Autumn Statement 2013 summary

How might the Chancellor's announcements today affect you?.

The big picture

When the current Government came to power facing a fiscal mess its big bet was to cut spending (i.e. ‘make difficult decisions’ in tedious political speak) and hope that economic growth would be sufficient to raise tax revenues to the point it could balance the books.

Chancellor George Osborne had hoped to stop borrowing by 2015, but has now pushed back his guesstimate to 2019. The trouble to date has largely been a stagnant economy and while things have picked up slightly of late there is still a long, long way to go before it is once again firing on all cylinders.

As I said this time last year, the glue that continues to hold everything together is rock bottom interest rates. Despite spending cuts, homeowners who have held onto their jobs and have decent tracker/variable rate mortgages are generally sitting pretty comfortably. If that were to change, the economy could collapse like a pack of cards, which is why the Bank of England continues to be so reticent to raise interest rates.

Here’s a summary of the key announcements today:

Income Tax

Personal Allowance - will increase to £10,000 from 6 April 2014. Increased age allowances will remain frozen; as part of the Government's continued plan to scrap them.

Tax Bands - the basic rate tax band will fall from £32,010 to £31,865. So higher rate tax will kick in at £41,865 (for those born after 5 April 1948).

Transferrable Allowance – from April 2015 married couples and civil partners will be able to transfer £1,000 of their personal allowance to their spouse/partner – provided neither is a higher or top rate taxpayer.

Capital Gains Tax

Annual Allwoance - as previously announced will increase from £10,900 to £11,000 from April 2014 and to £11,100 from April 2015 (£5,000 and £5,500 respectively for most trusts).

Private Residence Relief - at present, if you sell a property that has been your main residence at some time but not when you sell it, you normally enjoy relief (from CGT) based on the proportion of time it was your main residence –including the last three years even if you weren’t living there during that time. The three years wuill reduce to 18 months from 6 April 2014.

Non-resident Property Owners - non-residents buying property in the UK will be subject to CGT on any future gains from April 2015.

Inheritance Tax

Unchanged nil rate band of £325,000. HMRC is developing a system that will allow online probate applications and inheritance tax account submissions.

Benefits

State pension – will rise by £2.95 to £113.10 per week (full basic) for 2014/15. However, the Government plans to bring forward the intended state pension retirement age of 68 to the mid 2030’s from 2046 and link this to average life expectancy. The bottom line is that the current state pension (including the imminent flat rate scheme) is unsustainable so don’t be surprised if the planned increases in retirement age are even more brutal over the next few decades.

Those already in receipt of the state pension or reaching state pension age before the introduction of the flat state pension will have the option to top up their pensions in 2015 – more details to be released nearer the time.

Child Benefit – will only increase by 1% next year.

Pensions

Lifetime Allowance - from April 2014 the cap on your pension fund(s) at retirement will fall from £1.5 million to £1.25 million. Amounts in excess of this are effectively taxed at 55%. If you might be affected consider applying for Fixed or Individual Protection 2014 before 6 April 2014.

Investments

ISA Allowance - confirmed as £11,880 for 2014/15, as expected (Junior ISAs £3,840).

Exchange Traded Funds – from April 2014 stamp duty on the purchase of UK domiciled exchange traded funds (ETFs) will be abolished. Almost all ETFs are currently domiciled offshore (e.g. Ireland/Luxembourg), so this change might prompt more onshore ETFs. Not a big deal, but positive nonetheless.

Save As You Earn (SAYE) - the amount that employees can save and apply towards the purchase of shares for 2014 to 15 will be increased from £250 to £500 per month.

Venture Capital Trusts – the Government will be changing rules allowing VCTs to be held in nominee accounts, which is good news if you like to hold all your investments via a platform or stockbroker. And from April 2014 investments that are conditionally linked in any way to a VCT share buy-back, or that have been made within 6 months of a disposal of shares in the same VCT, will not qualify for new tax relief. This will only affect a minority of VCT investors.

Social Impact Bonds - A new tax relief for investment in social enterprise will commence in April 2014, which may extend to Social Impact Bonds thereafter.

Transport

Fuel Duty - the proposed 2p per litre increase in fuel duty next September is cancelled. Welcome news, although a drop in the ocean compared to overall fuel price rises in recent years. Maybe the Government would do better to instead set a maximum fuel price based on prevailing oil prices, taxes and the pound dollar exchange rate - reducing the scope for fuel companies to take motorists for a ride.

Car Tax - discs will also be scrapped from October 2014 in favour of an electronic system.

Rail Fares - Regulated rail fare increases next year will be limited to RPI (not RPI + 1%).

Corporation Tax

As already announced, the main rate of corporation tax will fall to 21% from April 2014.

Tax avoidance/evasion

Stronger measures still to be implemented.

Verdict

Despite a lot of minor changes this was actually a pretty dull Autumn statement, but that’s probably no bad thing. Despite the obvious difficulties, cutting spending while keeping fingers crossed for economic growth is probably still more sensible that borrowing even larger amounts to spend in the hope it will kick start the economy. And, thankfully, obvious tax rises such as bringing CGT rates in line with income tax, capping overall ISA holdings and further capping pension tax benefits have not seen the light of day (so far at least).

Read this article at http://www.candidmoney.com/articles/278/autumn-statement-2013-summary

Are full trail commission discount brokers history?

In my opinion almost certainly yes. Thanks to rule changes if nothing else..

In the beginning

Back in the mid to late 1990’s when investment discount brokers first started to emerge, the norm was that they would rebate some or all initial commission but keep any ongoing ‘trail’ commission for themselves. At the time it looked a great deal for investors. With initial commissions typically between 3-5% execution-only discount brokers often saved investors (who didn’t want or need advice) hundreds or even thousands of pounds. Especially since fund managers seldom offered any discounts when buying direct. The fact discount brokers retained trail commissions of around 0.5% didn’t seem that big a deal at the time.

Of course, trail commission is a big deal. Especially since many of those early customers will have built up significantly larger portfolios over the last 10 -20 years, meaning much higher trail commission payments.

The advent of trail commission rebates

Discount broker Commshare set the cat amongst the pigeons in 2001 when it started to rebate some trail commission and Hargreaves Lansdown more or less made the market its own the following year with the launch of its Vantage service. And since then we’ve seen the likes of Bestinvest and TQ follow. But these brokers have now largely been trounced in terms of cost by investment platforms with direct to public offerings, such as Alliance Trust Savings, Sippdeal, Interactive Investor and Charles Stanley.

Full trail brokers remain

Despite significant change in the marketplace, a number of the original discount brokers remain stuck in their ways, continuing to pocket all trail commissions. In fairness some claim to provide investment research in return, but then so do most of the lower cost brokers and platforms. Either way, it’s important to weigh up the quality and benefit of any such research against how much it’s effectively costing.

Who are the full trail brokers?

I’ve managed to find 11 discount brokers that, at the time of writing, still retain fund trail commission in full. As well as list them I thought I’d run a simple comparison showing the effective annual cost and projected 10 year portfolio value assuming a £300,000 ISA portfolio with a 7% annual return before charges and average 1.54% annual ‘retail’ fund costs (from which 0.5% trail commission and 0.25% platform fees are paid).

Broker	Annual commission	Effective Annual Cost for broker & platform	Projected Portfolio Value After 10 years
Chelsea Financial Services	0.50%	£2,250	£510,503
Close Brothers (self-directed)	0.50%	£2,250	£510,503
Dennehy Weller	0.50%	£2,250	£510,503
Elson Associates	0.50%	£2,250	£510,503
Financial Discounts Direct	0.50%	£2,250	£510,503
Fundsnet	0.50%	£2,250	£510,503
Moneysupermarket	0.50%	£2,250	£510,503
Moneyworld	0.50%	£2,250	£510,503
Seymour Sinclair	0.50%	£2,250	£510,503
SFS Invest Direct	0.50%	£2,250	£510,503
Willis Owen	0.50%	£2,250	£510,503

What about lower cost alternatives?

