for anyone to develop a 'platform of platforms'.

Read this Q and A at http://www.candidmoney.com/questions/question362.aspx

Is there a formula linking oil prices to petrol prices?

Question
Could you please let me know the formula to convert the price of oil per barrel to the price per litre paid on a UK forecourt?Answer
I don't have a precise formula as such, but would calculate the link between the oil price and petrol prices as follows.

The price of fuel comprises the amount charged by the oil company to the petrol retailer, the retailer's margin, excise duty and VAT on the total of these three items.

Fuel excise duty is currently fixed at 58.95p per litre of unleaded petrol or diesel, VAT is charged at 20% and petrol station margins are generally around 5p per litre.

Armed with these figures, if the price per litre of fuel is 130p then VAT would account for 21.67p of the sale price (130p - (130p / 1.2)). We know the other costs are 58.95p of duty and 5p (assumed) retailer margin, meaning the oil company is probably charging the retailer 44.38p per litre (130p - 21.67p - 5p - 58.95p).

Now, if the relationship between the oil price and the price fuel is sold to retailers were constant we could calculate a simple ratio between the two from our above example.

A barrel of oil contains 159 litres (42 US gallons) and, after refining, produces around 75 litres of petrol. So if a $95 barrel of oil produces 75 litres sold by the oil company at 44.38p the ratio would be 1 litre of fuel is sold (in pence) at 0.47% of the cost of a barrel.

But unfortunately it's not that simple. Oil companies will have some costs that are relatively fixed (e.g. the costs of refining oil to make fuel and distribution) and might also vary their margins over time, so it's not a perfect linear relationship. Plus oil is priced in dollars whereas we pay for fuel in pounds, so exchange rates will also need to be taken into account.

Sorry I can't answer your question exactly, but hopefully the above will point you in the right direction.

Read this Q and A at http://www.candidmoney.com/questions/question361.aspx

Can I carry on working after retirement?

Question
Can I continue to work part time after retirement and if so how much am I allowed to earn without affecting my pension?Answer
One you reach state pension age you'll be paid whatever state pension you're entitled to, regardless of whether you carry on working. And if you do continue working you'll no longer have to pay national insurance.

However, there are a couple of things to be aware of:

- If you don't carry on working and have little/no other source of income other than a basic state pension then you might qualify for a 'pension credit' - effectively a state benefit that ensures you receive at least £132.60 a week (including the £92.60 state pension). You might also receive a further £20.52 weekly 'pension savings credit'. Carry on working and it's unlikely you'll receive these (although if you have other pension/savings/investment income you probably won't anyway).

- When you reach 65 the annual amount you can earn before paying income tax rises from £6,475 to £9,490 - called an 'increased age allowance'. However, this falls by £1 for every £2 you earn above £22,900, so if continuing to work pushes your income above this limit you'll effectively pay more tax - equivalent to 30% on income between £22,900 and £28,930. See this previous answer for more info.

You don't have to take your state pension at retirement age. It's possible to defer it and receive either a higher weekly pension in future or a lump sum equal to the deferred payments plus interest. For full details read this earlier answer. You can normally defer other pensions too, although your future pension might be affected by investment performance and annuity rates, i.e. there could be some risk in doing so.

So yes, you can carry on working. Just bear in mind the above to make sure it's worth your while.

Read this Q and A at http://www.candidmoney.com/questions/question360.aspx

Can investments protect you from inflation?

If you're worried that inflation might eat away at your savings and investments what can you do?.

In practice the only guaranteed way of doing so at present is to buy index-linked gilts at issue and hold them until redemption. But as this could mean holding them for 20+ years and new issues are sporadic this is unpractical for most of us. More on this in a moment.

National Savings Index-Linked Savings Certificates are a more practical way to beat inflation, tax-free, but are currently suspended from sale due to becoming too popular (they probably became an overly expensive form of borrowing for the Government).

So if there's no cast iron method of protecting against inflation, is there anything you can do to at least stacks the odds in your favour? Let's take a look.

Cash

With the sale of National Savings Index-Linked Certificates being withdrawn in July 2010 there's currently no guaranteed way of beating inflation with your savings. The best you can do is to find a market leading savings interest rate, tax-free via an ISA if viable, and hope for the best.

