Make pensions personal

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As the Government ploughs on with making occupational pensions compulsory – unless the individual opts out, which lots will – our old defined benefit (DB) schemes get clobbered again and again. The EU wants new rules that would force employers to pump in lots more money, and the one marked effect of QE has been to cut yields on Government debt, which is what schemes hold.

Occupational pensions – outside the public sector – belong to an age when lots of people spent large proportions of their working lives with single employers. The old DB schemes screwed people who didn’t stay put, and had to be dragged kicking and screaming into offering respectable transfer values. The people who scored were those who stayed put and got big salary increases late in their working lives.

Since people move around so much more in this day and age, I wonder if it is not time to forget occupational provision altogether. Would it be simpler if we stopped pussyfooting around and insisted that individuals started putting something away for their old age? Then would it be better if employers were forced to make matching contributions, so that if the employee saved five per cent the employer would have to at least match that contribution?

The snag of course is that at the point of retirement the value of a fund depends on annuity rates. Would it be so expensive for the Government to guarantee a minimum annuity rate?

I really don’t know, but messing around with the detritus of history doesn’t seem to be getting us very far.

Euro doom & gloom, will we see recovery?

We are nowhere near the endgame of the euro problem. The Dutch government has fallen apart, and France is about to elect a President who wants to spend more money: this in a state that hasn’t balanced a budget in the last thirty five years. No-one believes that Spain can meet the targets set by its European masters. Greece is, post default, just about as ugly as it was before.

Hollande, the likely French president, is not alone. He has a soulmate in Ed Milliband, who also thinks that, having created a problem with too much debt, we should solve it with more debt. He clearly subscribes to the notion that if you owe the bank a tenner, you have a problem, but if you owe the bank a billion, the bank has a problem. He is leading in the polls, with a programme that would more or less guarantee a sharpish hike in UK interest rates. If an election was imminent, I would be well scared.

It is no surprise that the UK economy is more or less flatlining. But the news around the world – and we are part of a global economy – is not too bad. China motors on, and the US is looking better. I guess we will recover, but don’t hold your breath.

Read this article at http://www.candidmoney.com/articles/article253.aspx

Are gifts taxable?

Question
Can someone give you a large sum of money tax free?

It would probably be from the sale of a property or a monthly amount if they rent a property out.

This person is not related and owns two properties but wants to realise the money now using the majority of the profit (if sold) or (a regular monthly income if rented out) for their own use (buying a new car, improving the main residence etc). They have been friends for life and would like to gift as much as £100,000 with no strings attached. They are financially very secure and would like to share their "good luck" as they have no dependants and "can't take it with them when they die".

Would this be the same as, for example, a millionare lottery winner giving whoever they like large sums of money (you hear on the news that winner "X" is going to give large amounts to friends and family). As it is a "gift" is there definately no tax incurred?

Would the receiving Bank or building society (if it is in cheque / cash form) highlight this above average amount being credited and notify HMRC even though we could prove it is not the proceeds from nefarious or illegal activities..ie like money laundering, drugs etcAnswer
The simple answer is yes, provided the money is a genuine gift and not payment for work or some other service or trade, you can receive money tax-free. HMRC takes the view the gift is likely made out of taxed income or gains, so it would be unfair to tax you on receiving it. Of course, you'll be liable to tax as usual on any money you make from the gift, e.g. interest if you put it in a savings account, but you won't be taxed on the gift itself.

Neither HMRC nor the receiving bank should give you any grief (as there's no reason to, it's perfectly legal) but it might be wise if the friend gives you a letter confirming the gift to avoid any potential headaches in future

The bigger issue is usually how the inheritance tax position of the person making the gift is affected.

In normal circumstances if they live for at least seven years after making the gift it will fall outside of their estate for inheritance tax purposes. If they pass away before then it'll be included fully within their estate unless gifts within the last seven total more than the nil rate band (currently £325,000), in which case the proportion included within the estate reduces over the seven years.

However, if the gifts are from normal expenditure (which basically means taxable income) then the gift would usually be deemed to fall outside of their estate straight away. Property rental income that's surplus to requirements would be a good example of this.

As your friend doesn't have any dependents they might not be concerned about inheritance tax. But if they are then giving money away can help (if they live for at least 7 years), as would leaving the proceeds of their estate to charity when they pass away.

Read this Q and A at http://www.candidmoney.com/questions/question579.aspx

Cheaper option than Hargreaves Lansdown SIPP?

Question
I'm currently looking at Sipps and have read the article on the candid money website.

My Sipp (in excess of £125k) is currently with HL but I am concerned that this is no longer the best home for it and that this situation may well worsen post RDR.