Most of the discount brokers or platforms who rebate at least some trail commission or use clean units and charge an explicit fee should prove cheaper. I’ve listed three of the lower costs platforms that use clean fund versions below for comparison, assuming average 0.79% annual ‘clean’ fund costs (for a more complete list of ISA discount brokers click here).

Platform	Annual fee	Effective Annual Cost for broker & platform	Projected Portfolio Value After 10 years
Alliance Trust Savings	£48*	£48	£547,315
Sippdeal	£50**	£50	£547,286
Charles Stanley Direct	0.25%	£750	£535,231
* £12.50 dealing charge ** £50 annual custody fee gives access to clean fund versions. £3.95 online dealing charge.

It’s clear that investors can potentially save a significant sum by moving from a full trail discount broker across to a lower cost alternative. But even those who want independent advice could end up better off too; over at Candid Financial Advice we have been dealing with a number of clients in this scenario that still end up paying lower overall costs with advice.

Why full trail brokers face extinction

While it seems an obvious decision for full trail broker customers to use a lower cost alternative, many appear to have stayed put. By my estimates it’s likely these brokers are collectively pocketing something like £27 million or more a year from trail commissions. They must love customer inertia.

But all this could change very soon. Rule changes mean all execution-only discount brokers can no longer be paid via commissions on new investments (or increased contributions/switches) from next 6 April 2014. And the commission must cease for existing investments by 6 April 2016.

So the many customers who have stayed put over the years may get a shock on realising they must pay for a service they may have incorrectly assumed was ‘free’, having made the mistake of assuming trail commissions are not ultimately paid out of their pocket.

Whether these brokers will be able to justify and/or get away with a c0.5% fee remains to be seen, but I am very sceptical in this increasingly competitive environment. I predict a number will fall by the wayside or end up selling out to competitors over the next two to three years (if not sooner).

What should you do?

Meanwhile, if you’re a customer of a full trail (or even partial trail) broker then I’d strongly suggest reviewing how much it’s costing you (via the trail commissions paid out of fund charges) and decide whether you can get better value elsewhere. You might find www.comparefundplatforms.com useful as a starting point for comparison.

Read this article at http://www.candidmoney.com/articles/277/are-full-trail-commission-discount-brokers-history

How much am I paying Bestinvest for investment management?

Question
I have approximately £300,000 being " managed " by Bestinvest. While I know that I am being charged 1% (less refunded commission ) plus VAT, I would like to have a clearer understanding of the total charges involved e.g. including those being deducted within the funds themselves.

When I ask the question I just get told that it's approximately 0.6%/0.7% on top of Bestinvest's charges but I don't have a lot of confidence in this.

In addition, while I can see the "adviser charges" on each buying or selling transaction, I have to add them up myself in order to get a total for that element of the charges. Surely in this current era it should be possible to get a complete picture of costs without a lot of hassle?

Could you give me any suggestions as to how best to put it to Bestinvest in order to get the clarity I would like?

I should explain that I am interested because I am looking at how best to invest a further amount of money and am considering going to a different company to focus more directly on shares. I would therefore like to be able to have some comparison of the different costs involved in both approaches. In that context I wonder if you have any experience of Cheviot Asset Management Company? ( also know as Quilter Cheviot )

Many thanks for any help you can give me. Answer
Bestinvest has a range of ‘managed’ services these days, but it sounds as though you are either using its ‘Managed Portfolio’ or ‘Investment Management’ (option 2).services

The Managed Portfolio Service seems to largely invest in unit trusts and oeics held on Bestinvest’s platform and charges 1% a year plus VAT. There are no dealing charges.

The Investment Management Service (option 2) also invests in funds and charges 1% a year plus VAT, but adds dealing charges on top and may also favour investment trusts. The dealing charges are potentially quite steep at 0.4%, with a minimum of £30 and maximum of £100 per transaction.

So based on a £300,000 portfolio you are paying Bestinvest around £3,600 a year including VAT. And if the Investment Management Service then assuming 10 trades a year you could be paying up to an extra £1,000 on top in dealing charges – ouch.

In addition to the above any underlying funds held will have annual charges and the figure for each fund you need to look or ask for is the ‘total expense ratio’ or ‘ongoing charge’ – this includes both the manager’s annual charge plus other costs paid by the fund such as custodian and auditor fees.

The underlying funds (unit trusts/oeics) will either be ‘clean’ versions which have no commissions or platform payments to Bestinvest built in to annual charges, or ‘retail’ versions which include these payments - some (or all) of which Bestinvest may rebate to you. Bestinvest’s own terms and conditions are a bit woolly as it suggests clean versions were being used from 1 January 2013 yet the funds listed on its website are still mostly retail versions. Nevertheless, like all platforms and discount brokers it will have to move to clean versions for new business from 6 April 2014.

As a very general rule of thumb, clean actively managed fund versions tend to have total expense ratios of around 0.75% to 1% while the equivalent retail versions will be around 1.5% to 1.75%. Tracker funds are usually somewhat lower at 0.5% or less and tend to only offer clean versions.

So, I would ask Bestinvest for the total annual charges on your portfolio including their management fee and the underlying fund total expense ratios, net of any commission rebates - expressed as a percentage. And, if you use the Investment Management Service then also ask for the total sum you have paid in dealing fees over the last year.

Discretionary investment managers who prefer shares to funds may be cheaper overall since you won’t be paying annual fees on underlying funds. However, you need to be very careful as success will depend on the discretionary manager’s stock picking abilities and in my experience results can be very mixed. Also bear in mind that they are unlikely to have the necessary skills or experience to pick stocks in very small companies or overseas, so they may either end up using funds for these areas or ignore them altogether – and the latter isn’t a very satisfactory option.

Hope this provides some help and apologies for the slow reply; I’ve been rather tied up in recent months preparing the launch of Candid Financial Advice.

Read this Q and A at http://www.candidmoney.com/askjustin/932/how-much-am-i-paying-bestinvest-for-investment-management

Neil Woodford to depart Invesco Perpetual

Following today's surprise announcement, should investors switch their money elsewhere?.

If, like me, you are one of the many investors with money in a fund run by Invesco Perpetual’s Neil Woodford, then you may be as surprised as I was to see today’s announcement that he will leave the firm on 29 April next year.

It seems Mr Woodford wants to set up his own fund management firm and, after 25 years at Invesco Perpetual, it seems quite a natural decision. However, it begs the very obvious question: if you have money invested in one of the funds he manages what should you do? So let’s take a look.

Which funds are affected?

Neil Woodford currently manages the following four funds:

FundSize (£million)

Invesco Perpetual High Income 13,971.64

Invesco Perpetual Income 10,634.09

Edinburgh Investment Trust 1,175.60

SJP UK High Income 1,230.00

And also manages the equities portion of these two funds:

Invesco Perpetual Monthly Income 3,834.50

Invesco Perpetual Distribution 2,604.98

Will Neil Woodford continue running these funds until he leaves?

Invesco Perpetual says Mr Woodford will remain responsible for the High Income and Income funds until he departs, but that his successor for these two funds, Mark Barnett, will work alongside during a transition period.

As for the Edinburgh Investment Trust and SJP UK High Income funds, it’s too soon to say since these are run by external companies who outsource the management to Mr Woodford.

And the management of his portion of the Monthly Income and Distribution funds will be passed with immediate effect to Ciaran Mallon.

Are his replacements up to the job?

Mark Barnett has stellar track record spanning over 13 years at Invesco Perpetual, in fact better than Neil Woodford’s of late. However, he currently only manages around £1.4 billion across four funds, versus Mr Woodford’s £24.6 billion across the High Income and Income funds.

Assuming responsibility for such a significantly larger sum of money could prove very challenging for Mr Barnett. He will likely need to need to invest in more stocks and place larger ‘big picture’ bets than he is used to in order to add meaningful value to the funds. For example, Mr Woodford’s High Income and Income funds hold 118 and 127 companies respectively, with the 10 largest holdings accounting for 57% of each fund. By contrast, Mr Barnett’s UK Strategic Income fund invests in 74 companies with the 10 largest holdings comprising just 40% if the fund.