What kind of rates are currently on offer? At the time of writing you can earn around 3% a year before tax on easy access accounts and up to 4.75% on a five year fixed rate account. However, the rates paid by variable rate accounts tend to be very fickle, often plunging over time, so it's a good idea to regularly check the rate paid and take your business elsewhere if necessary.

Gilts / Corporate Bonds

Income from conventional gilts and corporate bonds might beat inflation longer term, but there's no guarantee. And inflation means your initial investment will be worth less in real terms when you get it back at redemption (maturity), so high expected inflation usually depresses gilt/bond prices. I wouldn't recommend these investments if you're worried we're entering a prolonged period of high inflation.

Index-linked gilts guarantee that both your initial investment and interest will increase by inflation, measured by the Retail Price Index (RPI). However, as mentioned above, this only works if you buy when they're initially issued and hold until redemption, which could be a very long time.

Why? Because after issue the gilts are traded on the open market and their price will reflect what the markets expects average inflation to be until redemption. If you buy index-linked gilts at a time when inflation is expected to be high and these expectations subsequently subside, their price might fall. For more information and examples read my answer to this question.

Commercial Property

Rental income from commercial properties (e.g. offices, shops and factories) tends to keep pace with inflation longer term as landlords usually build in periodic rent reviews for this reason.

But beware, during periods of economic turmoil it might be harder to negotiate rent rises, tenants are more likely to go bust and property values may fall, so there's some risk. Commercial property funds have lost around 12% on average (including income) over the last 5 years - losing money is hardly a good hedge against inflation. Nevertheless, commercial property should be a sensible long term hedge against inflation if you're confident we won't fall back into recession.

Residential Property

Residential property rental income tends to influenced by interest rates and the availability of mortgages. The harder it is to buy a property the greater the demand for rentals, which should push up rents. There's little evidence to suggest to rents consistently keep pace with inflation long term.

The larger slice of past returns have come from rising prices, not rent. But given the current outlook for house prices I wouldn't expect rises for at least a couple of years.

Stockmarkets

Dividends have historically kept pace with inflation pretty well. For example, between 2006 and 2010 Imperial Tobacco's full year dividend rose from 62p to 84.3p, a 36% rise while inflation over the period was about 18%. Of course, not all companies have fared so well during the credit crunch - Barclays' dividend fell by more than 85% over the same period. But chosen carefully, shares can be a good long term source of inflation-beating income.

The trouble is share prices are far less predictable. A decent income is little consolation if market falls lose you a fortune. They key with stockmarket investing is the willingness to stay put for 10 or more years, reducing the impact of shorter term volatility.

Gold

Gold is often perceived as a good hedge against inflation and has a good record of doing so longer term. However, the gold price can also be very volatile shorter term and demand from nervous investors has pushed prices to record levels in recent times.

Structured Products

Some financial providers build investments, often called 'structured products', that aim to match or beat inflation. Current examples include the RBS Exchange Traded Bonds (read our review here) and the Jubilee Financial Real Growth Plan (which offers the higher of stockmarket returns and inflation over six years).

These products can sometimes be worthwhile provided you understand exactly what you're buying (they can be complex). But bear in mind that these are 'artificial' investments, which rely on underlying investment banks agreeing to pay the returns on offer. If the bank(s) goes bust you could lose money.

Conclusion

A combination of high dividend shares, commercial property and index-linked gilts are likely to provide decent long term protection from inflation. But if you're worried about the threat from inflation over just a year or two then there's little you can realistically do - just ensure you get the very best interest rate on your savings that you can.

Read this article at http://www.candidmoney.com/articles/article190.aspx

Compulsory retirement age to be scrapped

The Government's announcement has prompted a mixed reaction..

The Government has confirmed that employers will no longer be able to force employees to retire at age 65 from 1 October this year. And from 6 April until then only employees who were notified of their retirement before 6 April and whose retirement date falls before 1 October can be compulsorily retired at 65.

On the one hand this is good news. Some people want to work beyond 65. And inadequate pension provision means greater numbers of employees will likely need to work past 65 to ensure they can eventually retire on a reasonable income. Removing the default retirement age allows them to do so.