The analysis you do is excellent on this topic between the potential suppliers of low cost Sipp's but is based on weighted assumptions on where the fund is invested.

I note that for your analysis you use 75% in funds and 25% ETF, is there an easy way to run your spreadsheet with say options based on 50-50, 25-75% or even 100% in favour of etf/equities and then to see if this significantly changes which provider comes out on top for different fund sizes.Answer
Hargreaves Lansdown has a good reputation for customer service, but its discounts/charges look increasingly uncompetitive as other discount brokers and low cost SIPP providers seek to increase their market share with cheaper deals.

I need to give the low cost SIPP page an overhaul, which I'll do over the next couple of weeks, but if you want to predominantly hold ETFs/shares then Sippdeal is likely to be a cheaper option that HL. There's no fee for the SIPP wrapper and dealing costs are fixed at £9.95 per trade.

Even cheaper still is the JPJShare.com e-sipp, with no SIPP wrapper fee and dealing fixed at just £5.75 per trade - they also rebate a decent slug of trail commission if you buy funds (they rebate half and cap their share at £500 a year).

Alliance Trust charges for the SIPP wrapper and has a higher dealing fee, but fares well if you have a bias towards funds as its trail commission rebates are very generous compared to others.

By contrast, Hargreaves Lansdown gives no trail commission rebates on funds held within its Vantage SIPP and charges 0.5% a year (caped at £200 across the holdings) on non-fund investments. It also charges up to £48 a year per fund where no trail commission is paid (typically trackers) and dealing costs for the majority will be £11.95 per trade.

One caveat is that Sippdeal and JPJShare both charge a fee (£150 and £225 respectively) if you want to withdraw income during retirement (while leaving the pension invested), whereas HL doesn't.

Hope this helps and check back in a couple of weeks for the beefed up/updated low cost SIPP comparison, which will incorporate some of your suggestions.

Read this Q and A at http://www.candidmoney.com/questions/question576.aspx

Investing for income and growth?

Question
May I ask a question in respect of sustainable rates of withdrawl from a diversified investment portfolio. It constantly excerses me in terms of augmenting our retirement income.

Conventional wisdom has it that a rate of 3-4% pa rising with inflation should be sustainable over the longer term with out denuding the real value of the portfolio ( we want to leave the kids something). The state of the markets over the past years seem to have worked against this and in our case we have managed a 2% withdrawl rate over recent years.

I wonder if this question is one that you could use to bring out some points. For example how would you construct a portfolio to meet the longer term objective of an inflation proofed income.

Hope thats not too much of a question to ask. By the way your web site is first class and like the novel way you present information.Answer
Glad you like the site, sorry I've neglected it somewhat it recent months but starting to spend more time on it again now.

In simple terms there are two ways to consider regular portfolio withdrawals.

The first is to withdraw the natural income produced by underlying investments (e.g. interest and dividends) hoping that the investments themselves rise in value over time to generate some growth.

The second is to simply withdraw a certain amount, regardless of actual income, in the hope that growth (including any reinvested income) is sufficient to fund this and at least keep pace with inflation.

In practice both approaches will likely fail when markets are falling, but the former will probablybe the more reliable route.

What types of investment might be suitable?

Cash is the simplest investment and it's safe. But if you withdraw the income (i.e. interest) your capital won't grow, you'll just be left with whatever you originally invested. Plus interest seldom keeps pace with inflation - it might be high at times and low at others - you can't rely on it to consistently rise over time.

Dividends (paid by companies) tend to have a better track record at keeping pace with inflation long term. In general terms board's like to consistently raise dividends, unless the company is in trouble, to send out positive signals and keep shareholders happy (perhaps in the hope they won't get a hard time over their excessive pay packets!). Trouble is, while dividends tend to consistent, share prices aren't. A dividend won't be much consolation if the share price has just dived 20%.

Commercial property is, on the face of it, a good way to generate inflation beating income long term, as the underlying rental income agreements with tenants usually have pre-agreed rent increases. However, property values can fluctuate and while generally stable in the past, they took a big wobble over 2007/08.

Fixed interest (e.g. gilts and corporate bonds) can struggle to keep pace with inflation as, like cash, yields fluctuate over time - largely dependent on interest rate and inflationary expectations. Unlike cash, there is scope for the capital value to rise or fall. The exception is fixed interest linked to inflation, e.g. index-linked gilts. In this case both the initial investment and interest payments rise with inflation until redemption.