Ciaran Mallon also has an impressive track record over the time he has managed funds at Invesco Perpetual and in many ways he faces a far less daunting task than Mark Barnett. He’s assuming responsibility for far less money and his impact will be partially obscured by the funds having fixed interest investments managed by others. Bearing this in mind I think the chances are he will do a perfectly adequate to very good job.

Should you switch elsewhere?

Since it is generally so straightforward and cheap to switch funds these days, especially using platforms, I think there is a strong argument for investors in the Invesco Perpetual High Income and Income funds to consider moving to alternatives over the coming months. While I sincerely hope Mr Barnett succeeds when he assumes full control of the funds next April, there seems little reason to run the risk that he won’t when there are proven equity income managers elsewhere running far more manageable sized pots of money.

I see little reason to move away from the Monthly Income and Distribution funds as things currently stand.

What alternatives to the High Income and Income funds might be considered?

As a starting point I think the Cazenove UK Equity Income, Fidelity Enhanced Income and Threadneedle UK Equity Income funds are all well worth a look.

As an interesting aside, Neil Woodford’s announcement might also shift the balance of power towards those fund platforms who are currently trying to negotiate extra cheap ‘super clean’ fund versions when they next sit down with Invesco Perpetual.

Read this article at http://www.candidmoney.com/articles/276/neil-woodford-to-depart-invesco-perpetual

The launch of Candid Financial Advice

I am absolutely delighted to announce the launch of Candid Financial Advice - an independent adviser intent on bringing down the cost of advice..

When I first launched Candid Money around four years ago my aim was very simple – to provide impartial guidance that helps savers and investors make better decisions with their money. And, over one million visitors later, I hope this site has gone some way towards achieving that.

However, one of the things I’ve learned along the way is that not everyone wants to go it alone. Many people either want, or need, the added comfort of a professional financial adviser to help them make the right choices and always act in their best interests.

Since such financial advisers seem to be thin on the ground, especially at a reasonable price, it seemed a logical next step for me to fill this gap. So I’ve been working flat out over the last six months to do just that - the fruit of my labours being Candid Financial Advice (www.candidfinancialadvice.com).

As you would expect, Candid Financial Advice has exactly the same values and ethos as Candid Money. But instead of guidance, it will offer first class advice and ongoing service – at a fraction of the usual cost charged by most other adviser firms.

Is Candid Financial Advice independent?

Yes. It is an independent adviser able to select the most appropriate products from the whole of the market. The business is also independently owned and run by myself and long time friend Ian Millward.

What areas can you advise on?

Candid Financial Advice can help with savings, investments, pensions, tax planning and protection. Common scenarios include reviewing existing pensions and investments to ensure they’re appropriate and cost effective, as well as investing new monies and optimising tax efficiency.

How can I be sure you’re impartial?

Good question. While many advisers proclaim to be independent and impartial, you’ll never usually know for sure. It’s not uncommon for advisers and financial providers to have quite cosy relationships that might influence advice.

Since total impartiality is fundamental to the Candid brand, Candid Financial Advice will never accept any hospitality, inducements or hidden fees from financial providers – the only source of revenue will be the fees paid by clients. As far as I know, no other financial adviser has to date made this commitment.

How much will advice cost?

Candid Financial Advice has a fully inclusive sliding fee for initial advice and service - capped at an absolute maximum of 1%. The exact level will obviously depend on the amount of work involved, but it normally decreases as the sum invested increases. By contrast many advisers routinely charge up to 3% or more and some bolt on extra ‘implementation fees’, so I believe Candid Financial Advice will prove significantly cheaper than the vast majority of other financial advisers.

And what about the investments, pensions and other products you recommend?

I’ve long believed that paying too much for investments, pensions and/or advice can greatly reduce the likelihood of success. Candid Financial Advice is therefore, unsurprisingly, brutal about keeping overall costs to a minimum, preferring low cost options wherever it makes sense to use them.

Does cutting costs mean cutting corners?

No, far from it. The truth is many advisers are content to pick up a handful of very profitable clients each month. My approach is to price high quality advice and service as competitively as possible to attract a large number of clients. We will then work harder, smarter and more efficiently to ensure the business makes a fair profit on much tighter margins. Since the business model relies on retaining clients long term and growing their investments, we have every incentive to do a great job.

What will happen to Candid Money?

For those of you who prefer to look after your own finances, please rest assured I remain fully committed to running both this site and Compare Fund Platforms. Above all else, I enjoy it.

So thank you for all the positive feedback and reader contributions that Candid Money has received to date. Please check out the new website www.candidfinancialadvice.com and don’t hesitate to get in touch if you think we can help you or someone you know.

Please note that when clicking the above links you will leave Candid Money, a financial guidance site not regulated by the Financial Conduct Authority, and go to Candid Financial Advice, a financial adviser that is authorised and regulated by the Financial Conduct Authority.

Read this article at http://www.candidmoney.com/articles/275/the-launch-of-candid-financial-advice

Royal Mail flotation summary

The financial story grabbing the headlines at the moment is the Royal Mail flotation, so let’s take a look. Might the shares be worth buying? And how best to do so? .

I should start by apologising for my lack of new articles recently - due to working flat out on a new business over the last few months. Launch is imminent, more news shortly...

Now, onto the Royal Mail share flotation.

What’s it all about?

The Government needs cash and selling off public assets like the Royal Mail offers a fairly straightforward way of raising some. It will be selling between 40.1% and 52.2% of its stake while giving a further 10% stake to Royal Mail staff. The issue price will be between £2.60 and £3.30 per share and if both the size and price of issue end up being at the midpoints the Government will raise around £1.33 billion after costs.

Will Royal Mail shares be a good bet for investors?

On the face of it yes, at least in the short term.

A simple measure used to assess whether a company’s share price seems good value is a price to earnings ratio, or P/E. Royal Mail’s initial P/E will be between 6.5 and 8.3 depending on launch price. This makes the shares appear quite cheap given a P/E of around 15 for the FTSE All Share as a whole. And UK Mail Group, a competitor of some sorts, has a P/E of around 24% at the time of writing.

And the Royal Mail has also pledged to pay a dividend of £133 million in July 2014 (equivalent to a full year dividend of £200 million), which would equate to an income yield of between 6.1% and 7.7% - again very attractive versus peers. Based on current earnings this appears to be a sustainable rate (it represents roughly half earnings).

But, of course, life is never that simple. There are risks. In the very short term expect lots of staff unrest and industrial action, as in private hands Royal Mail will look to aggressively cut costs. It will also find maintaining the Universal Service Obligation (in simple terms, delivering a letters six days a week to every UK address with uniform prices) a drag, especially in the face of falling letter volumes. Higher parcel volumes (thanks to Internet shoppers) could compensate, although Royal Mail faces stiff competition in this sector.

On balance, the shorter term outlook looks quite favourable thanks to a seemingly low issue price range and very attractive anticipated dividends. But moving forward a few years things could start to get choppier – and some of us will likely get the hump as the Universal Service Obligation is inevitably watered down.

How much can I invest?

Since the share price will not be known until after the application deadline, investment amounts are fixed as follows: £750, £1,000, £1,500, £2,000, £2,500, £3,000, £4,000, £5,000, £6,000, £7,000, £8,000, £9,000, £10,000, £15,000, £20,000, £25,000, £30,000, £35,000, £40,000, £45,000, £50,000 and £10,000 increments thereafter.

If oversubscribed, he the issue will be scaled back, so you may receive fewer shares (and of course invest less) than expected.

The Timescale

If you want to buy shares you’ll need to apply by 8 October. The share price and size of issue will be announced on 11 October and formal trading on the London Stock Exchange will commence 15 October.

How to buy

You can buy shares either via the Government’s own service or a third party stockbroker. Either way, there are no purchase costs nor stamp duty. However, the route you choose could have potentially big cost implications while you hold the shares and/or when you sell.