But it will do little to ease the pressure on rising unemployment and some employers could suffer from having less flexibility to manage employee numbers.

Employers will have to justify that older workers can no longer carry out their job properly before asking them to retire - I predict employment lawyers will be busier than ever...

Read this article at http://www.candidmoney.com/articles/article188.aspx

Which trackers pay dividends?

Question
I have a knowledge gap about trackers and dividends: I do know that some trackers include dividends and some do not and my questions relate to this aspect.

- Is there a way to tell which trackers do include income?
- Are income paying trackers a very specialist area or are they fairly easy to find and generally available?
- Is there a generic category or name for these income providing trackers or are they referred to simply as income paying trackers?
- Is the income ever paid out or does it simply accummulate within the fund?Answer
Most tracker funds pay income provided the underlying investments generate dividends or interest. For example, if you buy a FTSE 100 tracker fund you'll receive dividend income, whereas an exchange traded fund tracking the gold price doesn't because gold bars don't produce an income.

But there are exceptions. Protected plan type investments (which typically pay returns based on stockmarket movements over 5 or 6 years) don't normally pay dividend income and neither do most funds that offer leveraged exposure to an index. This is because they're built from artificial financial derivatives rather than actual shares - so there's no natural dividend unless the fund incorporates this using yet more derivatives.

To check whether a tracker fund pays income and, if so, how much, just take a look at its factsheet (which should be available from the provider's website). If it quotes an income yield then this is broadly what you can expect based on recent prices. It should also confirm when income is paid, if relevant.

When funds pay an income there's usually an option to have it automatically re-invested. This can happen one of two ways. A fund may offer 'income' ('inc') units with the income payment being used to buy further units in the fund. Or it may also offer 'accumulation' ('acc') units whereby the unit price increases to reflect the income that would otherwise have been paid out.

For example, suppose a fund is priced at 100p and makes an income payment of 5p. If you own £100 of income units you'll receive £5 of income, which can used to buy an extra 5 units. Had you owned accumulation units your holding would remain unchanged, but the unit price will have increased to 105p, valuing your stake at £105.

Income producing funds invariably offer income units with most having an accumulation unit option too. Note: accumulation units don't allow you to avoid tax, you still have to pay any income tax owed on income distributions even though they're not physically paid out.

Read this Q and A at http://www.candidmoney.com/questions/question354.aspx

Who gets a personal tax allowance?

Question
Can you please advise if the personal tax allowance is still granted to ALL individuals including persons of non working age. This is in connection to interest earned on capital sums in investment accounts.Answer
All UK residents enjoy a personal income tax allowance regardless of age. So they can receive taxable income up to that amount during the tax year without having to pay any income tax.

Everyone, including children, currently enjoys a £6,475 personal allowance up to age 65. This rises to £9,490 for those between 65-74 and £9,640 for those aged 75 and over. However, these higher age allowances are reduced by £1 for every £2 of income exceeding £22,900, subject to not falling below the standard £6,475 allowance.

High earners will also see their standard allowance reduced by £1 for every £2 of income above £100,000.

If you're eligible for the higher age allowance but worried you'll lose out due to your income exceeding £22,900 then holding savings and investments within Individual Savings Accounts (ISAs) might help as income from these does not count towards the £22,900 figure.

At the other end of the age scale personal allowances mean very few children end up paying income tax on savings or investments. However, parents should beware that if the annual interest/income on money they give their child exceeds £100 a year per parent, then the parent is liable to tax on that income, not the child.

This rule is intended to stop a tax loophole whereby parents hold money in their child's name to avoid tax. However, it doesn't apply to gifts from anyone else, e.g. grandparents.

Tax on investments gains is simpler. All UK residents currently enjoy a £10,100 allowance with gains in excess of this taxed at either 18% or 28%.

Read this Q and A at http://www.candidmoney.com/questions/question351.aspx

Local Government Pension AVCs worthwhile?

