Wednesday, 27 April 2011

Are you getting value from trail commission?

Are you getting value for money from any trail commission paid on investments or pensions that you've bought via a financial adviser in the past?.

Too few people realise that buying a financial product from a commission-based adviser could continue lining the adviser's pockets for as long as you own the product. This might be fine if they continue looking after you in return, but many don't. Neglect this and you could lose out on receiving either valuable ongoing advice or potentially thousands of pounds of commission rebates.


How do commissions work?


Commissions are a payment made by financial product providers, e.g. fund managers and insurers, to a financial adviser who sells their product. The commission is normally built into the product charges, so the costs of buying direct or through an adviser are often the same.


Commission comes in two flavours: initial and trail. Initial commission is paid to the adviser when you buy the product while trail commission is usually paid each year, often as a percentage of the investment value, for as long as you own it.


The amount of commission paid varies between products and providers, but for a unit trust is typically 3% initial plus 0.5% trail (which is paid out of a usual initial charge of 3-5% and an annual charge of 1.5%). For example, a £10,000 investment might pay £300 of initial commission plus £50 a year thereafter (or whatever 0.5% of the fund value is equal to).


Why do advisers receive trail commission?


In theory trail commission provides financial advisers with an income that allows them to spend time looking after their existing customers, rather than having to devote all their time to chasing new business. For example, if they sell you a unit trust or pension it makes sense to review things at least once a year to ensure all is ok. In most cases trail commission should cover these costs.


How do I know if an adviser is receiving trail commission?


An adviser is obliged to make it clear how they’re paid and what service you can expect to receive in return before you become a customer. However, if they didn’t, or you’ve forgotten, then simply call the adviser or product provider and ask them. Unfortunately it’s rare for product providers to detail any commission payments on the valuations and statements they send you.


Can I move trail commission to another adviser?


Yes! If you’re unhappy with your existing financial adviser then switching the trail commission to a new one is usually as simple as writing a short letter or signing a form supplied by the new adviser. It’s known as transferring the ‘agency’ on the product and normally costs you nothing. You should obviously vet the new adviser to ensure you’re not jumping out of the frying pan and into the fire – make sure he or she agrees to provide you with a service you’re happy with in return for the trail commission they’ll receive.


Can I receive the trail commission instead?


Yes, but it’s slightly more complicated than it needs to be. Product providers only pay commission to financial advisers who are authorised and regulated by the Financial Services Authority (FSA), i.e. they’ll refuse to pay commission directly to you.


However there are a few advisers, called ‘discount brokers’, that won’t give you any advice but will rebate some, or all, of the trail commission they receive (expect a small admin fee if all commission is rebated). If you’re comfortable looking after your own financial affairs then opting for this route could, over time, save you thousands of pounds or more.


You just need to transfer the agency on your existing investments/products to such a discount broker and they’ll either arrange to have the commission re-invested or sent to your bank account.


Does this mean a fee-based adviser is better?


Not necessarily. A good fee-based adviser should charge you a fair hourly or fixed rate and refund all commissions they receive. This (in theory) removes any product bias caused by commissions and ensures you only pay for the service you receive.


However some fee-based advisers charge annual fees as a percentage of your investment value, which risks the same problem as trail commission – you might be charged for a service you don’t receive.


The future


The FSA is planning some big changes in the world of financial advice and commissions from 2013. One the key plans is to replace commissions with ‘customer agreed remuneration’. This means products will no longer be able to build commission into their charges. If an adviser wants to charge you via the product, rather than you paying them directly, you’ll have to agree this in writing and the charge will be explicitly added.


If you’re unhappy don’t sit still!


If you’re unhappy with your current adviser then sitting still could be a very expensive mistake.


Should you need ongoing advice and assistance then look around for a better adviser who’s prepared to look after you in exchange for the trail commission paid on your investments and/or pension. Switching across should cost you nothing.


Otherwise reclaim some, or all, of the trail commission yourself by using a suitable discount broker. If a discount broker refunds all the trail commission they’ll charge a fixed admin fee instead, but this should still leave you in profit if you have a few thousand pounds or more invested.


Useful Information & Links


To read more about commissions and fees read our financial advice page and Guide to Trail Commission Rebates.


Want to know how much trail commission could be costing you? Use our Trail Commission calculator.


To find a list of Independent Financial Advisers in your area visit www.unbiased.co.uk.


Below is a list of the more competitive discount brokers you might find helpful (you can view a comprehensive list in our Guide to ISA Discount Brokers):








Refund all initial commission but take trail commission. Expect research and ongoing advice in return.Refund all initial and some trail commission. Expect research and relevant information in return.Refund all initial and trail commission in exchange for an admin fee. Expect some administrative assistance.
Bestinvest*Chartwell Direct

Commshare

Clubfinance

Hargreaves Lansdown
Alliance Trust Savings

Cavendish Online

*Advice given on portfolios of £50,000 and over.

Read this article at http://www.candidmoney.com/articles/article221.aspx

Good way to invest in gold and silver?

Question
I would like to invest in gold and silver as part of a diversified portfolio.I already hold Blackrock Gold and General, JPM Natural resources, Blackrock World Mining and City Natural Resources Investment Trust. Bullionvalt.com seems to be popular as is ETF Physical gold and silver.What are your views regarding costs and future growth in these two vehicles. How would you invest in Gold and Silver?Answer
Using an exchange traded fund (ETF) is a straightforward way to track the (spot) price of metals like gold and silver. The main things to look out for are whether the fund is backed by physical metal (rather than bits of paper, which could prove worthless if the bank 'guaranteeing' them goes bust) and charges.

The ETF Securities Physical Gold and Silver ETFs score pretty well on both counts, annual charges are 0.39% and 0.49% respectively and they're backed by allocated physical metal held by custodian HSBC. You can also buy versions traded in pounds, which are likely to be more convenient, although you'll still face currency risk as the underlying metals are traded in US dollars (e.g. if the pound strengthens against the dollar and the gold price is static you'll lose money due to the exchange rate movement).

I haven't used Bullionvault but they appear to offer a sensible, low cost, way to buy and store physical gold. For investments of up to $30,000 there's a 0.8% fee to buy and sell and a 0.01% monthly storage fee (min $4). This will probably prove a bit more expensive than the Physical Gold ETF, where stock broker dealing fees should be £10 or less - for example, on a £10,000 investment Bullionvault would cost around £80 to buy and £30 a year compared to around £10 and £39 for the ETF.

A small word of warning, neither Bullionvault or the ETFs will be covered by the Financial Services Compensation Scheme (FSCS) in the unlikely event something untoward should happen.

As for future growth potential, over the next 10-20 years I think it's good thanks to growing emerging markets demand. But shorter term is very difficult to predict. Much of the recent rise has been due to investors piling in rather than an upturn in gold jewellery demand, so if a number of those investors decide to sell we could see the gold price fall. Although if global uncertainty and turmoil continues then more investors might jump on the bandwagon and push up prices further still - take a look at my article here for more on this.

Given you already have quite a lot of metals exposure via your existing funds, I'd be inclined to hold off increasing your stake unless you really are optimistic prices will rise further or you're happy to ride out potential short term fluctuations and hold long term.

Also bear in mind that your existing funds generally invest in mining companies, whose share price movements tend to exacerbate underlying commodity price movements - great if prices are rising but more painful when they fall. This isn't necessarily a bad thing, just something to be aware of.

Read this Q and A at http://www.candidmoney.com/questions/question461.aspx

Tuesday, 26 April 2011

Are moringa tree investments worthwhile?

Question
Do you stil hold the same view on the Mozambiqe Moringa Tree invesment as you held in august 10, i.e. Very High Risk and not to be touched ??
Answer
(this question refers to my article here).