The Government

This service is provided by Equiniti and shares will be held in its nominee account unless you opt for a certificate. There is no option to hold within an ISA or pension. While there are no charges for holding the shares, the sting in the tail is potentially high charges when you come to sell when using the nominee account – whichever of the 4 options you use:

1. Sell online: 1% with a minimum £17.50.


2. Sell by phone helpline: 1% with a minimum £25.00.


3. Sell by phone automated service: 0.75% with a minimum £7.50.


4. Sell by post: 0.75% with a minimum £7.50.

However, even if you do buy via this route and face a potentially high charge for selling, all is not lost. You can transfer to another broker’s nominee account for £10, although this involves some paperwork, a wait of up to 2 weeks and potential fees charged the new broker.

If you opt for a share certificate you can sell through whoever you choose, but most brokers tend to charges upwards of £40-50 for this.

Other brokers

There is a long list of other brokers through whom you can buy the shares instead (see here). You won’t pay a fee to buy, but any usual account fees and dealing fees when selling will likely apply. In terms of pure cost, the one that stands out is x-o.co.uk, since there are no account fees and a dealing fee of just £5.95 to sell (at time of writing).

Can I buy within an ISA or SIPP?

Yes, provided you have an ISA or SIPP account with a participating stockbroker containing enough cash to fund the purchase by the 8 October deadline.

Read this article at http://www.candidmoney.com/articles/274/royal-mail-flotation-summary

Should I swap savings account for high yielding shares?

Question
I am depressed by the low saving rates and seeing my savings capital eroded by inflation.

I have received numerous mailings from Newsletters advising investment in High Yielding Shares. They claim if you purchase the shares they recommend each month then you have a better return and as you hold these shares for 'life' - you do not have to worry about how the share prices of the portfolio perform. You just enjoy the income. There are also suggestions that high yield shares tend to enjoy increasing share price.

Is this a good place to move my savings to as a retired man of 74 years of age. Isn't there a risk of capital loss?

Are there any other drawbacks of a High Yield share Portfolio?Answer
High yielding shares are a very different beast to a savings account and I would avoid unless you are comfortable potentially loosing capital.

The reason most of us have savings accounts is to hold 'rainy day' money in a safe place. So even if markets crash, reducing the value of investments you might hold, you still have a safety net to fall back on.

If your savings are well in excess of the amount of 'safe' money you think you'll need, then by all means consider investing some of the surplus provided you are comfortable with the risks. Otherwise, I would stick with savings accounts despite the depressing interest rates currently on offer.

It is true that the dividends paid by some companies are currently more attractive than savings rates, especially since dividends are deemed to be paid net of basic rate tax. And, since dividends generally tend to rise over time, such shares are a potentially good source of long term income.

However, share prices can fluctuate significantly, with even large companies sometimes seeing their share price drop by 20% or more during turbulent times. If you can afford to sit tight for several years in the hope of recovery you might deem the risk worth taking, but if not then I would be inclined to play safe.

And if you do want to invest then perhaps consider funds investing in higher yielding stocks rather than buying stocks directly. You’ll have to pay fund manager charges, but your investment should be spread far wider and the manager will (in theory at least) be keeping a close eye on things.

Read this Q and A at http://www.candidmoney.com/askjustin/921/should-i-swap-savings-account-for-high-yielding-shares

Can I move my Hargreaves Lansdown SIPP?

Question
I was quite suprised when I read the drawndown article in the Sunday Times today quoting you.

I have my SIPP with Hargreaves Lansdown Vantage and l always believed they were cheap. As a result I have a couple of questions...

The first is I am thinking of moving £120,000 into drawdown. Can I move that amount from HL and put it in drawdown with a new provider or do I need to leave it with HL?

Second, assuming I can move it I want to take the £30,000 tax fee lump sum but leave the rest of it. What would you recommend?Answer
To answer your first question, yes you can move your pension from Hargreaves Lansdown to another pension provider. You can do so either before entering income drawdown or after entering income drawdown with Hargreaves Lansdown (the former is probably more straightforward).

And yes, you can take £30,000 (i.e. 25% of the fund) as a tax-free cash lump sum, leaving the balance invested from which to draw an income.

Hargreaves Lansdown (HL) tends to be more expensive than some rivals when holding funds because it effectively pockets an annual platform fee out the charges you pay to fund managers. On average HL keeps about 0.6% of the commission it receives from fund providers after paying back an average 0.17% to customers as a ‘loyalty bonus’. So customers with commission paying funds are, on average, effectively paying an annual 0.6% fee for HL's services, which is high versus many competitors. The figures I supplied the Sunday Times reflected this.

HL will have to change its charging by April 2014, as will other platforms and discount brokers who haven't already done so, in line with new rules banning platforms/discount brokers from receiving payment for their services via fund managers. This will result in having to offer lower cost 'clean' versions of funds, which have no commission or platform fees built into charges, coupled with an explicit fee paid directly by customers for the service provided.

You may wish to wait until HL reveals its new charging before making a decision. It will be interesting to see what happens as HL would have to cut its profit margin somewhat and/or negotiate cheaper fund versions than the competition to look competitive on price overall.

Meanwhile, you might want to use my other site www.comparefundplatforms.com to get a feel for how the competition stacks up in terms of fund choice and cost.

Read this Q and A at http://www.candidmoney.com/askjustin/920/can-i-move-my-hargreaves-lansdown-sipp

Can I take AVC before company pension?

Question
I paid into an AA pension for 12 years plus AVCs to Equitable Life. Can I take the AVC to buy an annuity before drawing my AA Company Pension?. My year of birth is D.O.B 1955.Answer
Yes, in theory it's possible to take benefits from an Additional Voluntary Contribution (AVC) pension scheme before or after you take benefits from your occupational pension, provided you are age 55 or over (which you obviously are).

However, it all depends on whether your AA pension scheme rules allow this (just because HMRC rules do, it doesn't automatically mean your pension scheme does), so you'll need to check with the AA pension scheme administrator.

If the AA pension scheme does allow you to take the AVC before your AA pension then you have the option of taking 25% of the AVC fund as a tax free lump sum with the balance used to buy an annuity. It's the usual retirement gamble of receiving less income now but for longer or more in future for a shorter overall period of time. There's no right or wrong as such, it depends on how long you think you'll live and prevailing annuity rates. And, of course, how keen you are to get some extra income now.

Read this Q and A at http://www.candidmoney.com/askjustin/917/can-i-take-avc-before-company-pension

Will mortgage offers hurt my credit rating?

Question
My daughter and her spouse are looking to get a mortgage and recently had a first interview with Lloyds Bank. All went well and they were cleared to borrow more then they required, however they stated they will be seeking a number of offers and options from various lenders and the bank stated this could have a detrimental effect upon their credit rating which is very good at the moment.

Is this just a ploy or does it have any truth?Answer
Although various mis-selling scandals suggest banks have sometimes told half truths to win business, in this instance Lloyds TSB is very likely telling the truth.

When lenders look at your credit report (via an agency such as Experian), one of the things they might consider is how many applications you've made for credit. For example, they might deem someone who's made a lot of credit applications in a short space of time as high risk – the simple interpretation being you are trying to borrow a lot of money.

The key is whether seeking a mortgage offer is deemed to be an application and hence end up appearing as such on your credit report, or just deemed to be a quotation which is likely to leave your credit report unscathed.

In simple terms, asking a lender for the mortgage rate you're likely to pay should be classed as a quotation, hence safe. But asking a lender whether they'll lend you a specific amount of money will likely leave its mark on your credit report, even if it’s only a decision in principle.

Read this Q and A at http://www.candidmoney.com/askjustin/916/will-mortgage-offers-hurt-my-credit-rating

Repay mortgage or buy shares?

Question
My wife and I have a endowment policy maturing in December 2013 and is estimated to pay out £18,000.

We have a mortgage for £25,000 that is on a base rate of 2.5%. This is our only debt.

Is paying the mortgage off the best option or do I add to our 5,200 standard life shares?Answer
There is no right or wrong answer, it depends on whether you want to play safe or take risk.

Paying down your mortgage would be playing it safe and equivalent to a 2.5% annual return at current rates. Choosing to invest the money instead could result in a higher return or loss, depending on how it performs.

