Best financial calculator?

Question
What is the best financial services calculator?

I ask this because I realised that it was not just my skills that had gone a bit rusty but my trusty old calculator had too : killed by a leaking battery. I liked this calculator because it would compound up easily for me (eg: 1.04 * 10000 = 10400 and every time "=" was pressed it compounded it up. I tried my other very old basic caculators and found that unfortunately they did not respond to further "=" signs being pressed. So time to buy a new one

The question of the BIDMAS problem is also relevant in the choice of a new instrument. When I mentioned this to friends they scoffed maintaining that the basic structure of maths had been the same for centuries and that any equations would be unaffected.However when I emailed the problem "48/2(9+3)= " it was agreed that there was an ambiguity. So it was time to try a solar calculator from the early 1990s (a Texas Instruments TI-36X Solar) . Unfortunately its display would not accept the equation. So basically I am looking around for a calculator that compounds up easily with a display that will accept equations like the one above. Will this be easy to find with or without a solar option? Are calculators still used by the financial services industry?Answer
I'm afraid I'm probably not the best person to ask, as I've long since ditched my scientific calculator in favour of using a spreadsheet on my computer or the calculators I've built on this site.

If you have a spreadsheet program on your computer I'd strongly urge you to give that a go (if you haven't already) as I find it a lot easier to use than a tiny calculator screen. If you don't have a spreadsheet then there are a number of free options available, including Open Office Calc and IBM Lotus Symphony.

But if you prefer the convenience of a hand held calculator then the Casio FX-83GT Plus could be worth a look - it seems to have a screen that facilitates entering equations and retails for around £10 or less. However, I haven't used one so can't vouch for whether pressing the '=' button compounds (strange if modern calculators don't, as I remember pretty much all calculators doing this when I was a kid).

As for the question of whether the financial services industry still uses calculators, I'm sure some do but I think the majority tend to use spreadsheets or their employer's custom built software (or don't bother with maths at all, which is worrying...).

Read this Q and A at http://www.candidmoney.com/questions/question506.aspx

Switch Scottish Widows UK Growth?

Question
I have a Scottish Widows uk growth ISA which has never realy done anything I am thinking of changing it to Invesco Perpetual Income or the new launch Marlborough multi cap income fund. What do you thinkAnswer
I think changing to another fund is a good idea, as the Scottish Widows UK Growth fund performance has consistently been below average. Although Scottish Widows has changed managers on the fund several times over the years, this doesn't seem to have improved matters.

If you're fairly pessimistic about the economic outlook then Invesco Perpetual Income fund (or its sister High Income fund) looks a sensible choice. Manager Neil Woodford is fairly defensive with large holding in pharmaceutical, tobacco and telecoms companies - all of which should weather a downturn better than most (because consumer spending on healthcare, cigarettes and telephone calls tends to be unaffected by recession). These types of company also pay decent dividends, which can help boost returns (or reduce losses).

The Marlborough Multi Cap Income fund is arguably higher risk, as it'll have a higher exposure to smaller companies. Manager Giles Hargreave has an excellent track record over his long career and I don't doubt his ability, but his investment style is more aggressive than Neil Woodford's - while I think Hargreave might make you more money over 10+ years, there's probably greater scope to lose money shorter term.

Whatever you decide I'd suggest making the transfer via a discount broker that rebates trail commission, as this could save you a significant sum over time. Take a look at Guide to ISA Discount Brokers for more info.

Read this Q and A at http://www.candidmoney.com/questions/question505.aspx

Best way to invest my company money?

Question
I currently have a fairly substantial amount of retained profit in my limited company which I am reluctant to take out and pay higher rate income tax.

I do not expect to need any of this cash for 2 to 5 years and at the moment this is effectively being devalued with the effect of inflation.

What savings / investments are open to me to put this cash to better use?Answer
You can buy just about any investment via your company that you could buy personally, the only hassle being you can't obviously hold it within an ISA to escape tax.

Not all low cost stockbrokers allow companies to open an account, but SVS Securities does with a charge of £5.75 per trade. This route will allow you buy UK shares, investment trusts and exchange traded funds (ETFs).

If you'd prefer to buy funds like unit trusts then options are a more limited as most fund platforms/supermarkets don't allow companies to open an account. Skandia does, and purchasing via discount broker Club Finance should ensure you receive some commission rebates. Alternatively, TD Waterhouse allows companies to open a trading account, which allows you buy both funds and shares - although they're not the cheapest for funds. If readers know of other discount broker/fund platforms that allow companies to open an account please post below.

When it comes to savings accounts companies tend to get a raw deal versus individuals, as the best rates on offer tend to be less competitive. Nevertheless, reasonable deals can be found with some shopping around. You can view a list of current 'best buys' on theMoneyfacts website. The Investec Business High 5 account is also worth a look as it pays the average of the top 5 'best buy' accounts, reducing the risk that the rate will become uncompetitive in future. At the time of writing it pays 2.34% gross. If you don't mind tying the money up for 3 years The Principality Building Society pays a fixed rate of 3.24% gross.

As for how you should save/invest it really depends on how much risk you're comfortable taking and your views on markets etc. In these turbulent times I'd be nervous about investing in stock markets, commodities and property for less than 5-10 years. You might make money short term, but there's a fair chance you could lose it too given the economic outlook.