There are really two things to consider for this type of investment:

- Will a chosen project likely deliver expected returns?
- If something goes wrong what, if any, investor protection will you have?

The first is very difficult to answer. Based on the limited amount of financial information published by the companies promoting Moringa investments I'm sceptical. Even if we assume the projections are fair and the project is 100% legitimate, other unpredictable factors such as climate or politics may affect returns. And, of course, we are assuming that there is sufficient long term demand for Moringa Seeds to ensure a profit.

The latter is far easier to answer, you'll likely have little protection as these investments are not authorised or regulated by the Financial Services Authority (or by any other overseas government bodies as far as I can see). Personally, I wouldn't make a land based investment I'll never practically be able to visit, especially if it's not covered by robust government backed regulation and investor compensation. Yes, these companies might have various legal agreements, fidelity insurance and escrow accounts etc but, bottom line, if there's a problem you may have to endure the hassle and expense of taking them to court to enforce any of these. Far better to be covered by a government backed investor compensation scheme (e.g. the UK Financial Services Compensation Scheme (FSCS)).

The track record for African based investments marketed to UK investors is also less than convincing: The Cru Africa Invest fund (which largely invested in agriculture in Malawi) and New Star Heart of Africa fund (which invested in more mainstream African stock markets) both failed miserably in recent years.

Maybe I am missing the investment of a lifetime, but I'll nevertheless sleep far more peacefully than if I did invest some of my hard earned cash in an African Moringa tree project. You only have to cast your mind back to ostrich farming or Dubai property to see how 'amazing' (unregulated) investments can quickly turn sour...

Read this Q and A at http://www.candidmoney.com/questions/question460.aspx

How about a simpler tax system?

Our current tax system remains overly complex and, to some extent, dumb - the chancellor clobbers high earners with a hefty tax rate then gives them ways to avoid it. Would a simpler system work? .

The idea of a better flat rate State Pension, getting rid of much of the means testing and thus making saving worthwhile for more people, seems admirable to me. The catch is the problem of implementation. If it boils down to one regime for someone born on Tuesday, and a markedly different regime for someone born on Wednesday, it will never happen. Thus, there will have to be transitional arrangements. Still, the Government does seem close to joined up thinking on pensions, which is to be applauded.


Sadly, the same can’t be said of the policies on taxation. We want economic growth. So we want people to move to where the work is. So when they move we’ll hit them with stamp duty. When they retire, we want them to stay fit and healthy in their own homes for as long as possible. To achieve this, many will have to move. So when they move, we’ll tax them. Taxes on mobility are plain stupid. It baffles me that there is no political support for doing away with them altogether.


Having gone through the annual farce of shifting money around to minimise the tax liability, it also occurs to me that there is no political support for dumping a lot of the allowances that only benefit the relatively well off. Half of us have no savings at all, so the tax breaks are a hollow joke.


Suppose, just suppose, that all income and capital gains were taxed at the same rates. Then suppose that the top rate of tax would be 30%, but that ISAs and Pensions would no longer carry tax breaks (they would cease to exist). National Savings would not have tax free products. Insurance bonds onshore and offshore would have to generate taxable income and capital gains. To my mind, it would be a lot fairer than the present mish mash, where the Chancellor taxes you at 50% and at the same time designs all manner of ways for you not to pay tax at 50%.

Read this article at http://www.candidmoney.com/articles/article220.aspx

Thursday, 21 April 2011

Can I withdraw my money from Assured Fund?

Question
I have units in the Assured Fund C Class KY GBP managed by Policy Selection Limited. This is a traded life policies fund. The fund managers are not responding to enquiries. What can you tell me about this organisation and fund and how I can get my money out of it?Answer
The fund is managed by Cayman Islands based Policy Selection Limited (PSL) and administered by Isle of Man based Blue Sea International. The fund is still running and you should be able to get your money out, although the fund does sometimes have a redemption waiting time of several months or more if there are more sellers than buyers..

According to PSL's latest newsletter annualised performance of C GBP class units since launch (November 2004) has been an indifferent 4.96% and overall fund size is $430 million. Performance since early 2009 has been particularly choppy, with C units down around 10% since then, largely due to exchange rate volatility (the underlying life policies are traded in US dollars and although I think this fund might hedge currency risk, it doesn't appear to have done so sufficiently to avoid fluctuations).

Anyway, to sell units I'd contact the administrators (contact details in the above newsletter). And, in the unlikely event they don't help, contact PSL's UK office - contact details here.

Good luck getting your money out.

Read this Q and A at http://www.candidmoney.com/questions/question438.aspx

Wednesday, 20 April 2011

Is Cofunds ok?

Question
I've recently being given the name of a financial adviser who I'm now working with and who is starting to guide me on the right path with some inheritance money I've been left, which is more than can be said about financial advice I got from Barclays!!

He advised me on a number of options and with his guidance he has started to invest some of the money with Cofunds, who I expect you're familiar with the company name. Could you tell me if this company has a good reputation within the market place as I value your opinion.Answer
Yes, I'd be wary when taking financial advice from banks - in my experience it's all too often flawed and/or biased.

Cofunds are fine, but they're effectively only an administration company who provide a fund supermarket platform - what really matters are the investments held within.

Fund supermarkets are a good idea as they allow you to mix and match investment funds from a range of different fund managers in one place - especially useful when you want to mix different funds within your annual ISA allowance. In this respect Cofunds is really no better or worse than its competitors. My only gripe is that they make it difficult to transfer ISAs away to a different supermarket, but this is unlikely to be a problem given you're just starting to invest.

The success of your investments will depend on the funds that the adviser has recommended you hold within Cofunds. As there's over 1,500 to choose from it's hard to second guess here what they might be. But if you care to post a list below I'd be happy to give a brief opinion.

The funds chosen should be suitable given your objectives and the amount of risk you're comfortable taking. Also make sure the adviser is using your ISA allowance and, if relevant, plans to make use of your capital gains tax allowance.

Finally, too many advisers don't bother looking after their clients after the initial 'sale'. So seek re-assurance from your adviser that they'll continue looking after you (most likely in return for receiving 'trail commission of about 0.5% a year), including monitoring your funds and making suggestions for changes when appropriate, for example if there are fund manager changes or a change in your situation.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question459.aspx

Saturday, 16 April 2011

What to do when ISA interest drops?

Question
I have taken out a new isa each of the last 3 years. What I find is, in the first year the interest is very attractive then after the year is up the interest rate drops, hence me starting a new one each year. So the 3 isas I now have attract very little interest, what would you suggest I do?Answer
This is an annoying common practice amongst banks and building societies. They offer a competitive rate at the outset, often including a temporary bonus, which subsequently declines to a paltry rate a year or two later.

The reason banks and building societies can afford to pay very tempting rates on new accounts is that they're paying pretty awful rates to the majority of their existing customers. And they hope that attracting new customers will give them an opportunity to 'cross-sell' other products and services.

Fortunately it's pretty easy to play them at their own game by moving to a better rate elsewhere once they become uncompetitive.

In your case you can transfer your cash ISAs to a new provider(s). All you need to do is choose a competitive account and ask that provider for a cash ISA transfer form, complete this and they'll handle the rest. The process might take a few weeks (banks and building societies tend to drag their heels) but it's very easy.

And when the new account(s) becomes uncompetitive just repeat the process again. The only thing to check is that your existing ISA provider doesn't charge a penalty for transferring away - rare for variable rate accounts but worth checking nevertheless.

Read this Q and A at http://www.candidmoney.com/questions/question455.aspx

Friday, 15 April 2011

Should you be worried about unregulated investments?

If you own 'unregulated' investments could you end up losing your shirt if things go wrong? Or is there nothing to really worry about?.

