Life cover payout less than expected?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How does the LSE International Retail Service work?

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

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

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

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

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

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

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

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

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

Ways to reduce tax bill via a limited company?

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

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

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

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

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

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

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

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

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

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

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

How safe is a SIPP?

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

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

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

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

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

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

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

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

Best wishes for a happy retirement.

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

Tax on UK investments if I move abroad?

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

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

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

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

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

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

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

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

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

Bet on stock market recovery?

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

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

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

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

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

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

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

Whatever next?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good equity income fund for depressed markets?

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

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

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

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

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

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

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

Cavendish SIPP charges vs HL?

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

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

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

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

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

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

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

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

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

Hope this makes more sense now.

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

Tax on gift from my late father?

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

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

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

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

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

Fund discounts with monthly saving?

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

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

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

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

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

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

Difference between limit and stop loss orders?

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

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

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

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

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

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

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

Fund platform changes could help customers

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

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

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

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

Payments by fund providers to fund platforms

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

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

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

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

Payments by fund platforms to customers

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

Re-registering investments between platforms

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

Advice and independence

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

Conclusion

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

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

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

Choosing funds and financial planning?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hope your pregnancy goes well.

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