If you're happy taking a punt with some of the money I'd be inclined to focus on emerging markets and commodities - both pretty high risk but equally they probably have the most potential over the next 5 years. Or, for a (theoretically) less volatile ride perhaps consider high dividend shares (or equity income funds) where a decent income of around 4-6% (after basic rate tax) should help ease the pain of any stock market falls and boost profits if markets rise.

Protected capital plans (that typically protect your initial investment and link returns to a stock market index over about 5 years) are another option. I'm not a major fan, as the potential returns from such plans don't look great at present - because of the way they're constructed the current low interest rate/high market volatility climate makes these plans expensive to build, hence the terms aren't that generous. Nevertheless, they might appeal and some allow companeis to invest, discount broker Moneyworld provides a cheap way to buy (by rebating most of the initial sales commission).

Good luck.

Read this Q and A at http://www.candidmoney.com/questions/question502.aspx

How will commissions change from 2013?

Question
I understand that the rules regarding commission on financial investments are due to change in 2013. Have the new rules been published yet, or whether there has been any agreement as to how the new rules will apply.

Is it likely that existing arrangements for trail commission will have to be changed, or will previous arrangements continue as before?Answer
The new rules are the result of the FSA's so-called Retail Distribution Review (RDR), the aim of which is to give customers a fairer deal.

While still a work in progress, the main proposals/rules so far are:

• Product providers will no longer be allowed to build sales commission into the price of their product, hence commission will effectively be abolished. Financial advisers will be able to add their fees onto the cost of the product, very similar to commission, but the customer will have to agree this beforehand. However it seems commission will be allowed to remain for non-advised sales, e.g. when you decide to buy a fund via a discount broker. And commission paid on existing investments will be unaffected.
• Financial advisers who charge an ongoing fee must state how much this is and what they'll provide in return.
• Advisers will only be able to call themselves independent if they can advise on the full range of products suitable for you, else they'll be called 'restricted'.
• Advisers who sell their own funds (e.g. Towry) will no longer be able to call themselves independent unless they can show their funds have been considered alongside all others in the market and is most suitable for the client.
• Advisers will need to attain a higher overall level of qualifications than in the past.
• Fund platforms/supermarkets must allow investments to be transferred 'as is' between each other. And they'll the to disclose the fees they receive from fund providers.

All in all RDR should be a positive step forwards for consumers. They'll just need to adjust to the concept of explicitly paying for financial advice rather than continue with the misguided belief that financial advice is 'free' because it's paid by commissions - they couldn't be more wrong!

You can read more details in my article here.

Read this Q and A at http://www.candidmoney.com/questions/question501.aspx

How to check a credit illustration?

Question
How should a licenced credit broker set out its charges/costs/provide a financial illustration?

For example, is this correct and how would I know its accurate?
Price £12995
Deposit £6500
Amount of credit £6495
Charge for credit £2955
84 monthly payments@ £112.50
Total payable £16200 (yes it doesnt add up!)
Based on fixed flat rate of 6.5%
Typical APR 13.1% Answer
The Consumer Credit (Disclosure of Information) Regulations 2010 require certain information to be disclosed to consumers taking out an unsecured loan 'in good time' before they enter into an agreement. There are a number of items this information must include, I've listed the most important below:

• Type of credit
• Name and address of the lender (and broker if relevant)
• Total amount of credit to be provided
• Minimum duration of the agreement
• Rate of interest charged (including any conditions that affect this)
• APR and total amount payable under the agreement
• Amount, number of and frequency of payments
• Any other charges payable and associated conditions
• Warning regarding the consequences of missing payments
• Rights and penalties for early repayment

If this information isn't contained in or with a 'personal illustration' before you make the decision to borrow then walk and/or report the lender/broker to the Office of Fair Trading (OFT), who police consumer credit.

The illustration you've shown is a bit odd in that total payable is £250 more than the deposit and 84 monthly payments. There must be another charge somewhere which isn't disclosed (or, if it is, it's not clear). Either way, something looks amiss - perhaps an innocent mistake, but it's pretty fundamental!

To check an illustration is accurate start by totting up all the figures to ensure they're correct (as you did). You can check the APR figure by using the Loan rate APR calculator on this site. I just ran your figures and the APR came out at 12%, suggesting there probably is another fee (of £250) somewhere.

As an aside, an APR of 13.1% for borrowing over 7 years sounds high, although this will obviously depend on the financial position/credit history of the person borrowing the money.

Read this Q and A at http://www.candidmoney.com/questions/question504.aspx

Views on Bestinvest Select Service?

Question
Any comments on the new Bestinvest Select service Justin? The advertisorials I have seen look OK, including the FT, and allow purchase of shares and ETFs plus low cost entry to funds and some rebate of commission. The small print says that that a Custody Fee of £15 a quarter plus VAT is payable on each account, presumably your ISA and non-ISA accounts, if your accounts have non-commission paying investments. This is from the end of the first quarter and rebated commission, variable per fund, is payable after the first year. You may need a maths degree and lots of time to calculate if you are making a profit from the rebates if you use low cost trackers. It seems to make the idea of using trackers redundant.

Do you have any different or contrary observations that I might be missing?Answer
I recently wrote a review of the Bestinvest Select SIPP which you can view in the Candid Reviews section. But in summary my thoughts on the new service are as follows:

The charges, as you point out, are needlessly complex. For example, they vary depending on how much you have invested and whether trail commission is paid. I prefer the sippdeal approach (no annual fees and a single dealing fee) which is much cleaner and simpler. But it would be wrong to write off 'Select' just because of this.