Traditionally, most investments you'd ever likely hold within your ISA or pension will have been regulated by the Financial Services Authority. This gives a valuable security blanket for two reasons:



  1. Investment companies authorised and regulated by the FSA must adhere to quite a few rules and criteria, which should weed out the cowboys (although, the system has sadly not proved infallible).

  2. If you lose money due to fraud or mis-selling then you can lodge a compensation claim via the Financial Ombudsman Service (FOS). And, if the offending company or adviser is no longer solvent to pay your claim, you'll be covered by the Financial Services Compensation Scheme (FSCS) which currently covers 100% of the first £50,000 of investments per person per firm.

But with unregulated investments becoming more common there's an increasing risk you won't benefit from such protection, so it's important to know where you stand.


What are unregulated investments?


Very simply, they're investments that are not regulated by the FSA. This can include shares, investment trusts, offshore funds (including exchange traded funds) and other unregulated collected investment schemes (UCIS). Note: an overseas investment might be unregulated by the FSA but regulated by a similar overseas authority.


Just because an investment is not regulated by the FSA it doesn't mean it's unsafe. But it does give cause for concern if higher risk and/or potentially dubious investments are bought by inexperienced investors who don't understand the risks they're taking and won't benefit from any investor protection if things go wrong. The FSA has been particularly concerned lately over UCIS that invest in higher risk overseas property ventures (e.g. African plantations and geared property funds ).


Are unregulated investments always unprotected?


Not necessarily, and this is where things can get a bit confusing.


If you purchase an unregulated investment on the advice of a FSA authorised and regulated financial adviser then you would be covered by the FSCS if you lose money via fraud or mis-selling, but only if the adviser becomes insolvent. Otherwise you'd have to take your compensation claim to the adviser and, if unsuccessful, to the Financial Ombudsman Service (FOS).


If you buy direct from an unregulated investment provider, via a non-FSA regulated financial adviser or on an 'execution-only' basis then you won't enjoy any UK investor protection. For example, if you buy an investment trust on the advice or a regulated financial adviser or via an investment trust company's regulated 'share plan' then you will be covered by FSA regulation and protection. But buy the same investment trust via an execution-only stockbroker and you won't be covered.


When buying overseas regulated investments always check whether you're covered by any local investor protection and compensation schemes. European Union members must have such schemes in place, but outside the EU it can be a rather hit and miss affair, so check carefully.


Does holding an unregulated investment within an authorised/ regulated SIPP mean I'm protected?


No. Holding an unregulated investment within a regulated SIPP doesn't automatically give FSA protection. And SIPP providers will also usually absolve any liability for the investments you choose to buy via their trustee agreement. So buy an exchange traded fund or unregulated offshore property investment within your SIPP and that investment won't be covered (unless bought on the advice of a regulated financial adviser).


Should I be worried if I own unregulated investments that aren't covered by any compensation schemes?


Maybe, it really depends on how much potential risk you're taking.


If you buy an exchange traded fund run by a large European bank then the risk is generally low.


Firstly, the fund must 'ring-fence' its assets via a third party, called a custodian. If these assets are shares in the companies of the index being tracked then, with the (very unlikely) exception of fraud, there's not much that can go wrong (ignoring the loss of money from falling share prices). If the assets are instead 'synthetic', i.e. a financial instrument whereby another bank (counterparty) agrees to pay the index returns, then there's a bit more risk as the counterparty could go bust (although under EU law counterparty exposure within a fund can't be more than 10%).


And secondly, even if the fund did lose money due to fraud the bank providing the ETF would likely step in (assuming they're still solvent) and compensate to avoid damaging their reputation (although I'm less convinced they'd do so in the event of counterparty failure).


But buy an investment from a small unregulated company in an overseas country where you wouldn't fancy fighting for your money in court if things go wrong, then you're probably taking a risk too far.


Conclusion


As with most things in life, it boils down to common sense. Buying unregulated investments needn't be a bad idea provided you understand the risks and are comfortable with them. But make a bad decision and you could end up losing your shirt with little or no prospect if ever getting it back.

Read this article at http://www.candidmoney.com/articles/article219.aspx

Thursday, 14 April 2011

Is a group personal pension better than stakeholder?

Question
1) I have been invited to join my employers pension scheme but was slightly surprised to find that it was a group pension scheme rather than a stakeholder scheme given that I understood the latter were cheaper to administer and for me in terms of charges - the employer has less than 15 staff. The info provided clearly states that but I wonder what the advantages of them choosing this would be? The providers fees (Standard Life) are 1.02% overall for what appears to be a general managed fund. What are the basic differences between the two?

2) Never having invested in a managed fund (I manage my own SIPP) if I am allowed to go outside of this within the StL offer should I?

3) I also have a pension via another funds platform which I transferred in from another employer 20 years ago. It is contracted out of S2P. Do I have to contract out with this plan?

4) Should I be concerned that the commission paid to the FSA Adviser via an overarching support network is somewhat fluffy and just talks about a monthly commission based on the value of the investment rather than saying this how much I am getting for arranging this and this is the % each month/year

5) The key facts pension illustration shows it will not be paid to my dependant on my death. So what happens as I thought it was the norm that it was although you might have to accept a lower pension? Answer
Stakeholder pensions are really just a type of personal pension that must offer flexibility and low charges. The key stakeholder rules are allowing you to stop/start contributions and transfer your pension without penalty, and limit total charges to 1.5% a year for the first 10 years then 1% a year thereafter.

It's quite possible for a personal pension to have charges on a par with (or even lower than) stakeholder, but they could charge somewhat more - it varies depending on providers, specific plans and how much sales commission is paid to financial advisers.

Investment choice can vary, some stakeholders only offer a handful of funds while others offer more than some mainstream personal pensions

Why would your employer offer a group personal pension rather than stakeholder?

It might be that the scheme offers a very wide investment choice for the owners (perhaps at extra cost) and a limited (lower cost) investment choice for employees, which is less likely to viable with stakeholder pensions.

Or maybe a financial adviser has simply persuaded your employer a group personal pension is a good idea (because it's more profitable for the adviser than a stakeholder scheme!).

Either way, although an annual charge of 1.02% is not unreasonable (provided there are no other charges), having just one fund to invest in far from satisfactory. Even if the fund is decent, it's very limiting having no other choice.

If your employer will contribute money into a pension as part of your remuneration package then I'd be inclined to ask them to pay it into your existing SIPP instead of the group personal pension. They're not obliged to agree, but hopefully it won't be a problem given it's a small company. If they refuse then it's probably worth joining the group personal pension (as you're getting something for nothing) but ask if you can have a wider fund choice or use the single fund with the intention of transferring the money into your SIPP if/when you leave the employer (make sure there's no penalty for doing so).

If the employer doesn't pay any money into the pension for you then there's little point joining the scheme. You could continue using your existing SIPP or use a lower cost stakeholder pension if you want to make your own ongoing contributions.

You don't have to contract out of the S2P with a money purchase occupational pension (which is what a stakeholder/personal pension is) and, in any case, even if you want to this is being abolished from 6 April 2012.

Any commission paid to a financial adviser should be clearly stated as a percentage and amount. Provided the commission is absorbed within the 1.02% annual charge you'll pay then I wouldn't worry too much about it, but do ask for it to be clearly disclosed. Also make sure there are no additional charges, including penalties for stopping contributions or transferring the fund to another scheme in future.

The rules covering what happens to a money purchase pension should you die before taking benefits are standardised: a nominated person can receive the pension fund as a tax-free lump sum (it's taxed at 55% above the lifetime allowance, currently £1.8 million) or dependent's can receive it as a taxable income. If the lump sum and you haven't nominated someone to receive it then the money will pass into your estate hence could be subject to inheritance tax.