It boils down to which you are most comfortable doing.

Another option could be to reduce your mortgage and then set up a monthly investment with the money you save via lower mortgage repayments.

Finally, if you do choose to invest, maybe consider an alternative investment to Standard Life so you don't have all your investment eggs in one basket – assuming you don't already hold other investments. That way, should Standard Life shares dive in price for some reason your won’t be fully exposed.

Read this Q and A at http://www.candidmoney.com/askjustin/915/repay-mortgage-or-buy-shares

Good SIPP for holding cash?

Question
I have an existing SIPP, but am thinking of moving it.

I am trying to find a SIPP which is flexible enough to accept some or all of the investment into cash. I have checked on some of the platform providers websites, but haven't been successful in finding anyone who provides this service. Can you help with the names of some providers please.Answer
Low cost SIPP providers tend to be good value when you want to hold investments, but awful if you want to hold cash.

This is because cash rates (at the time of writing) are near zero, for no other reason than it's a nice earner for the SIPP providers (usually platforms) concerned. When you hold cash they'll place it on deposit and keep most or all of the interest for themselves. It's an annoying practice, although in fairness interest rates are low at present and maybe charges would have to rise elsewhere to compensate if they stopped making a profit on cash.

The one low cost SIPP provider offering semi decent rates is James Hay via its Modular iSIPP. (costing £180 a year plus up to 0.18% p.a. of investment value), giving access to four cash accounts via Arbuthnot Latham, Cater Allen, Close Brothers and Investec. You can view current rates here, not great but generally a fair bit higher than other low cost SIPPs.

If you want access to any savings account permitted to be held in a pension then you will need to use a more expensive 'bells and whistles' SIPP, for which you can expect to pay upwards of £500 per year.

You could instead choose to invest in 'money market' or 'liquidity' funds. These typically buy bits of paper from other financial institutions promising returns - which is good unless the promises turn out to be hollow, in which case you could lose money (as happened to some of these funds during the credit crunch). While not as safe as using a deposit account (with risk depending on exactly how the fund invests your money) such funds could be worth careful consideration where a competitive deposit account is not available, although returns can still be low after charges.

Read this Q and A at http://www.candidmoney.com/askjustin/914/good-sipp-for-holding-cash

Storage pod investment a good idea?

Question
I have a friend who has invested, through a broker, in storage pods. The guaranteed return in the first two years is 8% each year. Do you recommend such an investment for income investors?Answer
Investing in storage pods, or self-storage, isn't on the surface a bad idea. Demand for self-storage in the UK is high and managed well it can be quite a profitable venture.

The gist of these investments seems to be you buy a long lease on a storage unit or pod and the self-storage company handles renting it out and maintenance, in return for a fee.

However, as an investor there are a few potential drawbacks.

Firstly, the investment is unregulated, which means if someone runs off with your money then tough. You won't be able to fall back on the FCA or a compensation scheme and will instead have to take matters into your own hands which could prove expensive and ultimately fruitless.

Secondly, assuming the investment is bona fide, you will be reliant on the operations of the self storage operator concerned. If they are inefficient then occupancy could be low, hitting your rental income. And if they go bust your investment could prove worthless unless another operator takes over the management of the premises and your pod/unit, in which case they would probably negotiate different management fees. Things could get very messy.

And thirdly you may struggle to find a buyer in future if you want to get out.

Having looked around the web most of the adverts for storage pod investments lead back to a company called Store First Ltd, which operates several storage depots in the Yorkshire and Cheshire regions. While I have no reason to believe the business is anything other than proper, the potential issues I mention above could apply in a bad case scenario.

In simple terms it seems you buy a 250 year lease on a pod from £3,750 depending on size. Store First puts in place a 6 year agreement to rent and manage your pod, promising an 8% yield (after fees) in each of the first two years, with the option to extend the guaranteed return at the end of two years. When your pod is let you'll pay 15% of your rental income to Store First, as well as service and ground rent charges, basic details here.

Even if we assume occupancy is good, what happens if Store First goes bust or walks away after six years? You could be left with no rental income and an asset that's very difficult to sell on.

All in all, I think there are just too many potential downsides to make these types of investment appealing, but obviously you’ll need to investigate more closely and form your own conclusion.

Read this Q and A at http://www.candidmoney.com/askjustin/913/storage-pod-investment-a-good-idea

Are smart trackers worth considering?

Question
What will be the significance of the new 'smart trackers'?

Does the Schroder QEP US Core Fund fit into this category? And finally, if there is a future for these, what form will they take: fund or E.T.F?Answer
So-called 'smart' trackers sit somewhere between conventional tracker funds (which simply aim to mirror a specific index) and actively managed funds (where the manager aims to use their skill to beat the index).

The potential issue with conventional trackers is that many of the indices they track are 'weighted', that is larger companies dominate the index. So your money may largely be invested in just a few companies. There is also an argument that companies enter an index when they are expensive and fall out of an index when they are cheap, meaning trackers buy high and sell low.

Nevertheless, trackers tend to consistently perform better than many actively managed funds, suggesting the majority of fund managers are just not that good at their job and/or don't do enough to compensate for high charges.

Smart tracker type funds tend to take an index as a starting point but add some extra criteria on top. For example, they might select stocks based on dividend yields. In theory this sounds quite nifty, but in practice they might end up doing better or worse than conventional trackers, much like actively managed funds. Success depends on the criteria used, charges and how the technique fares in the market overall - selecting stocks based on dividend yield may do well when markets struggle, but lag when markets post strong gains.

The Schroder QEP fund range uses a lot of number crunching (called ' quantitative analysis') to select stocks from a wide universe, rather than the traditional hands on analysis approach used by many active managers. I wouldn't call these funds smart trackers as such since they don't tend to use an index as a starting point, they're more actively managed funds run by complex computer algorithms.

I think there is a future for funds using quantitative management techniques (although it’s not new, some have been around for years), but as with all actively managed funds there will be those that succeed and those that don't, based on the quality of their algorithms and market climate. The key, as ever, is not to place all bets on one investment technique.

As for funds or ETFs, we've already seen smart tracker type funds emerge in both and I'd expect that to continue, albeit ETFs are probably the more natural home if managers want to attract larger investors.

Read this Q and A at http://www.candidmoney.com/askjustin/905/are-smart-trackers-worth-considering

Could offshore savings account avoid possible UK collapse?

Question
If the country does go into liquidation, as I fear, would putting my savings into an offshore account save me from a government grab?Answer
I suppose the answer depends on your degree of scepticism.

If we assume the Financial Services Compensation Scheme (FSCS) remains robust then you would be covered up to £85,000 per person per institution if the banks go bust.

Of course, if our country goes bust you might argue the FSCS would go down the pan as well, since the banks it’s funded by might be bust and the Government wouldn’t have the cash to step in and bail out savers. In this case, yes, you could lose money although I think the chances of this scenario are very slim.

The security of holding your money in an offshore bank account depends on the financial strength of your chosen bank and the compensation scheme, if any, that operates in the country where the account is held. However, if the UK does truly sink then chances are quite a few other economies will have done the same, so an offshore account may not be immune depending on where it’s held.

If you are seriously concerned, pick a country that you feel will be financially strong long term and has a robust regulatory system and compensation scheme. And choose a local bank rather than global bank that might be sunk due to bad things happening elsewhere.

Read this Q and A at http://www.candidmoney.com/askjustin/902/could-offshore-savings-account-avoid-possible-uk-collapse

Buy extra pension years to boost flat state pension?

Question
I have just been talking to the pension service about my wife's state pension prospects. She is one of those who now (just) falls into the new flat rate zone starting in 2016. As she is four years short of the current required NI contributions, she would have got 26/30ths of the basic pension, representing a shortfall of £380/year. Now, she should get 26/35ths of the new flat rate, representing a shortfall of nearly £1500/year. As you can imagine, we're not happy about that, even if it is slightly more than she might have got, if inflation rises meanwhile are taken into account.