If you have less than £50,000 invested then the Bestinvest Select service is pretty pointless. You won't benefit from any trail commission rebates and the dealing fee is an indifferent £12.50. Cavendish Online would be much cheaper for commission paying funds (held directly or in an ISA) while Sippdeal would be a more competitive SIPP option.

Invest £50,000 or more (which can include combined family portfolios) and things look a bit more interesting. Dealing fees (on shares/investment trusts/ETFs etc) fall to £7.50 and trail commission rebates kick in. While the dealing fee is a bit more than x-o.co.uk, it's the cheapest I'm aware of within a SIPP and, unlike Alliance Trust and sippdeal, it doesn't apply to funds. However, the trail commission rebates are nothing to write home about, at typically half the annual trail commission, i.e. 0.25%. Alliance Trust gives around double this, hence likely to be much better long longer term unless you're a very frequent trader.

As you mention there are annual 'wrapper' charges if you hold any non trail commission paying investments, which, let's face it, is almost inevitable in this day and age. Compared to some competitors the fees aren't excessive at £50 a year for the ISA and £100 for the SIPP (both plus VAT, charged quarterly), but it would be nicer not to have them at all.

All in all I think Bestinvest has come up with a good, but not outstanding, proposition for those with £50,000 or more invested. It kicks the Hargreaves Lansdown Vantage SIPP into touch (not hard these days) but is likely to be more expensive overall than Alliance Trust or Sippdeal (net of all charges and commission rebates). As for the ISA it's broadly comparable to Hargreaves Lansdown if you hold commission paying funds, that's to say there are cheaper alternatives around (e.g. Alliance Trust and Cavendish Online depending on what you hold and how often you trade).

Bottom line, if you want the cheapest deal then look elsewhere.

But the Select Service could be a useful alternative for existing Bestinvest clients with £50,000+ portfolios who like the company and its in-house fund research but don't benefit from or take advantage of the 'free' investment advice they should be receiving in return for the trail commission. Moving to Select means receiving some modest trail commission rebates, a wider investment choice and retaining access to the research (which, in my view, is higher quality than other discount brokers). The latter might even be sufficient reason for some to move across from competitors whose research is less rigorous - although you can view much of Bestinvest's research on their website for free...

Read this Q and A at http://www.candidmoney.com/questions/question500.aspx

Are fund performance fees justified?

Question
I recently decided to switch ( a small amount) out of Anthony Boulton's China Investment Trust (Fidelity China Special Situations ) and was looking for a replacemement investment vehicle . I already had some Melchior Asian Opportunities and decided to look at that as a possibility for a small additional investment. I checked Hargreaves Lansdown's latest isssue of their Investment Times (IT85) as I remembered that had a list of the funds that had been moved out of the Wealth 150 to a separate subsection of the Wealth 150 entitled "Funds with performance fees" : and it listed about 11 funds including the Melchior ST European Absolute Return as having been removed for this reason. Of course , it was easy to assume , as I did at first , that it was a more comprehensive list including all funds with fees.When I realised that it was not a comprehensive list (as Wealth 150 only) I checked the Key Features of the Melchior Asian Opportunities and found that it DID charge performance fees. I will try to purge my portfolio of any funds groups that charge fees (but a few have sneaked past me !!) but I will not sell the Melchior immediately: the dilemma will come with funds that have done quite well !!

The other fund groups listed by Hargreaves Lansdown's Investment Times include Blackrock , Cazenove , Ignis , Investec , JO Hambro , Jupiter , Liontrust , Old Mutual , Sarasin: but of course these are only the ones previously in the Wealth 150 and now in their own subsection.

I am not sure about Aberdeen . Do any any other fund groups charge performance fees?

Is it best to assume (with my strategy) that if a fund group attaches fees to ONE of its funds it is likely to do so on the rest possibly discretely and serreptitiously possibly in a way that will not be noticed.(ie Will I need to purge from my portfolio any funds in that WHOLE fund group even those that do not currently have fees : ie TAKE A VIEW of their likely future orientation in this area and invest accordingly ? ) .One of the unpleasant things about investment fees it that it appears they can be added after the initial investment has been made (Am I right about that?)So should investment in relation to fees (and the likelihood of them being serreptitiously introduced) be looked at at FUND GROUP level or at INDIVIDUAL FUND level?

I hope this makes sense.Answer
In theory I'm a big fan of performance fees because they should firmly align a fund manager's financial interests with those of investors'. But in practice I mostly hate them because fund managers are so greedy in the way they're implemented.

In my simple world a fund manager charging 1.5% a year (from which they keep around half, the rest is paid as commission and platform fees) should cut their basic fee to about 1% and then earn a performance fee on top of this if they outperform a comparable index. The level of performance fee should be such that they can collect the original 1.5% with modest outperformance and perhaps earn up to 2% or more a year if they excel. This means the manager can earn more than usual by performing well and just about keep their heads above water when underperforming (it's not really in our interests to see them go bust).

In practice the performance fees we've seen introduced to date are a joke. The manager keeps the standard 1.5% annual fee then adds a performance fee on top - i.e. there's no risk sharing on the manager's part. If they perform badly they still collect the usual 1.5% and if they perform well they pocket a lot more than this.