If you've already taken benefits using an annuity then any spouse's income on your death will depend whether you selected this option when buying the annuity. But don't worry, it makes no difference whether or not this is shown on your illustration now - it's a decision to be made in future.

Read this Q and A at http://www.candidmoney.com/questions/question454.aspx

Are some fund supermarkets discount brokers?

Question
This is a Fund Supermarket / Discount Broker question about a "who does what" and arises from an article I read recently in the Daily Telegraph Saturday April 2 , 2011 on page Y3 of the Money Section .

Emma Wall's article under the sub heading "Forget the Fee" says "Initial charges when you buy a unit trust can be up to 6pc , but use an online platform and often the charge is waived. Platforms such as Fidelity Fundsnetwork , TQ Invest or Hargreaves Lansdown are discount brokers , meaning they absorb the initial charge on many of the funds you can buy through their websites." This surprised me a little and thought further clarification would be useful .I was aware that Hargreaves Lansdown "did both" as it acts as a Supermarket in its own right with its "Vantage" service and also offers a discount with Vantage and with some other providers (like Fidelity).But I was not aware that Fidelity on its own could be classed as a Discount Broker . Clearly competition and evolutionary changes can change the perceptions of what providers like Fidelity do and my own perception could be out of date.

Do you agree with Emma Wall that Fidelity is a discount broker or is it a matter of degree? Is the "division of labour" between the two , blurring at the edges a bit ?.If they are both discount brokers I need to ask myself the question : Why do I need to use one discount broker (Hargreaves Lansdown) to "feed into" another discount broker (Fidelity) !!). I have always regarded Fidelity as a FundSupermarket only but is this a too simplistic an approach in todays market ? To what extent would discount be available going direct to Fidelity?

Is the market slowly moving to simplify the distribution process by going from 3 "hubs" these being :- fund managers , supermarkets , discount brokers to just 2 hubs : - fund managers and "discounting" platforms/supermarkets?

Answer
Let's start by using an analogy (cars) to explain who does what.

Fund providers are like car manufacturers, they make the product. They might also sell their cars direct to public, but usually at the full list price.

Fund supermarkets are like car distributors, they sell the product of many manufacturers. The distributor might sell discounted cars direct to public via its own supermarket, or instead only deal via the trade, selling to smaller dealers.

Discount brokers are like car dealers who buy cars via distributors or manufacturers and trim their profit margin to undercut manufacturer (and maybe car supermarket) prices.

The above doesn't quite translate to funds, but hopefully give you a clearer idea of who does what.

In the fund world confusion can arise because fund supermarkets or 'platforms' might offer their services via different routes.

Some will only deal via financial advisers, including discount brokers, (e.g. Cofunds and Skandia), others only direct to the public (e.g. Hargreaves Lansdown) or, in the case of Fidelity FundsNetwork, a combination of the two.

If we assume the investment choice and service offered by the various supermarkets/platforms is similar, then what really matters is whether you want to get advice (in which case you'll probably end up on the platform preferred by your financial adviser) or you prefer to shop around for the best discounts.

Most discount brokers use third party fund supermarkets, such as Cofunds or FundsNetwork. The amount of discount given is determined by the discount broker and basically depends on how much fund commission (typically 3% initially and 0.5% annually) they wish to give up.

Discount brokers who run their own fund supermarket, i.e. Hargreaves Lansdown, have a bit more pricing power as they also pocket the fee fund supermarkets charge fund providers for featuring in their supermarket, typically 0.25% a year. This means they can rebate some trail commission while still making a healthy margin, albeit they incur the expense of running the supermarket.

When Fidelity FundNetwork sells direct to the public it is effectively acting as a discount broker for its own supermarket (like Hargreaves Lansdown), but not a very competitive one. There are no trail commission rebates and initial charges average 1.25%, so Fidelity is keeping a lot of commission for itself. You'll almost certainly save more money buying via a third party discount broker - I can't think of any reason why you'd want to buy direct from FundsNetwork.

With more fund supermarkets/platforms likely to be launched over the next couple of years by both fund providers and advisers/discount brokers, the marketplace will invariably become even more cluttered and confusing. And yes, the distinction between fund providers, discount brokers and fund platforms could, in some instances, become blurred.

But as a customer all that really matters is seeking out the best deal and service for your needs and this shouldn't change despite an evolving market.

And if you do make a decision that you later regret it's normally straightforward to move investments from one platform to another. Just bear in mind that Cofunds, FundsNetwork and Skandia continue to treat customers unfairly by not allowing them to transfer their ISAs 'as-is' (i.e. re-register) to another platform - customers will instead have to incur the expense and hassle or selling the investments, transferring cash and repurchasing on the new platform. The FSA has said this practice must end by the end of 2012.

Read this Q and A at http://www.candidmoney.com/questions/question452.aspx

Tuesday, 12 April 2011

Investing in food

Is it too late to profit from booming food prices?.

Rising food prices over the last year have been a key inflationary driver - the other being energy prices.


On the one hand this is bad news, it pushes up the cost of living for us all. But on the other it's been a great source of profit if you've invested in food. If you haven't already invested, is the party over? or might you still make money?


Let's take a look at the main things to consider.


What are food investments?


Food, often called 'soft commodities', comprises 3 main areas: grains (e.g. corn and wheat), other crops (e.g. coffee and fruit) and livestock (i.e. meat).


Each of these foodstuffs is bought and sold on global markets, so it's possible to invest and trade. However, it's not easy buying a few tonnes of wheat then storing it in the hope the price rises, so many investors use futures contracts instead. These allow you to buy or sell an agreed amount of food at an agreed price on a specific future date. You don't ever have to own the food as you can sell the future contact to someone else before the due date.


What affects food prices?


As with any commodity, price is determined by supply and demand, so we need to consider the main factors affecting this:


Weather (supply)

Bad weather usually hurts crop production, reducing supply. For example, Russia last year endured its worst drought in 50 years which, according to the US Department of Agriculture (USDA), reduced Russia's annual wheat supply by around a third.


The problem with weather is that it's unpredictable, better weather this year could boost supply hence soften prices, or draught could continue and probably further push up prices.


Emerging markets demand (demand)

Food demand from developed countries tends to be fairly stable. But it's growing from emerging markets, as increasing prosperity leads to more demand for food and a shift in taste.


Figures from the International Coffee Organisation (ICO) suggest that consumption by coffee producing (mostly developing) countries has grown around 40% over the last 10 years, whereas developed country consumption has only increased by around 5% over the same period.


If these kinds of trend continue then a sustained long term increase in demand for many food stuffs seems inevitable, especially those that have traditionally been more restricted to developed markets.


Alternative fuels (demand)

Some crops, notably wheat, corn, rapeseed and sugar are used to produce fuel (called 'biofuel'). Demand for biofuels is affected by both legislation (i.e. governments forcing more biofuel use) and the price of oil (the higher the oil price the greater the attraction of using crops for fuel rather than food). As the long term trend is currently towards greater use of alternative energy (and greater energy consumption altogether), we can expect biofuel demand to continue growing future.


Decisions on what to grow (supply)

If practical, farmers will often switch crop production if they think they can earn more by growing a different crop. This means that crops with especially high prices may well see supply catch up over time, potentially pushing the price back down. This is hard to predict, but does tend to cap demand exceeding supply medium term, for most soft commodities.


Reserves (supply)

Most crop producing countries hold stocks of crops in reserve to help tide over periods of surging demand or reduced supply. When reserves are high you'd expect prices to be less sensitive to growing demand or falling supply than if stocks are low - so this factor can also affect prices.


Currency

Most food is traded globally in US dollars, so movements between the dollar and pound will affect returns for UK investors. For example, if the pound strengthens against the dollar this will reduce returns for pound sterling investors (and vice-versa).