However, index-linked gilts/bonds are not necessarily as attractive as you might imagine. Firstly, you'll only enjoy the full benefit if you buy an launch and hold until redemption, buying and selling meanwhile via the open market means you might end up better or worse off overall - as the price will vary based on inflationary expectations. Secondly, the interest payments might start at a very low level, for example the index-linked gilts issued last year (redeeming in 2062) have a starting income of just 3/8th of a percent, i.e. 0.375%. Yes, this will rise with inflation, but it'll take many years to get to anything near a respectable level. Even when inflation has doubled you'll still only be receiving 0.75% annual interest.

Finally, gold is often touted a good inflationary hedge. I don't think there's any hard evidence to back this up and it doesn't produce an income, although it might make a good long term investment.

So where does that leave us?

Well, there is no sure fire way of generating inflation beating income and growth. Holding shares in stable companies with a history of raising dividends looks sensible and commercial property investments might suit the objective well. Both should generate a natural annual income (yield) of around 3-6%, but involve risk and could backfire if markets fall, especially shorter term.

Cash doesn't really work, but is nevertheless a sensible holding in almost all portfolios, especially in times of high uncertainty as at present. And index-linked fixed interest, while potentially useful if you believe inflation will be high, are not the golden panacea you might think.

So in practice you'll probably want to combine a mix of all the above (as you may well be doing already), the exact mix dependent on how much risk you're comfortable taking. But this means accepting that things might not go to plan short term and taking a 10+ year outlook - which is hopefully be long enough to ride out all the short term volatility we're experiencing at the moment.

Read this Q and A at http://www.candidmoney.com/questions/question573.aspx

How to invest a lump sum?

Question
I have £80,000 to invest, as I don't need income just capital growth, can you suggest the best tax efficient way to invest this sum. Given I pay tax at 40%, my wife pays tax at 20%, and I have a mortgage with 10 years to run. Answer
As you and your wife are both taxpayers, using individual savings accounts (ISAs) would be a tax efficient way to hold both cash and investments such as corporate bonds and shares You can currently invest up to £11,280 per tax year (running from 6 April to following 5 April), with up to half allowed to be held in cash. Pension contributions are also tax efficient, although the money will be locked away until retiement (age 55 at the earliest).

Outside of an ISA/pension savings and income producing investments would be more tax efficient held in your wife's name, as she's in a lower tax band than you, although you should obviously check whether the extra income would push her into the higher rate tax band. Growth investments would be more tax efficient held jointly (or split between the two of you) so as to benefit from both of your annual capital gains tax allowances of £10,600 each (gains realised up to the allowance from selling investments are not taxable).

Although you're seeking growth and not income, cash along with some investments (such as corporate bonds, commercial property and dividend paying shares) generate an income, even if you decide to reinvest this for growth, so it's important to understand the tax implications of the various options available to optimise how you hold them.

The big question is what investments should you buy with the money - this is far harder to answer! It really depends on how much risk you're comfortable taking.

The safest option is to stick to cash, as it can't fall in value (if we ignore inflation and assume the bank doesn't go bust - you'd be covered by the FSCS up to £85,000 per institution per person in the event of the latter). 'Best buy' rates are (at the time of writing) around 3% for easy access accounts rising to around 4.5% fixed for 5 years (see Moneyfacts http://moneyfacts.co.uk/compare/savings/accounts/best-sellers-savings/?hp for a comprehensive list).

The alternative to cash would, of course, be to pay down/off your mortgage. if your mortgage rate exceeds what you could earn on cash (after tax) it seems a no-brainer, although you would of course lose the flexibility of having the cash at hand for other purposes should you need/want it. An offset mortgage overcomes this by effectively offsetting your savings against your mortgage balance, reducing your monthly payments (which is basically the same thing as earning tax-free interest).

I can't see interest rates rising for at least a couple of years, as our economy remains troubled and raising rates would further hamper recovery, as well as killing the struggling housing market.

The trouble with cash is that at current interest rates it won't make you rich. But seeking higher returns means taking risk, i.e. being comfortable you could lose money, especially shorter term. And current global economic uncertainly has created very nervous (volatile) markets, exacerbating the risk.

Investment areas you might consider include:
Stock markets - all over the place at present and I can't summon must enthusiasm for the outlook over the next year, especially if the eurozone plunges further into crisis which looks likely. However, I think emerging markets are still a good 10+ year bet and higher dividend shares might turn out ok shorter term if markets don't fall back too far.

Corporate bonds - at the safer end of the scale high demand means yields (i.e. income) are little better than cash, although if stock markets dive again this would likely push up demand hence prices. Higher risk bonds have reasonable yields but are more susceptible to economic and stock market downturns - as this increases the perceived risk that your loan won't be repaid (bonds are basically IOUs, where you lend money to governments and companies).