Worse still, some performance fees apply to any positive returns rather than just those above a benchmark index (called a 'hurdle'), so the manager could stick his fund in a savings account and still collect higher than usual fees. For example, Cazenove Absolute UK Dynamic charges 1.5% and 20% of any returns above the fund's previous highest price - it really is daylight robbery.

Why do some fund groups adopt such greedy practices? Simple, because they are greedy and generally get away with it!

The majority of funds that charge performance fees are absolute return. I think this stems from the hedge fund world, where managers are especially greedy and hefty performance fees are commonplace. Absolute return funds are effectively a type of hedge fund so their managers have mostly added performance fees and argued 'it's the norm for this type of fund'.

So where does this leave us as investors?

While I don't like hefty performance fees like those outlined above (that are a win/win for the fund manager) I concede they're probably worth paying if the manager consistently performs well. Not ideal, but if it's a case of using manager A who's really talented but expensive or manager B who's cheap but performs poorly, I'd obviously plump for the former every time if I think I'll end up with a higher return net of charges.

The trouble is, managers seldom always perform well, especially when it comes to absolute return funds. So even with a supposedly good manager you could still end up paying high fees for lacklustre performance at times (especially if the performance fees don't have a challenging hurdle).

However, where a fund group charges performance fees on its absolute return fund(s) I wouldn't lose sleep over the possibility of this spreading to their other funds. While I daresay it'll happen to an extent in future, I don't think it'll become commonplace.

I would love to say let's all avoid fund groups charging greedy performance fees with a view to encouraging them into giving customers a fairer deal. But being realistic it won't happen, after all there's still over £1 billion of money invested in the Virgin Tracker Fund which, at 1% a year, is more than 3 times more expensive than the cheapest comparable trackers on the market. Most investors are lethargic when it comes to transferring funds.

So in practice I'd avoid such funds where practical (i.e. good non-performance fee alternatives exist) but bite the bullet where you feel potential performance justifies paying high potential management fees. And let's hope there's a fund group out there that has sufficient nerve (and morals) to introduce a fair performance fee along the lines of my earlier proposal - giving the market a much needed shake-up.

Read this Q and A at http://www.candidmoney.com/questions/question499.aspx

Can I avoid inheritance tax with gifts?

Question
I am thinking of giving some of my assets to my kids and hoping that I will survive another 7 years so they escape IHT. At what point does the taxman calculate his due, at the start of the 7 years with a refund if I survive 7 years, after 7 years, or at the time of my death? Also how is the gift reported to the taxman?

Would your answer be different if instead of giving directly to my kids, I set up a trust?Answer
Inheritance tax is always calculated and paid on death. If you gift assets and live for at least 7 years thereafter, they'll be deemed (by HMRC - the taxman) to have fallen outside of your estate hence won't be liable to inheritance tax when you eventually pass away.

The one proviso when making gits is that you mustn't retain an interest in them, e.g. you can't give away a property and continue to live in it unless you pay a commercial rent.

While you don't need to notify HRMC when you make gifts, it's a good idea to keep notes (including bank statements as proof if applicable) so that the executor of your estate (whose job, amongst others, is to sort out inheritance tax) can take these into account if relevant.

If you were to die within 7 years of making a gift(s) then things become more complicated. Unless the gift(s) total more than the inheritance tax nil rate band, currently £325,000, then their full value effectively remains in your estate (as they must be offset against the allowance before anything else). Any gifts in excess of the allowance are subject to inheritance tax at a reduced rate of between 20% - 80% of the standard 40% rate, depending on how long ago the gift was made (see our inheritance tax page for full details).

The upshot is that unless you're making gifts in excess of £325,000, or expect to live for at least another 7 years, then there's probably little point in making any gifts.

There are however a few annual HMRC allowances that allow you to get money outside of your estate immediately: you can gift up to £3,000 a year in total (and carry forward last year's allowance if unused) plus as many gifts of £250 per person as you want. Wedding gifts of £5,000 for a son/daughter are allowed (£2,500 for other family members) and any gifts made from your taxed income (rather than savings) fall outside of your estate immediately.

Gifting money into trust doesn't really change anything, the main purpose of trusts is to give you control over what happens to the assets after you gift them (e.g. when and how the beneficiary(s) gets them) - useful if you want to stop a teenage grandchild blowing the money on frivolous activities.

The one exception is a discounted gift trust, which allows you to shift some of the gift outside of your estate immediately and receive regular withdrawals (i.e. an income) for life. Essentially, the part of the gift that will provide the withdrawals (called the 'discount') is not deemed to be a gift at all for inheritance tax purposes, because it'll be returned to you over time, so it falls outside of your estate straight away. The size of the discount increases with life expectancy and the amounts withdrawn. But there are also potential downsides - rather than cover discounted gift trusts in depth here, take a look at my answer to this earlier question for more details.

Read this Q and A at http://www.candidmoney.com/questions/question498.aspx

Understanding fund charge rebates

As annual fund charge rebates become more common, so does the confusion they cause. Read on to find out all you need to know to be confident of getting a good deal..

One topic that seems to cause more than its fair share of confusion is annual fund charge rebates, especially when buying via fund platforms/supermarkets/wraps (or whatever else you want to call them) and discount brokers. Fortunately it's quite straightforward once you understand what's going on, so here's the rundown:

What's in an annual charge?