Does supply keep up with demand?


Getting hold of accurate figures isn't easy, but the USDA publishes data for some crops, for example:





























2008/092008/092008/09
CropProducedDemandBalanceProducedDemandBalanceProducedDemandBala nce
Corn799782+17812815-3815838-23
Wheat682641+41684652+32647663-16
Source: USDA to April 2011.

What about past performance?


Looking at the above figures it's not hard to see why some food prices, such as corn, have soared in price by around 80% over the last year. Demand is generally growing faster than supply, exacerbated by poor weather reducing supply over the last year. But prices can crash too, the corn price almost halved between June 2008 and June 2010. Like many commodities, investment speculation is often to blame for such excessive volatility.



























Crop20072008200920102011
Corn ($US/tonne)169234164159290
Sugar (¢US/pound)10.412.912.919.325.9
Coffee (¢US/pound)117148128162294
Source: IMF prices as at 31 March each year.

Will prices rise in future?


Although there is scope to grow more crops around the World, it may be that practical and political constraints (e.g. restricting the chopping down of rainforests to grow food) will curb growth to some extent. The key is whether demand continues to grow faster than supply - and if emerging markets continue their meteoric growth there's reason to believe this might be the case.


But shorter term prices could remain as erratic as the weather - literally. And demand for crops used in biofuel production will continue to influenced by oil prices. Both these factors are very difficult to predict, making short term food investing quite a risky gamble.


I'm a fan of long term (10-20 year) soft commodity investing, but I'd be nervous trying to predict prices over the next year or two - other than to say if the weather improves then prices will probably fall back on the crops most affected by drought last year.


How can I invest in food?


Buying futures directly isn't that practical for most of us, although you can get similar exposure quite easily via spread betting companies.


A simpler (and arguably less risky) way of investing in food is to buy an exchange traded commodity fund, like those offered by ETF Securities. These use futures to track crop prices in return for annual charges of around 0.5% a year.


Or you can invest in the shares of companies that stand to benefit from rising food prices. These might include agricultural equipment, fertiliser and seed suppliers, as well as food producers themselves (e.g. Tate & Lyle and Associated British Foods).


The risk with this approach is that negative stock market sentiment and/or operational problems (think BP) could affect their share price regardless of underlying commodity prices. Plus it's less flexible as you can't bet on specific crops unless you can find a company whose sole business is that crop.


You can spread risk via the shares approach by using funds that invest in a range of 'food' shares. There are only a handful of onshore funds so far: First State Global Agribusiness, Baring Global Agriculture, Sarasin AgriSar and CF Eclectica Agriculture.

Read this article at http://www.candidmoney.com/articles/article218.aspx

Monday, 11 April 2011

How can I get a good cash rate in my SIPP?

Question
I have over £1 million in cash in my SIPP which is with Suffolk Life. I am receiving very little if any interest on this cash which is mostly in GBP but some is in Euros and some in US$.

I want to earn more interest on this cash. Suffolk Life do offer to place these fundd on deposit with 3rd party banks and building societies but receive fees for themselves for this service and the rates are very low and the charges high.

I thus think I need to find either a financial adviser that will pay good rates on cash (v difficult I think) or change my SIPP provider to one that does pay good rates on my cash.

You were quoted in the FT on 19th February saying "next big step forward could be more choice on cash". Can you tell me of any SIPP providers or advisers that will do this?

I can only find Fair Investment Company but that charges a fee of 0.85% which is £8,500 p.a. for my SIPP.

Have you got any other ideas how I can get a better rate of interest on my SIPP cash?Answer
At the cheaper end of the SIPP market decent cash rates are non-existent. Providers such as Hargeaves Lansdown and sippdeal offer just one cash account - their own - paying next to no interest (up to 0.25% and 0.1% respectively).

It's a very nice earner for the SIPP providers but a terrible deal for customers. They get away with it due to lack of competition and I suppose the majority of customers hold little cash so they don't kick up a fuss. My comment in the FT was aimed at these providers offering more completive cash accounts from a range of banks and building societies at some point. I'm pretty sure it'll happen, but think it's probably 2-3 years away.

Fair Investment has taken a step in the right direction by offering a Scottish Widows Bank Account paying up to 2% a year via its SIPP but, as you point out, the 0.85% annual SIPP fee rather negates this.

So to get a reasonably attractive cash rate you still currently need to open a 'full service' SIPP, which comes at a price. And, even then, you might still be restricted to a range of savings accounts paying paltry rates of interest - Suffolk Life being a prime example.

If you want access to any savings accounts permitted in a SIPP then the AJ Bell Sippcentre SIPP might fit the bill. Annual charges seem to be around £300 so it could prove cost effective given the size of your pension fund.

You can then shop around for the best savings account deals, although you're still restricted to savings accounts that banks and building societies allow to be held within a pension - with generally lower rates than you can get via conventional savings accounts (probably because the banks don't much fancy their chances of cross-selling you other products). Nevertheless, there are still some reasonable rates on offer, best buys at the time of writing include:

The Anglo Irish Bank (Isle of Man) Access account paying 2.6% on sterling, 2.25% on euros and 1.5 on US dollars.

Investec Pension and Trust Reserve Account (min £25,000) 2.25%, 1 month notice.

Scottish Widows Bank 5 Year Fixed Term Pension Fund Deposit Account (min £10,000) 4.5%.

You might find the Investment Sense website helpful as they display a list of savings accounts available for SIPPs.

But, a word of warning. Pay close attention to the amount of investor compensation offered by the scheme covering your chosen account(s) (e.g. for those covered under the FSCS it's £85,000 per institution), else your strategy of using cash for safety could backfire in the unlikely event your chosen bank(s) goes bust.

As an alternative you could consider short dated gilts (and/or equivalent euro/US bonds), which are arguably safer than savings accounts (the UK Government is unlikely to default), although current yields to redemption aren't very exciting - about 1% for 1 year and 2% for 3 year.

Hope this helps.

Read this Q and A at http://www.candidmoney.com/questions/question451.aspx

Will I be a state pension loser?

Question
Hi again Justin - you gave me such good advice previously and I am now back with another question.

I was very pleased to hear that the pension was going to rise to a set amount of around £140 a week come 2015/2016 - I then got deflated on hearing that this will not apply to people who are already receiving a pension. Can you please confirm that this is indeed correct?

If it is I think this is very unfair, especially to people like myself who only receives around 2/3 of the basic state pension (reason being is that I paid a married womens rate years ago as was not advised that this would affect my pension later on). If I had had this knowledge, I would certainly have put the full amount in.

I have worked most of my life (even doing an evening shift in order to be home for the children in the day and supplementing it with hours in the day when children were at school). So you see, I have paid a lot of NI and tax most of my life - 65 this year and still working mostly because I enjoy what I do. Why is the government going to cause such a divide between pensioners if this is the case?

Looking on the bright side (you can usually find one if you look hard enough) my personal allowance will be going up to nearly £10,000 and as I am still working I can reap the benefits.Answer
Good to hear from you again. I'm afraid I can't confirm whether any changes to the state pension will or will not apply to those already receiving their pension, for the simple reason the Government has yet to do so.

However, in its recently published 'consultation paper' (outlining proposals for its two preferred options) the Government clearly stated that those already receiving a state pension won't be affected by any changes - so it looks very likely we'll end up having a 'two class' state pension system.

It this proves to be the case it will be grossly unfair to people in your position, as you'll be receiving a significantly lower state pension than someone under the new system despite you both paying a similar amount of tax over the years.

But, on the flipside, it any changes did apply to existing pensioners then those who currently receive a decent level of SERPS/S2P (i.e. extra state pension) would probably lose out to some extent, so they'd be equally angry - seems to me it's a no-win situation.