Question
I work in Local Government and I pay into an Occupational Pension. I am 56 years of age and I was wondering if I should join the AVC scheme run by my pension provider, which is provided by the Prudential. I have been working with same employer for 37 years and I have paid into the pension for the same period. Please advise me.Answer
An Additional Voluntary Contribution scheme (AVC) is one of several ways to top up your pension. It usually involves paying contributions into a pension fund which is then invested. When you retire the money is used to buy an income for life via an annuity.

On the plus side you'll enjoy tax relief on the contributions: pay in £80 and the taxman will make this up to £100, plus you can reclaim a further £20 if a higher rate taxpayer. However, when you eventually receive the pension income it's taxable and it might not be very much if investment performance and/or annuity rates are poor.

You should also have the option to buy extra annual pension within the Local Government Pension Scheme, either via ongoing monthly contributions, called Additional Regular Contributions (ARCs), or a lump sum. The cost varies between schemes and depends on your age, sex, time until retirement and whether a dependant's pension will be paid on your death.

Your scheme administrator can provide a quote, but as a guide I'd expect the cost (before tax relief) to be around £50 per month, or about £3,200 if a lump sum, per extra £250 of annual pension at retirement for a male aged 56 retiring at 65. The advantage of this route is that there's no investment risk on your part, you'll know exactly how much extra pension you'll receive at retirement.

The Prudential AVC scheme offers an ok range of funds with annual charges of around 0.65% - 0.75%, which is very competitive. But, as mentioned earlier, the amount of extra pension you'll receive depends on investment performance and future annuity rates - which means risk.

If you're comfortable taking some investment risk but want a wider choice of investment funds than offered by the AVC then a stakeholder or self-invested personal pension might fit the bill. However, both will likely be more expensive than the AVC, with Stakeholder annual charges typically around 1% a year and the cheapest SIPPs charging around 1.5% a year for most mainstream funds.

Of course, you don't need to use a pension to save towards retirement. For example, Individual Savings Accounts (ISAs) offer access to similar investment funds but with more flexibility, as you can access the money whenever you want. There's also no tax on income, which could be useful during retirement, although unlike pensions there's no initial tax relief on contributions.

Or, if you have a mortgage or other outstanding debts, then maybe you'll want to clear those as the interest charges are likely more than you could otherwise safely earn on the money.

Hopefully this gives you some food for thought. Your decision should really depend on how much risk you're comfortable taking and whether flexibility is important to you. And, if you feel you have sufficient pension provision already, then maybe you'll want to use your spare income for something other than boosting your pension.

Read this Q and A at http://www.candidmoney.com/questions/question350.aspx

How to invest in the German stockmarket?

Question
Is there any way of investing in the German stock market?

I dont mind whether its an active or passively managed vehicle although I prefer Investment Trusts to Unit trusts, but this is not critical. I have not been able to find anything that invests purely in the German stock market and I have read that their stock market has performed well, and I think it will cotinue to, whereas I feel the rest of Europe is too risky at present.

On another matter I would like to say that I really appreciate the advice you have provided and that I think your web site is a great idea.Answer
Glad you're finding the site helpful!

Assuming you don't want to buy shares in individual German companies (which you can do cheaply via online stockbrokers including TD Waterhouse, iWeb and iDealing) then your options are limited.

The only unit trust I know of that invests solely in German companies is Baring German Growth. Performance versus the index has been promising since manager Robert Smith took over the reins at the end of 2008. Like you, I can't find an equivalent investment trust.

Your other option would be to use an exchange traded fund (ETF) that tracks a German stockmarket index - I've found a couple:

db x-trackers DAX ETF - tracks the German DAX 30 Index for an annual charge of just 0.15%. It has distributor/reporting status so gains are subject to capital gains tax and not income tax (see this previous question to understand why this is important). It's traded on the Frankfurt, Swiss and Swedish stock exchanges.

ETFX DAX 2 x Long Fund - aims to provide double the rise (or fall) of the DAX 30 Index on a daily basis. Could make you a lot of money if the DAX soars, but the two times leveraging and daily compounding make the risks high. You also won't benefit from any dividends. It's traded on the London Stock Exchange.

So not much choice I'm afraid, but you can hopefully achieve your aims using one or more of the above options.

Read this Q and A at http://www.candidmoney.com/questions/question349.aspx

Protect my investments from inflation?