A typical 1.5% annual fund charge breaks down as follows:

• 0.5% - paid as a 'trail' sales commission to financial advisers.


• c0.25% - paid as a fee to the fund platform on which the fund is held.


• c0.75% - revenue pocketed by the fund provider.

Whereas trail commission is fairly standardised at 0.5%, the c0.25% paid to fund platforms is harder to determine - primarily because the amount doesn't have to be disclosed to customers. I wouldn't be surprised if some platforms take more than this, particularly on bigger selling funds that are promoted via 'recommended' or 'best buy' lists. While this isn't really your problem , it comes out of the fund provider's margin, it does potentially give reason to take such lists with a pinch of salt (is a fund included on merit or because it's more profitable for the platform?).

How do fund rebates work?

There are two sources of potential rebate: trail commission and the platform fee.

Trail commission rebates (either partial or full) are given by some discount brokers - FSA regulated companies that don't give advice, but simply transact investments and collect commissions. These rebates are usually paid to your bank account or the cash account on the platform you're using.

Platform fee rebates are given by a few platforms who instead charge an explicit fee to customers for their services - i.e. they rebate the fee received from fund providers (to your cash account) and charge you a fee instead. What matters is whether the fee you're charged is higher than the rebated platform fee.

In some cases (e.g. via the Nucleus and Aviva platforms) it's possible to buy 'institutional' versions of funds which don't pay commissions or platform fees, so a fund normally costing 1.5% a year will instead cost around 0.75%, although you'll expect to pay a platform fee in addition.

What about discount brokers who operate their own platform?

Discount brokers like Hargreaves Lansdown, Alliance Trust and Bestinvest who operate their own platforms ('Vantage', 'i.nvest' and 'Select' respectively) collect both the trail commission and platform fee, meaning they're often paid half or more of a fund's annual management charge. Obviously they have to foot the bill for running a platform, but it does potentially increase their overall profits and/or ability to offer rebates to customers.

Focus on the bottom line

There are quite a few permutations of the above, buying funds direct from platforms, on platforms but via discount brokers or advisers and from platforms operated by discount brokers.

This means rebates can vary from zilch to around half the annual management charge, but the key is to look at the bottom line, i.e. what you'll end up paying after all rebates and extra charges. I've taken a look at a selection of options below to see how they stack up.

The figures show typical rebates for a fund charging 1.5% a year (held within an ISA) and include estimates of the amount you'd save on a £50,000 investment over 10 years compared to the standard 1.5% charge (assuming 7% annual growth before charges) and the net amount (margin) pocketed by the provider after rebates and fees. I've assumed fund rebates simply offset the annual charge - not strictly true if it's rebated as cash, but fine for comparison.

Platform purchased direct

Provider	Fidelity Fundsnetwork
Annual rebate	Nil
Other annual fees	Nil
Your net annual cost	1.5%
Potential 10 year saving	Nil
Provider's estimated annual margin	0.75%

Buy direct from Fundsnetwork and they'll be laughing all the way to the bank!

Platform purchased via discount broker

Provider	Cavendish Online (using Cofunds)	Clubfinance (using Skandia)	Fairinvest (using Nucleus)
Annual rebate	0.5%	0.375%	0.75%
Other annual fees	£25 one-off charge	£68.50 Skandia charge	Fairinvest 0.5%
Your net annual cost	1% plus one-off £25	1.125% plus £68.50	1.6%
Potential 10 year saving	£4,090	£2,134	-£806
Provider's estimated annual margin	Cavendish Online £25 (one-off)	Cofunds 0.25% Clubfinance 0.125%	Fairinvest 0.5% Nucleus 0.35%

Cavendish Online's one-off £25 revenue is so small I can't see them becoming rich from selling ISAs, still, it means a great deal for customers. Clubfinance keeps a quarter of annual commission, but is still reasonable value despite Skandia's charges. Although Fairinvest offers the highest annual fund rebate, charges actually end up higher than normal after they and Nucleus have taken their fees.

Platform purchased via financial adviser (assumes 0.5% trail commission paid to adviser)

Provider	Aviva Wrap	Standard Life Wrap
Annual rebate	0.75%	0.5%
Other annual fees	0.25% Aviva charge 0.5% financial adviser	0.5% financial adviser
Your net annual cost	1.5%	1.5%
Potential 10 year saving	Nil	Nil
Provider's estimated annual margin	0.25%	0.25%

Aviva offers institutional fund pricing, but net costs return to the usual 1.5% after their platform charge and trail commission have been paid. Standard Life does thing slightly differently, but with the same end result.

Platform operated by discount broker

Provider	Alliance Trust Savings i.nvest	Bestinvest Select	Hargreaves Lansdown Vantage
Annual rebate	0.5%	0.25% (only on £50,000+)	0.25%
Other annual fees	£30 ISA fee	Nil	Nil
Your net annual cost	1% a year plus £30	1.25%	1.25%
Potential 10 year saving	£3,716	£2,046	£2,046
Provider's estimated annual margin	0.25% plus £30	0.5% (0.75% below £50,000)	0.5%

Alliance Trust Savings leads the pack by rebating all trail commission, although partially offset by their annual ISA fee. Bestinvest and Hargreaves Lansdown look a bit stingy by comparison, typically rebating half the trail commission, which leaves them raking in around 0.5% or more a year - a lot more than the cheapest discount brokers (even after the cost of running a platform).