There is no doubt that the state pension needs to be reformed. The current system will become increasingly unaffordable for the Government in future (demographics mean fewer people working to support more in retirement) and the pension credit system gives no incentive for many to save towards retirement (as they'll simply end up replacing 'free' state benefits).

But as the Government can't afford to increase state pension spending then any changes will invariably mean a large group of people losing out, making them (understandably) very unhappy. It risks being a big vote loser so will be interesting to see whether any changes do get pushed through during this parliament.

Read this Q and A at http://www.candidmoney.com/questions/question450.aspx

Are ISAs subject to Inheritance Tax?

Question
Are ISAs subject to Inheritance Tax?Answer
Yes, in so far as they will form part of the deceased's estate.

The ISA 'wrapper' ceases on the date of death. And while there is no income or capital gains tax payable up until that point, the underlying savings or investments will form part of the deceased's estate.

Any investments that were held within the ISA may be sold or transferred to beneficiaries, but either way there's no escaping inheritance tax if the overall estate is greater than the prevailing nil rate band (currently £325,000).

In general the only way to avoid inheritance tax is to give away assets and live for at least 7 years afterwards. This is not particularly practical with ISAs as the tax 'wrapper' can't be transferred to another person, so gifting away the contents of your ISA(s) means losing the tax benefits forever.

Read this Q and A at http://www.candidmoney.com/questions/question449.aspx

Friday, 8 April 2011

db X-trackers S&P 500 ETF reveiw

The US stock market is one where active fund managers tend to struggle to beat the Index. So using a tracker fund to get mainstream exposure to the US market seems a sensible strategy.


The key when buying a tracker fund is that it tracks an appropriate index accurately and cheaply, something the db X-trackers S&P 500 ETF (exchange traded fund) has done well to date.


db X-trackers is the arm of Deutsche Bank (Germany's largest) that offers exchange traded funds, so even though not a household name they're part of a very large institution. Probably just as well as like all ETFs (that I'm aware of), db X-trackers funds are not covered by the Financial Services Compensation Scheme (FSCS). So, unlike investments covered by the FSCS, in the very unlikely event you lose money (for a reason other than poor investment performance) you won't be entitled to any compensation.


The fund is allowed to use financial derivatives track the index (as well as holding actual shares) which adds a bit of risk, as the other financial company (called a 'counterparty') might not pay whatever they've promised as part of the derivative deal. The risk probably isn't especially high, in any case EU investment rules restrict such exposure to 10% of the fund, but it's something to be aware of.


So that's the nitty gritty out of the way, what about charges? With total annual charges (as measured by the total expense ratio) of just 0.2% this fund looks something of a bargain. And if you want a US tracker fund and can live with the counterparty risk mentioned above, then I think it is.


Bear in you'll need to buy the ETF via a stockbroker, so you'll have to pay dealing fees to buy and sell, but at least there's no stamp duty. As the fund is traded on the London Stock Exchange so should be available via most stockbrokers.


Because ETFs are domiciled (i.e. based) overseas it's important to check they have either 'distributor' or 'reporting' status, as without this any gains will be taxed as income which is generally not very efficient. Thankfully this fund has reporting status, so it'll be taxed in the same way as a UK based fund. Note: dividends are re-invested into the fund in a similar way to unit trust accumulation units.


The S&P 500 Index invests in 500 of the largest US companies. It's weighted by company size, so the largest companies will dominate, but overall it has a pretty good spread across a number of sectors, including energy, manufactured goods, financials, technology, pharmaceuticals, food, tobacco and healthcare.


When investing in the US you obviously need to be aware of currency risk. That is, dollar/pound currency movements will affect the value of your investment independent of stock market movements. This applies to most actively managed funds too, as few fund managers bother insuring against (i.e. hedging) currency risk.


All in all this looks a very cost effective way to invest in the US stock market. Just make sure you deal via a low cost stockbroker and understand the nature of investment counterparty risk.


Note: the review rating relates to the fund itself and not the investment prospects for the US stock market.

Read the full review at http://www.candidmoney.com/candidreviews/review59.aspx

Wednesday, 6 April 2011

Save tax by passing savings to my wife?

Question
I have a redundancy payment and retirement grant to put into cash savings - over and above my ISA allowance and other investments. As I remain a tax payer on my pension, but my wife isn't, what is the legal position if we put all the money into a savings account in her name? Could it be seen as income for her (a gift), or a capital gain?Answer
The legal position is that you're allowed to and it's usually a very good idea.

There's no tax on passing the money across to your wife. The interest generated in future from the savings will obviously be taxable as her income, but provided she's a non-taxpayer (if so, remember to complete form R85 to receive interest gross) or in a lower tax band than you then it'll save tax overall. And don't forget your wife could use her ISA allowance too (if she hasn't already).

Perhaps the only downside, in some people's eyes, is that it means trusting your spouse with your money!

Capital gains tax (CGT) doesn't apply to savings accounts, but if you have investments like shares where CGT does apply then it's also often sensible to split them with your spouse so you can use both of your annual capital gains tax allowances. There's no capital gains tax chargeable when transferring assets between spouses - the spouse is simply deemed to have purchased the asset at the original price their partner paid.

Read this Q and A at http://www.candidmoney.com/questions/question448.aspx

Is a MIP worthwhile?

Question
I have been advised by my IFA To take out a "qualifying savings plan" for 10 years to build up a tax free fund to pay for my kids university fees. He said if I pay in 12 k p.a. There will be life insurance built in of 90k. What is the tax position after 10 years? Does the life insurance remain? Are these plans a good idea? Is there a downside?Answer
The IFA is recommending what is generically called a 'Maximum Investment Plan' (MIP) - a type of endowment policy that focuses more on investment than life insurance

The 'qualifying' bit refers to a 'qualifying policy' which means provided you make the monthly/annual contributions for at least 10 years or three quarters of the term, whichever is lower, there'll be no further tax to pay at maturity/surrender.

However, it won't be tax-free, both income and gains will be taxed at basic rate within the policy along the way. So there's no tax saving for basic rate tax-payers.

Are they worthwhile for higher or top rate taxpayers?

Maybe, but they rank a fair way down the list of tax efficient investments. Better to use your ISA and capital gains tax allowances first (including those of your spouse if relevant) as well as a pension (if appropriate) and consider VCTs and EISs - although these can both be risky so be careful (see our specialist investment page for more info).

If you're already taking advantage of the above tax allowances (or at least the ones you're comfortable using) then a MIP might be worthwhile.

The main drawback (aside from not being as tax efficient as the allowances listed above) is that you're committed to making the £12,000 annual contribution each year for the next 10 years. Fail to do so and you could face a penalty and/or tax bill for doing so.

Qualifying policies also tend to pay high sales commissions - a commission based adviser might receive around £6,000 upfront for selling you a £12,000 a year MIP. Commissions ultimately come out of the charges you pay so it should prove much cheaper to buy a MIP via a fee-based adviser with a sensible rate card.

And if you do consider a MIP make sure it's with an insurer that offers a decent investment choice, including funds from other fund management companies, with reasonable charges.

Unless it would otherwise be very expensive for you to attain life cover then I'd largely ignore the cover via a MIP. It's low in the scheme of things (75% of the total premiums payable - the minimum allowed for a policy to be 'qualifying') and doesn't last beyond the policy itself.

You can read more about qualifying policies on our life investments page.

Read this Q and A at http://www.candidmoney.com/questions/question447.aspx

Tuesday, 5 April 2011

More flat state pension news

The Government has published a consultation paper on reforming the state pension, outlining two options to achieve a flat rate weekly state pension of around £140 in today's prices. Might you be a winner or loser?.