However, the pension service will not suggest we buy nine years (some yet to come) of voluntary contributions, as the legislation has not yet been passed by parliament. I am considering buying four years of past NI and waiting for the legal position to be clear before committing to any extra.

Do you have an opinion on when that might happen please?Answer
The Government's flat state pension proposals assume a £144 state pension for 35 years of service versus a current £107 basic state pension for 30 years of service (note: the £107/£144 are based on the last tax year). Ignoring inflation up to 2016 and assuming your wife has not contracted out or will receive any SERPS/S2P benefits, then she should be around £13 per week better off under the new scheme if it sees the light of day.

The rules for plugging gaps in National Insurance Contribution (NIC) records allow you to make voluntary NICs for any given tax year with a shortfall within six years of the end of that tax year.

It is proposed to extend this for those who reach state pension age on or after 6 April 2016, giving them until 5 April 2023 to make voluntary contributions for the tax years 2006/07 to 2015/16. These contributions will be at the 2012/13 rate of £13.25 per week for contributions based on the 2006/07 to 2010/11 tax years if paid by April 2019.

The flat state pension proposals (called the Pensions Bill) is currently going through Parliament and due to see the light of day (i.e. gain 'royal assent') during Spring 2014, you can track progress here.

Given your wife will very likely benefit from making voluntary contributions I would seriously consider making them assuming she has NIC gaps over the last 6 years. If she makes contributions for a previous year it will normally be at the rate which applied that year, unless more than two years ago in which case current rates usually apply.

Since she'll seemingly have until her retirement date to make up any shortfalls over the last six years (at the 2012/13 rate) there is arguably no need to rush the decision - assuming of course the proposals all go ahead in their current form. A minor issue with waiting is that any contribution intended for the 2011/12 tax year would be at £13.25 per week and not £12.60 if you wait (since it would fall outside the two year rule mentioned above).

Read this Q and A at http://www.candidmoney.com/askjustin/872/buy-extra-pension-years-to-boost-flat-state-pension

Should I keep Hargreaves Lansdown SIPP for income drawdown?

Question
I have temporary annuity with Living Time, plus a SIPP using OEICs with Hargreaves Lansdown. When the LT annuity matures in 12 months time I'm intending to put my SIPP into income drawdown and combine the two into one drawdown pot using investment trusts.

Are there any problems with this and would it be better to use another SIPP drawdown provider?Answer
Yes, you will be able to transfer the maturity value from your Living Time temporary annuity to another pension provider. This can then be used to provide retirement income via an annuity or income drawdown.

I can't see any problems with this, the main potential issue being whether there is sufficient money in your combined pension pot to provide a reasonable income for the rest of your life - and this will also obviously depend on investment performance along the way.

Hargreaves Lansdown (HL) will have to change its SIPP charging structure by next April in line with new rules (applying to all discount brokers/platforms) banning commission payments from fund providers to brokers and platforms where no advice is given. Put simply, HL will no longer be able to receive the average 0.66% initial commission and 0.77% annual commission payments it currently receives from fund payments. The company will instead have to use lower cost fund versions without commissions built in and charge customers directly for its services (as Alliance Trust Savings and Charles Stanley Direct already do).

Technically the current commission system can continue to apply to existing discount broker/platform clients until April 2016, although maintaining two concurrent pricing models would get very messy.

If you hold investment trusts these changes may not be an issue, since investment trusts don't pay sales commission. HL currently charges 0.5% year capped at £200 to hold shares and investment trusts within its SIPP, although whether this charge will change when the new pricing is announced is currently anyone's guess.

If you only want to hold investment trusts then Sippdeal is likely to be the cheapest route at present. There is no annual SIPP charge and dealing is a flat £9.95. Unlike HL it charges drawdown setup and annual fees, £180 and £90 respectively, but these would soon be outweighed by the lack of annual SIPP fee.

Given a lot could change over the next few months, I would defer a decision until more platforms, including HL, have announced their new charges. But unless Sippdeal puts its prices up I would expect it to remain very competitive in your scenario.

Read this Q and A at http://www.candidmoney.com/askjustin/899/should-i-keep-hargreaves-lansdown-sipp-for-income-drawdown

How does contracting out affect the flat state pension?

Question
As I understand it, long serving members of company pension schemes (paying lower contracted out NI contributions) who are just coming up to retirement in April 2016 are likely to gain little if any benefit. Particularly relevant for those currently aged around 60/62 at present.

Younger members will be paying higher NI contributions from April 2016 (except members of public sector schemes who I believe will be exempt) but older people will have paid lower rates of NI over perhaps a long period.

Because of the lower NI contributions having been paid, the new pension will be reduced prorata perhaps even
back down to the existing basic SRP figure. Can you please provide more information on this.
Answer
Let's start with 'contracting-out'. Before 2012 employees could choose to contract out of the State Second Pension (S2P), the successor to the State Earnings Related Pension Scheme (SERPS). In simple terms, S2P (and previously SERPS) allows you to receive a small National Insurance Contribution (NIC) rebate that must be invested in a pension scheme to potentially provide extra pension income when you retire. The alternative being to remain in S2P and enjoy additional state pension on retirement, dependent on how long you worked and your yearly earnings over your working life.

Whether contracting out was worthwhile depended on pension fund investment performance (after charges!). Needless to say, it wasn't a black and white decision - especially since Governments have a habit of moving the goalposts on these things further down the line.

From 2012 only employees in final salary pension schemes may be contracted out of S2P - and in reality most are since the schemes are automatically set up to contract out. This means employees and employers receiving respective NIC rebates of 1.4% and 3.4% (between certain income limits), paid into the pension scheme. Such employees should broadly enjoy resulting pension income at least equivalent to having remained contracted in to S2P, although the associated guarantee was dropped in April 1997.

Contracting out for final salary pension members will cease with the introduction of the flat state pension in April 2016. So, you're right, affected employees and employers will see their NICs rise by 1.4% and 3.4% respectively from April 2016 with nothing to show for it moving forwards - although some will benefit from a higher state pension under the new proposals than they would have received under the current system.

Non final salary pension employees who chose to contract out of S2P/SERPS in the past will still benefit from any state pension accumulated above the new flat rate as determined via a 'foundation amount' calculation in April 2016.

Their state pension will be based on this 'foundation amount', being the higher of their entitlement under the current system (including any S2P/SERPS) and the below formula based on the new system:

(pre 2016 qualifying years x £144 / 35) less a 'rebate derived amount' if you contracted out of SERPS/S2P at any point. Note the pre-2016 qualifying years are effectively capped at 35 since you can't receive more than £144.

The rebate derived amount is likely to broadly equal the additional pension you would have received had you not contracted out.

But you're right, employees nearing retirement who have contracted out long term are unlikely to benefit from the introduction of the flat rate state pension. The chances are the rebate derived amount will push the above calculation below their entitlement under the current system (probably just the basic state pension), so they'll end up with around the same as they'd get under the current system. Although for each year they work post April 2016 (until state pension age) they could accumulate an extra 1/35th of the flat rate pension, worth £4.11 a week on current figures.

An interesting side issue to all this is what employers with final salary pension schemes will do when faced with extra 3.4% NICs from 2016. You'd expect them to pass on the cost to employees in some way, but rules mean this might not be straightforward. It's especially pertinent to the public sector, where cash strapped government departments and councils will likely wince at the added cost.

Read this Q and A at http://www.candidmoney.com/askjustin/850/how-does-contracting-out-affect-the-flat-state-pension

What are Shroder Oriental Income C shares?

Question
What are Shroder Oriental Income C shares now on offer?

I wonder if you can help as no one at Interactive Investor, Schroder nor Affinity could deal with the concept of 'C' shares being offered by this popular Investment Trust . Schroder Oriental Income have allocated current share holders ( in my case inside an ISA) with subscription shares which, I understand, for £1 can be converted into C shares. So really my query is what happens next once an investor has bought such C shares? Answer
C shares are simply a way for investment trusts to raise money.

When investment trusts want to attract more money under management, they need to issue more shares. But unlike unit trusts, they can't simply create extra units/shares on demand, it needs to be via a formal share issue - with 'C' shares the usual route to doing so.