Conclusion

Fund rebates are a good thing - they can save you lots of money. But while some providers claim to be giving you a great deal, they end up pocketing far more for themselves than they rebate to you. Always look at your actual cost net of any other charges, as this can vary widely (see examples above).

Read this article at http://www.candidmoney.com/articles/article233.aspx

Switch from Bestinvest Growth Portfolio?

Question
I discovered your site last year and I have been meaning to congratulate you on what I find to be an incredibly informative, knowledgeable and comprehensive financial site. Please keep the articles coming, especially those that give the inside view on financial advisers and products.

Your article on financial adviser funds was of particular interest to me, as I have ISA funds in Bestinvest's Growth Portfolio. Better value may be found if I switched to other funds. The problem is which ones to choose? I know that a spread of funds around the world is the right way to go and that time in a fund, rather than timing, is essential.

Comments on selecting an alternative way forward would be much appreciated, though I realise you cannot give individuals specific financial advice.Answer
Thanks for the kind words and glad you're enjoying the site.

The Bestinvest Growth Portfolio has total annual charges (as measured by the 'total expense ratio' - 'TER') of 2.33% - this includes Bestinvest's 1.5% annual fee plus underlying fund charges. If you invest more than £50,000 in the fund Bestinvest's annual fee falls to 1%, cutting the TER to 1.83%.

If you're paying 2.33% that's rather steep, although 1.83% is not unreasonable for a fund of funds. Either way, charges are likely to be higher than Bestinvest's standard investment advisory service, which provides 'free' advice on portfolios of £50,000+ in exchange for the fund trail commission (typically 0.5% a year), where TERs are likely to average around 1.6% or less. And the Bestinvest Managed Portfolio route is a lot more expensive than using a discount broker that rebates all trail commissions (like Cavendish Online), where the effective TER will be around 1% a year on typical managed funds.

However, charges are only half the picture, performance being the other. If a fund of funds manager performs well you might still end up better off overall versus doing the job yourself.

This is a harder to gauge, as the only real basis for guessing the future success or failure of a fund of funds manager is to look at the past, which isn't particularly reliable, and form an opinion on their current fund holdings - not easy.

If we look at Bestinvest Growth Portfolio fund manager Graham Frost's track record to date it's mixed, essentially one good year, one bad and one indifferent. His track record across all the Bestinvest Portfolio funds is reasonable and he scores a respectable 79.4% on Bestinvest's Manager Record Index (MRI) measure (which estimates the likelihood a manager has added value due to skill rather than luck). Nevertheless, Growth Portfolio performance is hardly anything to write home about.

If you're comfortable choosing your own funds then buying via the cheapest discount brokers (list in our guide to ISA discounts) might see you end up better off than staying put, but this will obviously depend on how skilful/lucky you are at choosing funds.

Alternatively you might try your luck with another fund of funds manager with a better long term track record, the Jupiter Merlin fund range springs to mind (although they're expensive with TERs of around 2.5%).

Or, you could stay with Bestinvest but consider moving across to their investment advisory service if you have more than £50,000 invested. This should reduce costs and, provided the service you receive is good, your portfolio shouldn't end up looking too different to the Bestinvest funds of funds.

Read this Q and A at http://www.candidmoney.com/questions/question496.aspx

How much do you need to save for a comfortable retirement?

It's common knowledge that as a nation we're not saving enough towards retirement. But how much do you need to save to retire comfortably?.

The answer obviously depends on what you'd class as comfortable. But for the purpose of illustration let's plump for £18,000 a year, about two thirds of average earnings.

Assuming you qualify for a full basic state pension, we can knock off about £5,000, meaning you'll need to provide £13,000 a year from somewhere when you retire.

If you're fortunate enough to have a final salary pension then it's quite easy to guesstimate how much pension income you'll get, just multiply your total years of service by the scheme's multiple (e.g. 1/60th) and then your estimated salary at retirement (some final salary schemes are a bit more complex, but this is the gist of how they work). So someone earning £30,000 at retirement with 26 year's service in a 1/60ths scheme would expect an inflation-linked pension of £13,000 a year.

However, this assumes that your final salary scheme remains open until you retire and that you remain in the same job - both far less likely these days than in the past.

For the rest of us things are more difficult to predict, as our retirement income will depend on investment performance and, if you save via a pension, annuity rates.

If we assume an annuity rate of 3.5% for a non-smoker in their mid sixties buying an inflation-linked pension with 50% spouse income (on death), then they'd need to have a pension fund of about £370,000 to produce a £13,000 annual income.

How much do you need to save each month to build up £370,000? Well, it depends on investment performance and how long you have until retirement. I've calculated some examples below assuming a 6% annual return after charges:

Years until retirement	Monthly saving required	Value of £370,000 at retirement if 3% inflation	Inflation-adjusted monthly saving required
40	£193	£109,414	£402
30	£378	£148,373	£638
20	£812	£201,204	£1,129
10	£2,266	£272,847	£2,647

The monthly saving required (left hand column) looks quite horrific. But this doesn't take inflation into account - our £13,000 income will buy less at retirement than it does today if prices continue to rise. Factor this in (so that the £13,000 at retirement is in today's terms) with assumed annual inflation of 3% and the required monthly saving (right hand column) is enough to make you weep.