Firstly a very important point. Both proposals only apply to those retiring after the new system is introduced, so if you reach state pension age before then you should be unaffected.


Option 1 - Move the State Second Pension (S2P) to a flat rate by 2020


This would keep the existing basic state pension and accelerate moving S2P to a flat rate basis by 2020 (the current target is 2030). This means everyone would receive the same state pension for a given contribution period, regardless of earnings. But as the extra weekly pension (via S2P) will increase by a fixed amount (c£1.60) for each year worked, those who work longer could receive a higher overall pension.


Option 2 - Scrap S2P in favour of a flat weekly payment for all (no target date specified)


This means a single flat rate of state pension for everyone who meets the minimum criteria for a full basic state pension (currently 30 qualifying years). S2P would effectively be abolished and working for more than 30 years would not increase your pension.


What would happen to existing SERPS/S2P entitlement?


This is the key question for most of us - the proposals are as follows:


Option 1: Existing SERPS/S2P entitlement would be retained, although future entitlement will be at a fixed rate.


Option 2: Those with SERPS/S2P entitlement above £140 per week should benefit from a higher pension to reflect this, but in effect this means they will lose any benefit from SERPS/S2P entitlement between the basic state pension and £140 per week. Those who have contracted out will see their £140 state pension reduced, but no details yet as to how much.


Who might be the winners and losers from these proposals?













Option 1
WinnersLosers

Low earners might receive a higher overall state pension.


Those who work for more than 30 years could enjoy a state pension higher than the 'flat' amount.


Those with existing SERPS/S2P entitlement should retain their benefits.


Mid to high earners will receive less benefit from S2P than at present.


The self-employed won't receive a £140 weekly state pension unless provision is made for them to join S2P.

Option 2
WinnersLosers

Low earners and the self-employed will receive a higher state pension than at present.


Mid to high earning employees will probably receive a lower state pension than at present.


Those with existing SERPS/S2P entitlement will, to some extent, lose out.


Those who work for more than 30 years won't get any extra state pension.


Conclusion


There's little doubt that the current system of topping up a £97.65 weekly basic state pension to at least £132.60 via pension credits for those on low incomes needs changing. It provides no incentive for many to save towards retirement as they could simply end up replacing money the Government would have otherwise have given them for free.


However, any changes the Government makes will be cost neutral. So a higher flat state pension will effectively need to be funded by mid to high earners via reduced S2P entitlement (or scrapping it altogether), leaving them worse off than at present.


And if the Government pursues option 2 the issue of existing SERPS/S2P entitlement will need to be resolved - and as this is bound to leave to some people worse off it won't be popular.


But perhaps the biggest and most unpopular obstacle will be the 'two class' state pension system any changes create. This would especially be the case under option 2 where retiring just before or after the changes are introduced could mean a quite different state pension, for better or worse.


Have your say


The Government is accepting feedback, see the DWP website for more details on how to have your say.

Read this article at http://www.candidmoney.com/articles/article217.aspx

Some general financial advice

Graeme Laws dispenses some big picture financial advice..

A company chairman once wrote in his annual report that forecasting was a very difficult business, especially in regard to the future. Financial advice is always like that, but is now more difficult than usual. Anyone who reckons they know what is going to happen to the economy over the next ten months, let alone the next ten years, is clearly untrustworthy.


My own bet is that growth will be very modest, that taxes may rise but won’t fall, and that real interest rates will stay negative for at least the next few years. But it is only a bet. I have banged on about inflation before, so will simply restate that the Government appears to be quite happy that savers are being screwed by artificially low interest rates, and that inflation will, as it always does, work its redistributive magic. Best of all, it erodes debt. Except of course that a big chunk of our national debt is index linked.


Financial planning now needs to follow the best advice I ever had when I was learning to drive. Just assume that everyone else is an idiot: be prepared for the worst. If it happens and you’ve planned for it, you’ll cope. If it doesn’t, you’ll be quids in. And if you’ve got kids who want to go to Uni, move to Wales, because they won’t pay tuition fees.


The really brave will borrow up to the hilt now and invest in real assets, like houses. It might work, but they’ll look sick when interest rates jump and house prices go on falling.


Please do not bet what you really cannot afford to lose.

Read this article at http://www.candidmoney.com/articles/article216.aspx

Which is the cheapest stockbroker?

Question
Kitty asked a similar question in Oct 09. Can I have an update please? I am looking for an execution only sharedealer - online and/or by phone, preferably the cheaper. I have used my ISA allowance for 11/12 so am not interested in ISA wraps. I want to be able to place small purchases (max £1000) to track what could be my path to early retirement... Who do you recommend in 2011? Answer
The cheapest stockbroker I currently know of is x-o.co.uk, who offer online-only dealing at just £5.95 per trade. And, if you do eventually want an ISA wrapper they don't charge for it. You can read my review here. Otherwise, Guardian stockbrokers are also cheap for smaller deals, at 0.1% with a minimum of £8.

If you'd also like the facility to deal by telephone then Interactive Investor charges a flat £10 dealing fee for both online and phone trades. A free ISA wrapper is available too.

Read this Q and A at http://www.candidmoney.com/questions/question445.aspx

How can I top up my pension?

Question
I am a high rate taxpayer with a Government pension due in some years (I am currently 45 years old). I still have a dormant personal pension from the days when you could opt out of Serps. This is only worth £9000 today, as for various reasons I switched back to a Govt pension after I had taken out the personal one. It will currently not do me much good in 2032. I understand that I can now top it up and claim tax relief for doing so. What are my options for topping it up now - more to offset my current tax bill than to plan for a windfall when I am 65?Answer
The personal pension you have from when you 'contracted-out' of SERPs is generally called a 'protected rights' pension. It can continue to remain invested and when you eventually take benefits (i.e. a retirement income) you'll be able to take 25% of the fund as a tax-free cash lump sum.

Although your existing protected rights pension will remain unaffected, from 6 April 2012 the Government will no longer allow contracting out via occupational money purchase schemes, stakeholder or personal pensions, so only those will final salary pensions will have the option to contract out of the State Second Pension (S2P) from then. In any case, plans to introduce a flat weekly state pension would likely spell the end of contracting out if introduced.

If you wish to top up your pension provision you can do so via an occupational or personal pension. This would be via conventional pension contributions rather than contracted out.

Your only restriction will be an annual pension contribution limit of £50,000 from 6 April 2011, which includes any employer pension contributions.

If you're employed and your employer offers a pension scheme then it would be worth considering contributions via that scheme, especially if your employer makes contributions on your behalf and/or subsidises the cost of the pension.

Otherwise you might consider a stakeholder or self-invested personal pension (SIPP), particularly if you're self-employed. SIPPs are generally more expensive, but offer a wider choice of underlying investments than stakeholder. Whether it's worth paying the extra depends on how you wish to invest.

Whichever you choose, the tax relief works in the same way. If you contribute £80 the pension provider will automatically add a basic rate tax rebate (£20) so £100 is invested. You can then reclaim the 20% higher rate tax rebate (£20) via your tax return (or sometimes PAYE), meaning a £100 pension contribution has effectively cost you just £60.

The downsides of pension investing are your money being inaccessible until at least age 55 and the pension income, when eventually taken, being taxable.

Read this Q and A at http://www.candidmoney.com/questions/question444.aspx

Monday, 4 April 2011

How much can I borrow in my SIPP?

Question
Is my sipp able to borrow to increase it's value by 33%? Am I then able to take my tax free cash? Is the borrowing able to be carried over? What happens on death?Answer
Self-invested personal pensions (SIPPs) can borrow up to 50% of pension's assets for investment purposes. So, for example, a SIPP holding assets worth £100,000 could borrow £50,000. If the pension has already borrowed money this must obviously be deducted during the calculation.