Question
My Stocks and Shares Isa includes holdings of Corporate Bond,Strategic and Gilt Funds representing 25% of total portfolio.

I fear the effect of inflation on these investments. I am considering, index linked and/or Equity Income Funds as an alternative.

I am 72 years old. Please comment.Answer
Very sensible to be concerned about the impact of inflation - it's something too many savers and investors ignore.

Whether it's worthwhile adjusting your investments with a view to protecting them from high inflation obviously depends on where inflation goes in future - and this is currently very difficult to predict.

The biggest contributors to higher costs of living over the last 12 months have been transport (i.e. fuel prices) and food, with supply of the latter suffering from bad weather affecting crops. Fuel prices depend on global demand and while there's little doubt this will rise longer term, prices can be erratic shorter term as they're often driven by investors betting on where they think the price will be in future.

The other key factor that tends to drive rising prices across the board is when we all spend more. On the one hand low interest rates and governments pumping vast amounts of money into economies could lead to greater spending, but on the other higher tax and spending cuts might cause us to spend less.

Index-linked gilts benefit from both income and the redemption value increasing by inflation (measured by RPI). However, the price at which you buy them is affected by the market's inflationary expectations (unless buying at initial issue), so if the market's right your overall return will probably be similar to a conventional gilt.

What's important is to look at the breakeven average inflation rate where the return from an index-linked gilt to redemption equals that of a similar conventional gilt. For example, at the time of writing 2024 2.5% index-linked gilts have a breakeven inflation rate of 3.3%. If the market starts to believe that average inflation will be higher than this then the gilt's price will probably rise (by more than the standard inflationary link) and vice-versa if inflationary expectations shift downwards.

So consider index-linked gilts by all means, just be aware that if inflation ends up being lower than expected you might lose out.

Dividends generally have a good track record of rising faster than inflation, so equity income funds could make sense. The obvious risk is that if stockmarkets dive you'll probably lose money regardless of dividends - and losing money isn't a very helpful hedge against inflation.

Given it's nigh on impossible to successfully predict all these factors then hedging your bets makes sense and tweaking around a quarter of your portfolio doesn't sound unreasonable. Just beware that not all equity income funds are alike. If you're worried about possible stockmarket falls I'd be inclined to lean towards funds that focus on sectors like utilities, healthcare and tobacco - as these usually fare better during difficult times.

Read this Q and A at http://www.candidmoney.com/questions/question347.aspx

Hunting for income

With savings accouns struggling to beat inflation, is the grass any greener in the investment world? .

The Bank of England Base Rate has been at 0.5% since 5 March 2008, generally spelling bad news for savers, especially those who rely on the income.

Aside from shopping around for a better savings account deal, there's no magical way of earning more interest - a higher income means taking risk. And if you can't afford to lose money then taking risk is probably a bad idea. But if you can afford to risk some money, or already have a portfolio of investments, then how are the main sources of income stacking up at present versus cash?

Let's take a look:

Investment	Typical Income Yield (before tax)	Good Inflation Protection?
Cash	2% - 3%	No
Gilts	1% - 4.5%	Yes, if index-linked
Corporate Bonds (safer)	3% - 6%	No
Corporate Bonds (riskier)	6%+	No
Commercial Property	5% - 7%	Reasonable
Residential Property	4% - 6%	Possibly
Shares	3% - 6%*	Reasonable
*net of basic rate tax.

Note: yield means income divided by the cost of the investment. So for example, if you receive £6 annual income on a £100 investment your yield would be 6%, had the investment cost £200 the yield would be 3% etc. The yield shown for gilts/bonds also includes any profit/loss if held until redemption.

Cash

Best buy savings accounts are currently paying up to 3% on variable rates, or around 4.5% if you tie-up money on a 5 year fixed rate. Rates will no doubt rise at some point, but I think it may be another year or two before we see a meaningful change. Meanwhile inflation remains a killer, leaving most savers worse off in real terms (i.e. their money, including interest, will buy less in future than today), although this could subside later in the year if the oil price settles down. The big advantage of savings accounts in this uncertain climate is safety, provided your money is fully covered by the Financial Services Compensation Scheme (FSCS) - up to £85,000 per person per institution.