The trouble with assumptions is that they could be wrong. Investment performance, annuity rates and inflation could all end up high or lower than the figures I've used (and, of course, you might choose to retire younger or older), but I don't think they're that unrealistic. The required saving would be lower if we assume a flat (rather than inflation-linked) pension, but I think inflation proofing your pension income is pretty key if you expect to live for a while.

Where does that leave us?

In reality, probably with far less money in our retirement pots than we'd like. Which begs the question, should you bother?

You might decide to live life to the full and, in the words of Roger Daltry, "hope I die before I get old". Trouble is, Mr Daltry is now nearing 70 and looks in fine fettle (albeit I doubt he has to worry about his pension)...

Otherwise I think the only viable approach (if you won't have a decent final salary pension) is to save what you can, invest wisely and hope it's enough. Whether you use a pension, ISA, property or some other route to save for retirement doesn't really matter, the key is that you save into something that's robust, cost effective and has the potential to perform well.

Nevertheless, it's a good idea to keep tabs on your retirement pot and have a feel for what it could be worth when you retire. You could try using our 'How much will I get' retirement calculator - just bear in mind it requires making assumptions (like my very simple examples above), so take the outcome with a pinch of salt.

Read this article at http://www.candidmoney.com/articles/article231.aspx

Question
Coming up to 65, I find that, due to a varied career, I have three personal pension pots estimated to be worth about, £5k, £20k, and £50k. The terms of the contracts appear to mean that, effectively, I cannot transfer these before retirement/maturity without possible penalties.

My questions are:

is it possible for me to transfer all three at maturity into one pot to achieve a better annuity rate or can each provider insist I apply for an annuity separately?

If the latter is the case, does the '25% tax free commutation' apply to each pot separately or can I, say, commute the £5k pot, leaving me with turning the two larger pots into annuities.

Or is there a third way I haven't thought of?

Many thanks.Answer
Annoying that you can't transfer without penalty - many older personal pensions levy nasty penalties if you want to move to another provider (in part because they paid enormous sales commissions at the outset which they recoup over the life of the pension).

Annuity providers tend to give lower rates on smaller sums, so using a single annuity provider makes sense - especially as you'll likely want to use whoever's offering the best rate at the time for all three pensions.

Annuity providers normally allow you to combine several pensions when buying an annuity, so this shouldn't be a problem.

Technically there are two ways this can happen. The three pensions can be transferred 'as is' at retirement into a pension with the chosen annuity provider, from which the 25% tax-free cash can be paid and an annuity purchased straight away - this is called an immediate vesting personal pension. Or, the 25% tax-free cash can be paid out by each existing pension provider and the balance sent to the annuity provider who'll combine all three into one annuity - called an 'open market option'.

Pension providers must offer you an open market option (i.e. the ability to buy your annuity from another provider) while a immediate vesting transfer might be viable provided your existing providers cease to penalise transfers at retirement.

Both routes will probably lead to a wait and some stress at retirement because insurance companies tend to be rather inefficient at administration, but it's small price to pay if you can bag a better deal on the income you'll receive for the rest of life.

The 25% tax-free cash must be applied to each pension separately, although if you consolidate it'll be 25% of the combined £75k pot.

Before buying an annuity with another provider just check you won't lose any benefits, such as a guaranteed annuity rate, with your existing provider. I suppose the only reason for keeping the pensions seperate (aside from possible loss of benefits) is that it gives you the flexibility to take each pension at a different time, although.chances are you'll want all the tax-free cash and income when you retire.

Read this Q and A at http://www.candidmoney.com/questions/question493.aspx

Time to sell Northern Rock PSNs?

Question
Can I sell PIBs?

Also I have some pibs with Northern Rock, are these only fit for the bin or will I ever have any interest on them again?Answer
Without wanting to sound facetious, you can sell PIBs provided someone else wants to buy them.

The reason I say this is that the PIBs market is quite small and there can be a shortage of buyers, meaning they may be difficult to sell, especially at a decent price. The simplest way to find out is to ask a stock broker; Collins Stewart seems to be prominent in the PIBs market, but most others should be able to tell you if there are potential buyers and, if so, give you a price.

Your Northern Rock PIBs (actually called 'Perpetual Subordinated Notes' - PSNs - since they converted to a bank) seem to be selling for around 46p at the time of writing and there does appear to be market for them, so it should be possible to sell.

No news yet on if/when Northern Rock will resume coupon (income) payments and it's anyone's guess on whether the PSNs will be purchased/.redeemed in future, so keeping hold of them is something of a lottery.

The future of your PSNs depends on the fortunes of Northern Rock Asset Management (NRAM), the part of Northern Rock that holds the 'toxic' debts.

Thanks in part to falling bad debts, NRAM has been doing well recently, posting a £277 million underlying profit in 2010 (although it lost £313 million the year before). If this sort of performance continues you might make money by holding onto your PSNs, but there are risks - e.g. bad debts and mis-selling claims (especially PPI) could rise (see my answer to an earlier question here). The advantage of selling now is avoiding further risk and being able to earn some interest on the money elsewhere.

Read this Q and A at http://www.candidmoney.com/questions/question492.aspx

Should I use absolute return funds?