However, SIPP providers normally only allow borrowing when purchasing commercial property, i.e. it's unlikely your pension could borrow money to buy shares.

Loan interest must be at a commercial rate (i.e. you can't lend interest-free to your own pension) and bear in mind that low cost SIPPs don't normally offer a loan facility - you'll need to use a more expensive 'full-service' SIPP.

Yes, you are able to take tax-free cash while the loan is in place, but if you've purchased a property there'll need to be sufficient other assets in the pension fund to pay out the cash (to avoid selling the property).

The loan provider will probably require the loan to be repaid on death, necessitating either the sale of the property or, more commonly, a life insurance policy being taken out at the time of the loan to protect against this.

Read this Q and A at http://www.candidmoney.com/questions/question443.aspx

How much pension contribution to avoid 40% tax?

Question
I would like to make an additional personal pension contribution to more or less recover all tax paid at 40% during the year. I have two part time jobs. One income is £45000 pa and has an occupational pension with a final salary pension. I pay 7.35% and my employer pays 14% contributions. The other income is £45000 pa and my employer pars 12% and I pay 10% into a personal pension. How can I calculate the additional payment please?Answer
Let's start with a bit of maths. Your earnings for the year are £90,000 and (assuming you're under 65) the threshold for higher rate tax is £43,875 (£6,475 personal allowance plus £37,400 basic rate band), so you'd need to make £46,125 (£90,000 - 43,875) of gross pension contributions to wipe out your higher rate tax liability.

Note, the above might be a little different if you receive taxable employee benefits, but let's stick with our simple example.

You've already made £7,807 of gross pension contributions (7.35% and 10% of £45,000) leaving £38,381 (£46,125 - £7,807) of further gross contribution required.

To make this contribution you'd normally pay £30,705 into a pension. The pension provider will then automatically reclaim basic rate (20%) tax to increase your contribution to £38,381. You can then reclaim the additional 20% tax, £7,676, via your tax return.

Just a word of warning: if your annual taxable income has exceeded £130,000 since April 2007 then you'll subject to the following restrictions:
If you increase existing regular (i.e. monthly/quarterly) pension contributions and annual contributions exceed £20,000 then you'll have to pay tax on the excess to remove the benefit of higher rate tax relief.
If you make ad-hoc pension contributions, then your higher rate tax relief is limited to the lower of your average annual contribution over the three years to April 2009 and £30,000. Any excess is again taxed to reduce the tax relief to basic rate.

From 6 April 2011 the annual pension contribution limit for enjoying tax relief will be £50,000 (including employer contributions) and the rule affecting those with incomes exceeding £130,00 will be dropped. It will also be possible to carry forward any unused annual allowance (calculated at £50,000) for the last three years.

Read this Q and A at http://www.candidmoney.com/questions/question442.aspx

Sunday, 3 April 2011

A travel insurance farce

Homogenised insurance policies can be a real pain when you don't fit a standard profile. .

Yet another computer crash has taken me off air these past three weeks. I was away for one of them, but only just. I would be interested to know if others have shared my nightmares with medical travel insurance.


Laws Junior was to be married in Houston, Texas. His brother was to be his best man, and I was to represent the wider family. But, of course, only a mug risks the trip without the appropriate insurance.


As it happened, I had fainted a few weeks back, and because I have a bit of heart history the GP had recommended that I should have a 24 hour ECG. With that test pending, I soon found that I couldn’t get any cover at any price. Anyway, the surgery’s ECG gizmo, which looked like something out of the ‘fifties, failed to function. Thus, I was despatched to a cardiologist, who managed to get two lots of tests organised in two days, and signed me off.


I obtained the cover in the end, but it cost about the same as the return ticket. Along the way, I must have done half a dozen call centre interviews. I have to admit that I was irritated by the question: “can you walk 200 yards on the flat without losing your breath? As it happens, I play golf on a fiendishly hilly course, and walk for an hour and a half every day with our faithful hound.


But what was most infuriating was that none of the underwriting algorithms seemed able to cope with the fact that I had unpleasantly high blood pressure in the year 2000, and was told then that if I couldn’t get it down I would have to have medication. So I got it down and was never prescribed medication. Along came the policy schedule, which stated that I had taken medication for high blood pressure. So I ‘phoned up to correct the simple error. The entire interview had to be gone through all over again because apparently that is what the FSA requires. And at the end of it all the insurer wanted another £20. I paid up because I had no choice.


There were no questions about family history. There were no questions about height and weight. So I reckon if I had been a 30 stone non-smoking alcoholic, with a father and three siblings all of whom had died of heart attacks before the age of 30, I would have got the cover on the cheap.

Maybe it is just a racket, like PPI. Has anyone out there had similar problems?

Read this article at http://www.candidmoney.com/articles/article215.aspx

Friday, 1 April 2011

Reclaim lost personal allowance via pension contributions?

Question
For high earners, how is income calculated when determining whether an income taxpayer loses their personal allowance in the 2011-12 tax year? For example, if you earn £140,000 and make a £40,000 pension contribution, is one's income considered to be £140,000 or £100,000 for personal allowance purposes? In other words, is it worth making a big pension contribution (subject to the £50,000 annual limit) in order to avoid the very high effective marginal rate of income tax on incomes in the low £100,000s?

P.S. Great site.Answer
Pension contributions are deducted from your income, allowing you to potentially reclaim your personal allowance when earning above £100,000 (the £6,475 personal allowance is reduced by £1 for every £ 2 earned above £100,000).

So, in your example of a £40,000 pension contribution when earning £140,000:

A £40,000 pension contribution would initially cost you £32,000 - as the contribution automatically enjoys basic rate tax relief.

You can then reclaim higher rate tax relief via your tax return (or, in some instances, PAYE). This equates to a further £8,000, meaning the £40,000 contribution has effectively cost you £24,000.

However, you can also reclaim the lost personal allowance as your income has now been reduced to £100,000. This equals an extra £2,590, calculated as 40% of your £6,475 personal allowance (i.e. the tax that would otherwise been paid on this amount).

This means your £40,000 pension contribution ends up costing £21,410 after tax relief. Putting this another way, pension contributions from income between £100,000 and £112,950 effectively enjoy 60% tax relief.

I've used the 2010/11 personal income tax allowance, but the concept remains unchanged for the next tax year (you'll just get more tax relief from the £7,475 allowance).

Just a word of warning on contributions made before 6 April 2011. If your income exceeds £130,000 you may not benefit from higher rate tax relief on pension contributions, see our pension rules page for more info. From next tax year pension contributions are unaffected by earnings, but a flat £50,000 annual contribution limit will apply.

Glad you like the site!

Read this Q and A at http://www.candidmoney.com/questions/question440.aspx

Oeic version of Capital Gearing Investment Trust?

Question
Capital Gearing Investment Trust has a very enviable long term record but has been consistently on a hefty premium.This makes buying it expensive.It is run by Peter Spiller.Do you know if the same fund manager runs a similar oiec or unit trust that one can invest in?Answer
I agree, long term performance has been good but the 18% premium at the time of writing makes it expensive. Although provided the premium when you eventually sell is similar to when you bought then it doesn't really make any difference.

There are two open ended versions of the Capital Gearing Investment Trust, run by CG Asset Management (of which Peter Spiller is CEO). Both aim for absolute returns by investing in cash and a range of fixed interest, commodities and equities, often using investment trusts for exposure.

The first, called CG Portfolio Fund, is closed to new investors. The second is the Capital Value Fund, which has a minimum subscription of £100,000 with weekly dealing.

So, I'm afraid, unless you have deep pockets then the investment trust remains the only practical way to access Peter Spiller's fund management talents.

Read this Q and A at http://www.candidmoney.com/questions/question441.aspx