C shares are a short term home for new subscriptions. Once money is raised and invested, then the C shares are converted into ordinary shares in the main investment trust. Why go to all this bother? It makes life much simpler - the shares can be offered at a fixed price then converted at the prevailing price later on, plus it avoids affecting the performance of the existing investment trust by suddenly injecting a whopping amount of cash and existing investors partly having to foot the bill for stamp duty and dealing charges on new investments purchased.

The potential advantage of buying C shares is avoiding premium to net asset value (around 3% on the Oriental Income Trust). In English this means the shares currently cost about 3% more than the value of the underlying investments, largely because it's a popular trust with more buyers than sellers - hence the extra share issue.

When C shares are converted into ordinary shares (in this case by 16 July) they buy those ordinary shares at net asset value, not the prevailing share price, hence avoiding any premium there might be at that time.

However, this potential benefit may be partly offset by the net asset value of C shares being reduced to cover the costs of issue - in this example by about 1.4%.

Should you buy C shares instead of the existing ordinary shares? While they can avoid paying a premium for the existing shares, bear in mind the cost of issue and period the fund not be fully invested, which could drag short term performance versus the ordinary shares if markets rise meanwhile.

Read this Q and A at http://www.candidmoney.com/askjustin/897/what-are-shroder-oriental-income-c-shares

View on Capital Alternatives?

Question
Hi Justin, first and formost well done with the site, its been most useful.....

I wanted to find out if you had ever had dealings with Capital Alternatives, i have been approached by them in relation to an alternative investment which sounds very appealing (i have thier full proposal and can forward if you wish) however something tells me something isnt right.

The other alarming fact is that they obtained my details i suspect through Alternative Confidential which portrays it self as a consumer champion yet i am almost certain they generate lead for capital Alternatives as they ar ein the same office. The other factor concerning me is Premier Alternatives again seem to be in the same office and they offer investment products to brokers.

You assistance would be valuable as the offer the have given me seems very very good considering current market conditions......Answer
I haven't come across Capital Alternatives before so can't give you any feedback specifically about them I'm afraid.

However, a quick look at their website confirms they are not regulated by the FCA and I suspect the investments they sell are not either - personally I never consider such companies.

The Capital Alternatives website says ' Your investment will not be listed or dealt on any stock exchange. There is no guarantee that there will be a secondary market for your investment which may be difficult to realise.' which basically means there may never be a buyer for whatever they sell you - never a good position to be in.

As for the potentially devious way they obtained your contact details to subsequently cold call - this in itself should be enough to make you wary.

In recent years far too many aggressively sold unregulated investments that appeared 'too good to be true' turned out to be scams. So proceed with extreme caution when approached by such companies. if something goes wrong you'll have very little, if any, comeback.

Read this Q and A at http://www.candidmoney.com/askjustin/894/view-on-capital-alternatives

How can I hold cash in my pension and ISAs?

Question
I am concerned that the market is becoming overheated and think we are due a correction.

Most of my investments are held in an ISA wrapper or a self select drawdown SIPP. I obviously don't want to remove my investments from the ISA and can't remove them from my SIPP. Are there unit trusts which invest in deposit accounts so that the capital is not at risk?

And, if so, is it possible to hold these in an ISA or SIPP? I do not want to invest in corporate bonds or gilts as I believe these are equally at risk as equities.Answer
In the time it's taken me to answer your question (sorry) your fears have become partially founded..

The safest asset you can hold in your pension is cash, effectively a bank account linked to the SIPP. The downside, is that low cost SIPP providers pay next to no interest on such accounts, they make a tidy sum by pocketing the margin (between what the bank pays and what you receive) themselves,

You can usually earn a bit more using 'money market' or 'liquidity' funds. These typically buy bits of paper from other financial institutions promising returns - which is good unless the promises turn out to be hollow, in which case you could lose money (as happened to some of these funds during the credit crunch).

Otherwise, if you have a more expensive 'full' SIPP you can probably use a savings account of your choice, provided it allows pension investment (look for 'trustee' accounts). Rates will still be low (1-2%) in the current environment, but significantly higher than usually paid on low cost SIPPs. However, higher SIPP charges may well erode the difference.

It's rather harder in a shares ISA as you're only allowed to hold cash if you intend to invest it, plus any interest is taxed at 20%. But doing so for a few months is unlikely to cause a problem and is quite feasible if you use a platform, just be prepared to receive pretty much zero interest.

Money market funds are also normally prohibited by the '5% test', that is HMRC does not allow investments to be held in a shares ISA if they guarantee (or the nature of the investment is such) that any loss will not exceed 5% at any time in the next 5 years.

Read this Q and A at http://www.candidmoney.com/askjustin/892/how-can-i-hold-cash-in-my-pension-and-isas

Can I get a buy to let mortgage without an income?

Question
Is it possible to get a buy to let mortgage if you are not in full time employment ? I am 51 and have just retired having built up a share portfolio to provide me with an adequate income. I have also paid off the mortgage on my house which is probably worth about £150,000.
The house I would like to buy with a buy to let motgage is worth approximately £175,000 and I have funds for the sort of deposit lenders seem to require of around 35%.

Whilst I could sell some shares and buy the house and apply for a mortgage after I have a tenant in place, I do not want to do this, I really want the morgage to buy the house and then rent it out.

I have spoken to an Agent who has told me it should be possible to find a Tenant quite quicklyAnswer
It's common for buy to let lenders to require a valuation confirming that rental income will be at least 125% of the mortgage interest. Provided you can meet this then you're over the first hurdle.

The bigger issue might be that many lenders require proof of personal income too and link the maximum amount you can borrow to this.

I'm afraid I'm not buy to let mortgage expert, but I gather BM Solutions (part of Lloyds Bank) has recently relaxed the personal income requirement for experienced buy to let investors. And Mortgage Works has a reputation for being quire a flexible lender in this respect too.

I'd start by speaking to a mortgage broker, since the above mentioned buy to let mortgages are only available via brokers in any case. They should be able to give you a clear idea of how much you can borrow and how much it will cost. Just ensure the broker doesn't try to take you for a ride with their own fees - the mortgage lender will probably be paying them around 0.25% to 0.50% in any case.

Read this Q and A at http://www.candidmoney.com/askjustin/891/can-i-get-a-buy-to-let-mortgage-without-an-income

Can I hedge potential returns on a protected plan?

Question
I have a holding in NDFA Twin Option Kick out Plan Dec 07 (now Meteor) which will pay out 104% after 5.3.2014 if the FTSE 100 is over 5853.5 and the Nikkei 225 is over 12972.1. Both indexes are looking good at the moment but there are still 10 months to go and I am feeling nervous. Would it be possible to hedge my investment by buying an option at those index levels for next March?Answer
This plan promises to pay 18% a year with the option to end early on each plan anniversary if both indices are higher than their starting level - something that hasn't happened to date due to the Nikkei being lower. However, the Nikkei has surged over much of this, before falling back a bit of late, so you're in with a chance of a payout at maturity - equal to 18% a year x 6 years = 108% - provided both indices are above their starting level on 8 May 2014.

If either index is lower on 8 May 2014, you'll get back your initial investment in full at maturity provided neither index has fallen by more than 50% of the start level at any time during the 6 year term. Otherwise, you'll lose capital on a 1:1 basis based on the index which has fallen the most.

Could you hedge your bets? Difficult, as even if you buy an option it probably won't compensate for the 108% return you'll lose if either index is lower than its starting level. For example, let's assume you put £10,000 into this plan originally. You could buy an option giving you the right to sell the Nikkei at 12972 next May. if the Nikkei finishes at 12970 then you won't receive the 108% return on your £10,000, so you've lost out on £10,800 of growth, and the option will be almost worthless meaning you'd have lost money on that too. If the Nikkei plummets then your option would have more value, but still maybe not enough to cover your lost 108% return.

You could spread bet on the Nikkei (or FTSE), aiming to make a big profit if the index falls in value. But this is very high risk, if the index rises you could lose a significant amount of money, potentially wiping out the returns you would then probably get from the Meteor plan.