Question
I am recently retired at 60 and my wife is not currently working but may do so part-time. We have enough cash for forecast spending in 2011-12 and for emergencies. We have about £100k in unit trusts put aside for the longer term (10 years plus) in a mixture of 30% gilt/linker funds and 70% equity (global/UK trackers plus active EM, resources and property funds).

We have another £100k to invest over 2-8 year timescale for university costs for the children and moving to a better house. I am thinking about putting this money into a mix of Trojan O, Ruffer Total Return O and Newton Real Return (and possibly Absolute Insight Ap) funds. Does this seem reasonable or unnecessarily risky over this time period?Answer
Your existing investment strategy looks very sound, so well done. If you haven't done so already I'd focus on getting the investments within ISAs for both of you to ensure a tax efficient income and avoid that income counting towards the limit for higher age-related income tax allowances (£24,000 for 2011/12 tax year - may or may not be a problem depending on how much pension income you both receive).

As for your new investments, a focus on absolute return does, in theory, make sense. The reason I say 'in theory' is that while funds intend to deliver consistently attractive, positive returns regardless of market conditions, in practice this is rare. Absolute return managers still have to exercise judgement on which direction markets (whether it be stock markets, commodities, currency or interest rates) are headed and, being human, they won't always be right (some will be wrong more often than others).

Looking at your suggested funds in turn:

Troy Trojan - invests in a mix of shares, fixed interest, cash and gold, but it doesn't 'short' investments, i.e. place bets on falling prices. Performance has been good the last couple of years (when most assets have risen in price) and flat the two years prior (when markets were in turmoil), so respectable overall. However, it's currently closed to new investors.

Ruffer Total Return - a similar approach to the Troy fund (mix of assets and no 'shorting') and it has delivered consistently positive returns since launch 10 years ago, albeit sometimes falling well short of the 10% annual target. At £2 billion in size the fund could prove unwieldy, but as the managers focus on larger companies and securities it doesn't seem to have been a problem to date.

Newton Real Return - another mixed asset fund, although it can use options for downside protection. It has delivered positive returns, but did struggle during market falls in late 2008.

Insight Absolute - invests in a range of Insight's other absolute return funds. This gives access to a number of different absolute return strategies (e.g. mixed asset, shorting and currency bets). Returns were minimal (albeit positive) during the credit crunch but have been ok over the last couple of years (not difficult!).

I don't think any of these funds would be a bad choice, but bear in mind they could still lose you money. I'd be nervous about investing for less than five years and longer would be good (maybe I'm a pessimist, but I don't like to trust that absolute return managers will deliver year in year out). Perhaps also consider another fund that makes more extensive use of 'shorting', like Gartmore UK Absolute Return or Blackrock UK Absolute Alpha. Returns from the latter have been negligible the last 3 years, but this style of fund could come into its own if markets dive.

I would be tempted to keep some cash aside for the next few years in case the absolute return funds don't perform. Interest rates aren't great, but fixed rates over 1-5 years of between 3.5%-5% look reasonable given (in my opinion) the Bank of England Base Rate is likely to remain rooted at 0.5% for some time yet. If your wife is a non-taxpayer then holding savings in her name would avoid tax on any interest that doesn't fall above her personal income tax allowance.

Good luck whatever you decide and happy retriement.

P.S. If readers have view/suggestions re: absolute return funds please post them below.

Read this Q and A at http://www.candidmoney.com/questions/question491.aspx

Tax on deferred state pension?

Question
My female friend is 65 in December and will be retiring from work 31/12/2011. She is a 40% tax payer; gross earnings around £57000 under PAYE. She has deferred her State pension for the past five years so is it advantageous for her to not take the lump sum available (approximately £32000 basic tax deducted) until the beginning of tax year 2012/13 when her tax rate will have fallen to basic rate level?

Also as her basic tax code for 2011/12 will increase to 9940 in December 2011 does this impact on the whole of the current tax year? If so is it desirable for her to contact HMRC now to tell them her intentions to retire as this will take her out of 40% bracket for this tax year, assuming she does not take any pension until the beginning of next tax year.Answer
If she takes the lump sum option from a delayed state pension the entire amount is taxable at the highest rate paid on her income that tax year. Given her gross PAYE income this tax year will be around £38,000 she should be comfortably below the higher rate threshold (£42,475), provided she has no other income this tax year.

Because the lump sum isn't added to her income when calculating the tax owed (it's just taxed at the highest tax rate paid on other income that year), she should be able to take it in December net of basic rate tax.

If she could arrange to be a non-taxpayer next tax year (e.g. by deferring other pensions) then she could potentially receive the deferred state pension lump sum tax-free, so there would be a benefit waiting until 6 April 2012 if this is feasible.

The increased age-related personal allowance applies for the whole tax year in which she turns 65, so a birthday in December means she'll enjoy the £9,940 allowance from 6 April 2011 to 5 April 2012. However, the allowance reduces by £1 for every £2 of income above £24,000, subject to not falling below the standard £7,475 allowance. So the extra age-related allowance will be fully wiped out by an income of £28,930 or more.

It would be sensible to contact HMRC to try and get her tax code changed so that she doesn't end up paying too much tax this year. However, I wouldn't count on them getting it right and suggest she double checks everything and reclaim any overpaid tax using form P50.

Read this Q and A at http://www.candidmoney.com/questions/question490.aspx