Commercial property - The market has picked up since a disastrous patch during 2007/08, but is hardly firing on all cylinders. The UK IPD All Property Index shows a total return of 6.6% over the last year, with most of this coming from rental income. If the economy holds firm then rents should remain stable, but it's still a delicate marketplace.

Commodities - gold has benefited from nervous markets while other metals have benefitted in recent years from huge emerging markets demand (especially from China) to build infrastructure. Soft commodities (e.g. food) have also generally benefitted from erratic weather and growing populations, but prices remain very volatile. I think commodities is a sensible place to be over 10-20 years (thanks to continued emerging markets growth), but the potential risks are high short term, as prices certainly don't look cheap.

Absolute return - these fund investments aim to make positive cash-beating returns whether markets rise or fall. Trouble is, many have failed to do so as it still relies on human judgement which is prone to error.

There's also the decision on how to access investments, i.e. buy directly or through investment funds (and the latter might be run by active managers or simply track an index). In general, unless you're prepared to be hands on then funds are a convenient route, albeit usually more expensive - especially if actively managed.

I can't really tell you which of the above, if any, would be right for you, but hopefully my comments might help you get a better feel for what could be suitable for you. Of course, my outlook for the above investment types may be proved wrong, but hopefully an appreciation of the relative risks involved will help you make a sensible decision.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question572.aspx

Emerald Knight carbon credits a scam?

Question
What is your opinion of this, is it a scam?

Emerald Knight is proud to offer investors an exclusive opportunity to purchase carbon credits direct from a prestigious project in the Amazon that will be sold to the offset market during a 12-month period to generate investors a fixed 30% return on investment.Answer
Sorry for the long delay in answering - been side-tracked the last few months. Anyway, catching up on a large backlog of questions, starting with yours.

Emerald Knight is proud to offer investors an exclusive opportunity to purchase carbon credits direct from a prestigious project in the Amazon that will be sold to the offset market during a 12-month period to generate investors a fixed 30% return on investment.

The first point to note is that Emerald Knight is not authorised or regulated by the Financial Services Authority, so if something goes wrong you're on your own.

Emerald Knight's website refers to two companies, one registered in the UK and the other in Gibraltar. A quick look at Companies House suggests the UK company was incorporated in November 2009 and the only accounts submitted to date (to November 2010) were for a dormant company. So no track record and no proper accounts available for analysis.

The above two points are sufficient alone to make me avoid a company selling investments. But let's a take a look at what appears to be on offer:

From what I can gather from the limited information available, Emerald Knight offers carbon credits sourced from Brazil with the aim of selling them on to companies (wishing to offset the pollution they cause) for a profit within a year, generating a 30% return for investors along the way.

The credits being sold appear to be Voluntary Emission Reduction (VERs), which means there's no official compliance framework, structure of market around them. As a result, the quality hence value can vary quite widely. They often originate from countries with tropical forests (e.g. Brazil) as the VERs are earned by reducing the amount of forest cut down. The companies that potentially buy these would do so in a bid to voluntarily offset their carbon production (i.e. pollution) - these credits do not form part of the stricter certified credit system formalised by the Kyoto Protocol.

The Chicago Climate Exchange did try to run a market/price for VERs, but it closed down in 2010.

As there's no formal standard or market (hence common price) for VERs it's hard to quantify the value of what you'd be buying (which is always a concern). It seems the estimated market value of VERs is up to a couple of pounds per unit.

I suppose there's a chance you might make 30% in a year, but this would seem to require Emerald Knight selling its low cost VERs for a price closer to 'proper' certified carbon credits, which seems a tall order. Of course, Emerald Knight's VERs might be especially high quality to warrant a premium price, but I've no idea how you could practically verify this. Personally I wouldn't risk my money to find out.

In any case, certified carbon credit prices have plunged over the last year - halving over the second half of 2011 as the global downturn has generally led to less production meaning producers need fewer credits. EU certified credits (by far the most popular) are trading at around €7 at the time of writing.

[I've seen a report suggesting Emerald Knight is charging £7.50 per credit - which is well over the odds for a VER, but can't verify this].

As always when sky high returns are supposedly on offer, ask yourself why the company pushing the investment doesn't just invest its own money and make a mint. If I could sure of generating a 30% return within 12 months I certainly wouldn't bother cold-calling strangers, I'd be too busy raising as much money as I could to invest myself!

Incidentally, the FSA to set up a web page warning caution against such schemes http://www.fsa.gov.uk/consumerinformation/scamsandswindles/investment_scams/carbon_credit.

Read this Q and A at http://www.candidmoney.com/questions/question571.aspx