Cash unit trusts (called 'money market' funds) and guaranteed income bonds (GIBs) have been competitive alternatives to savings accounts in the past. But money market funds are generally struggling to yield above 0.5% a year at present while the market for GIBs has all but dried up.

Gilts

Loaning money to the Government is still fairly safe in the scheme of things, so yields (to redemption) look little better, or in some cases worse, than fixed rate savings accounts. High inflation is still a threat unless you buy index-linked gilts (where both income and the redemption price rise by inflation). The break even (relative to conventional gilts) rate of inflation (RPI) on 6 year index-linked gilts is about 2.7%, so if you believe inflation will average more than this over the next 6 years they could be worthwhile - although returns may still lag the best fixed rate savings accounts.

Corporate Bonds

Lending money to companies is more risky. And the riskier the company the higher you can expect the rewards, i.e. income, to be.

For example, the redemption yield on a Unilever bond redeeming in December 2014 is currently about 2.4% - it's seen as being almost as safe as the government. A Lloyds Bank bond redeeming in March 2015 is yielding around 6.1% - suggesting investors are less confident. While Enterprise Inns (a pub chain) bonds redeeming in December 2018 are yielding 8.73% - not a great vote of confidence.

If you sell a bond before redemption you might make a profit or loss depending on its price, which tends to be affected by interest rates, inflation and the company's financial position. High inflation and interest rates are bad news, because a bond's income is fixed, and vice-versa.

The golden rule when investing in bonds is try to understand how much risk you're taking. While high yields look tempting, they're high for a reason...

Commercial property

Commercial property investments, such as offices, factories and shops, tend to have a good track record of paying a decent rental income. And, barring recessions, rents also tend to rise longer term, making commercial property a good antidote to inflation. However, property values can fall, as we saw clearly during the credit crunch, so you could lose money if the economy turns sour.

With rental income yields currently around 5-7%, commercial property looks fairly attractive provided you're not pessimistic about our economic outlook. Bear in mind the only practical way to invest smaller sums is via a fund - and the fund manager will often take their 1.5-2% annual charges from income, plus you'll indirectly pay around 4% in stamp duty when buying the fund (as the fund must pay this when buying UK property).

Residential property

Rental yields on residential property are averaging around 4-6%. But house prices can fluctuate quite widely and easily dwarf rental returns for better or worse, so you need to be careful. Given the negative outlook for house prices and mortgages still being in short supply, rental demand is currently high - so you shouldn't struggle to rent a good property at a worthwhile rate. But as prices are expected to fall you'll need to drive a hard bargain when buying to reduce the likelihood of sitting on a loss in a year or two.

Longer term you'll probably be fine provided you project the rental income will turn a profit after all initial and ongoing costs. But I'd avoid buying to let using a mortgage - any future interest rate increases could crucify your profits.

Shares

Some dividend yields look very tempting at present, for example the Severn Trent shares dividend yield is 4.9% and its 5.2% for AstraZeneca shares - after basic rate tax! (which can't be reclaimed). Plus companies tend to increase their dividends over time unless they're in bad shape, reducing the threat from inflation. However, share prices can be volatile, even for fairly pedestrian companies like these, so a sharp downturn in share prices could leave you sitting on a loss despite potentially attractive dividends. And there's no guarantee dividends will be as high as expected or even paid at all if a company hits hot water.

If you already own shares or stockmarket funds then taking a bias towards cash-rich high dividend companies makes sense to me in what could be a turbulent year for markets. But if you like the comfort of savings accounts I'd be very wary of jumping into stockmarkets, despite the appealing dividends on offer.

Conclusion

The world of investment never gives you something for nothing. If you want to beat the income from cash you'll need to risk losing money - and in the current climate markets are exceedingly difficult to predict, so the gamble is very real. While nothing to get excited about, the best savings account rates look ok given your money should be safe. If you decide to venture further afield I'd really try and take a 5-10+ year bet and ensure you're unlikely to need the money before then. While the income might be steady, it's very unlikely your capital will be.

Read this article at http://www.candidmoney.com/articles/article184.aspx

Most common financial adviser scams?

Question
Your mission statement advises us that ‘having worked in financial services for over 12 years, mostly as an Independent Financial Adviser (IFA), it never ceased to amaze me the extent that some providers and advisers would try to hoodwink their customers in pursuit of a fat profit’. So what are the most common scams we all should be aware of?Answer
I think using the word 'scam' might be a bit harsh, as it's quite rare for financial advisers to run off with their clients' money. But do some financial advisers give advice that's more in their best interests than their clients'? - almost certainly yes.

The catalyst for dishonest financial advice is invariably greed. Commission-based financial advisers can usually make more money shorter term from giving dishonest advice than they can good advice. Why? sales commissions tend to be higher on unappealing products for the simple reason they wouldn't otherwise get sold.

So the number one thing to watch out for is how much commission the financial adviser will be pocketing. And whether it's paid in full upfront or a combination of upfront and ongoing.

If the adviser recommends products that pay above average commissions (3% initial and 0.5% annual is about average for investments) there's a high chance commission is influencing their advice - examples include investment bonds and some pensions. And the more commission that's paid upfront the less likely the adviser will bother looking after you in future.

You should also be wary if your adviser:

• Receives a commission or fee when recommending you switch your existing investments or pension - will the switch leave you better off or is the adviser 'churning' your investments to make themselves a quick buck?
• Recommends investing money in their own investment funds - probably means a bigger margin for the adviser and will their funds really be the best in the market?
• Charges 'fees' that are little more than commissions in disguise - for example, are their fees similar to the commission they would otherwise have received?
• Recommends products that tie you into long term regular payments, e.g. endowments and whole of life insurance. They'll probably make most, or all, of their money upfront while you're shackled to a poor product for maybe 10 years or more.
• Recommends a product that isn't regulated by the Financial Services Authority (FSA), you'll have less protection if something goes wrong.

Of course, if an adviser does one of the above it doesn't necessarily mean they're dishonest or bad, but it is reason to be extra vigilant that their advice is appropriate and cost effective.

Finally, remember that investments which look too good to be true almost always are!

Read this Q and A at http://www.candidmoney.com/questions/question345.aspx

Can IFAs recommend investment trusts?

Question
I notice in an article about investment trusts you said:
"Investment trusts don't normally pay sales commissions, making them unpopular with commission-based financial advisers."

However on another site I see an IFA insisting that commission has nothing to do with it with the only reason being that most IFAs are unauthorised to recommend ITs and so prevented from recommending them by the FSA. The same IFA tends also to be very dismissive of low-cost index tracker funds.

Could you clarify please? If IFAs are prevented from recommending ITs (and possibly ETFs) even if they thought them appropriate, it rather limits the value of their advice.Answer
The Financial Services Authority (FSA) allows independent financial advisers (IFAs) to recommend investment trusts provided they're authorised to do so. In practice this means an adviser ensuring they're qualified and competent to advise on investment trusts, as well as carrying out/buying research on the investment trust marketplace.

Unfortunately, most IFAs don't bother as it involves hassle and expense. Especially as investment trusts don't normally pay sales commissions.

But while IFAs might moan the FSA doesn't let them recommend investment trusts, it's ultimately their choice. If they really want to recommend investment trusts then ticking the FSA's boxes that allow them to do so is not usually that difficult.

Call me cynical, but it seems pretty obvious to me that the only reason most IFAs don't put themselves in a position to recommend investment trusts is the lack of commission. The same is also true of exchange traded funds (ETFs).

I do have some sympathy for IFAs insofar as the FSA is making their life rather difficult and expensive these days, but as a consumer I would much rather use an adviser who's allowed to include investment trusts in their recommendations than not. And I'd make sure that adviser really knows their stuff as good research is especially important when putting money in investment trusts - there's greater scope for losing money (due to share price volatility and/or gearing) compared to unit trusts.

Assuming the FSA's Retail Distribution Review plans go ahead then from 2013 an adviser will only be able to call themselves independent if they can advise on the whole range of products suitable for you - which should finally force them to consider investment trusts and ETFs when making recommendations.

Read this Q and A at http://www.candidmoney.com/questions/question344.aspx