If any readers are smarter than me in this area, please post ideas below - I can't see a sensible way to hedge the gain that might be lost in the above example.

Meanwhile, fingers crossed the indices don't end up below the start level so you get your pay out.

Read this Q and A at http://www.candidmoney.com/askjustin/890/can-i-hedge-potential-returns-on-a-protected-plan

Are second hand VCTs tax-free?

Question
If you buy VCT shares in the market then you obviously don't qualify for the up-front tax relief. However, how are dividends treated? Should they be included in your tax return or, as I believe is the case with VCT shares that were subscribed for on issue, can they be simply left off it?

My reason for asking this is that some established VCTs seem to offer a pretty good (and relatively stable) yield based on the market price and (as part of a sensibly diversified portfolio) might provide an opportunity to get a good income stream.Answer
You raise a very good point - 'second hand' venture capital trust (VCT) shares continue to benefit from exemptions to tax on both dividends and gains. The only tax benefit you won't enjoy, versus investing in a new issue, is income tax relief on contributions.

Of course, dividends are never truly tax-free, they're paid out of taxable company profits and deemed to be received net of basic rate tax, which cannot be reclaimed. Nevertheless, this could still prove a useful tax saving for higher and top rate taxpayers. And there's no need to enter this income on your tax return.

However, bear in mind the (potentially high) risks of VCT investing. Aside from underlying investment risk, VCTs often trade with wide spreads between buying and selling prices - some of the smaller trusts can prove especially difficult to sell. On the plus side this means you might grab a decent deal when buying second hand, but expect to be hit when trying to sell in future.

Read this Q and A at http://www.candidmoney.com/askjustin/884/are-second-hand-vcts-tax-free

Best way to pass money to children to avoid IHT?

Question
What is best way to pass on assets which is over the threshold, i.e. £650,000, to children without incurring Inheritance tax?Answer
Let's start with the basics. Everyone's estate (i.e. net assets on death) is exempt from inheritance tax up to a threshold called a 'nil rate band', currently £325,000 until at least 2018. Amounts over this are subject to 40% inheritance tax.

However, married couples and civil partners can pass assets between each other free of inheritance tax and any unused nil rate band (as a percentage) on the first death can be transferred to the surviving spouse/civil partner, as you refer to.

Aside from a few allowances I'll cover in a moment, the only way to get assets outside of your estate is to give them away and live for at least 7 years. Furthermore, you can't continue to use assets, e.g. property, once given away unless you pay market value rent.

If you die within 7 years of making the gift it might be subject to taper relief, reducing the tax payable. However, since all (non-exempt) gifts within the last 7 years are offset against your nil rate band on death before other assets, taper relief is only likely to be relevant if total gifts (within the last 7 years) exceed your nil rate band.

If you don't want your children to have the assets right now you can gift them into some form of trust that will pass ownership to the children at some point in future. But again, you can't continue to use/enjoy the asset once gifted into trust.

There are various types of trust (read more on our inheritance tax page), although discretionary trusts tend to be popular since they offer lots of flexibility as to who gets what and when. However, potential inheritance tax benefits may be partly (or totally) offset by a 20% tax ('chargeable lifetime transfer') on transfers into a discretionary trust greater than the nil rate band followed by a further tax ('periodic charge') of 6% every 10 years. Capital paid out between periodic charges is effectively taxed on a pro-rata basis as an 'exit charge'.

Annual gift allowances include annual gifts totalling up to £3,000 (you can carry forward the previous year's allowance if unused) and as many (up to) £250 gifts per person that you wish to make. Wedding gifts of up to £5,000 per son or daughter are also exempt, as are gifts out of taxable income (not capital).

Investing in 'unquoted' companies, which includes AiM shares can mean the money falling outside of your estate after two years under business property relief rules. However, there is a list of criteria a company must meet to qualify - primarily it must not hold investments, including shares and land/property, And you'll need to keep holding the shares, as the relief is only granted when the 2 year holding period was during the 5 years immediately before death. Such investments can also prove high risk, so great care is needed.

Bottom line. If you can afford to give money/assets away forever to your children now and think there's a good chance you'll live for at least another 7 years then consider doing so. If you'd rather your children don't take ownership until a later date then consider using a trust, but beware of chargeable lifetime transfer/periodic charge taxes diminishing any potential inheritance tax saving if the gift (including other non-exempt gifts within the last 7 years) exceeds the nil rate band.

Read this Q and A at http://www.candidmoney.com/askjustin/883/best-way-to-pass-money-to-children-to-avoid-iht

Should I use more than one fund supermarket for safety?

Question
i have a Henderson Global Growth in an ISA and the AXA Framlington Health fund outside of an ISA, both held directly with the fund managers. I have also recently invested in Fidelity UK Smaller Companies through the Cavendish Online supermarket.

I feel I should re-register the first two investments via a supermarket/broker to reduce fund charges, but I am still unsure of the safety of using supermarkets and the fact that they own the nominee account tf things go wrong.

Can you advise on using supermarkets and whether to use the same broker or different brokers?Answer
There are basically two levels of risk (ignoring falling stock markets causing losses).

At the fund level your money is held by a 'custodian' (often a bank) separate from the fund manager, so even if the fund management company goes bust your money/fund holding should be unaffected. If fraud is committed, e.g. someone illegally dips their fingers into your fund, and the fund manager is insolvent hence unable to make good the loss, the Financial Services Compensation Scheme (FSCS) will step in and compensate for up to £50,000 of losses (per person per fund management company) provided the fund is authorised by the Financial Conduct Authority (FCA).

The above applies whether you hold funds directly with the fund manager or via a platform (another word for supermarket).

You're right that platforms normally use a nominee account to hold your cash and funds. Again, this must be ring fenced from the platform business, but if fraud takes place you could lose money. If such an instance if the platform is insolvent and unable to compensate the FSCS should step in and compensate for up to £50,000 per person per platform.

Provided the broker you use doesn't own the platform or ever hold your money then they shouldn't add any risk to the process. At worst, if they go bust you'll just have to appoint another broker as agent, which requires a simple letter or form, to continue receiving trail commission rebates if applicable.

Cavendish Online uses the Fidelity FundsNetwork platform/supermarket, which I'd rate as one of the safest based on Fidelity's financial strength. Personally I'd be comfortable holding more than £50,000 on Fidelity's platform. But since we can never say never, consider limiting your total holding to £50,000 per platform if you want peace of mind that you're fully covered by the FSCS.

Read this Q and A at http://www.candidmoney.com/askjustin/882/should-i-use-more-than-one-fund-supermarket-for-safety

Where to invest in troubled times?

Question
I have seen your recent posts that stock markets are being propped up by Central bank intervention. As the FTSE index is quite high now and could crash in the near future, I am looking at ways to reduce my riskier funds by investing in much more cautious funds, especially as I am not far off 60.

I have checked out some cautious funds (e.g. Investec Cautious managed) and notice that this fund manager lost money in 2008/9. Even though I am happy to accept a lower return on funds now, I do not want to lose money when a crash comes. Are there any ultra cautious funds around that offer reasonable returns and will return minimal loss should a crash arise?

Are gilts still a good bet now, even though the financial press seems to give a negative forecast on these?

Also, which are better in today's market and going forward: corporate bonds or strategic corporate bonds?

Thank you very much for any help you can give me on this.

I really enjoy your website.Answer
Stock markets are very difficult to predict, especially in the current fragile economic climate. However, reducing your portfolio risk may well be sensible, especially since you're approaching age 60 - there's little point taking excessive risk in retirement if you can afford not to.

Unfortunately the only investment where you can be pretty sure of not losing money is cash - and rates are currently low compared to inflation, other asset types and historical levels.

Most 'cautious' funds tend to be run along one of the following strategies:

1. Hold mostly gilts, corporate bonds and cash, with the balance held in stock markets.

2.As above, but also hold other assets such as gold (this is the approach taken by Investec Cautious Managed).

3. Run an absolute return strategy that tries to deliver positive returns regardless of markets, for example the manager might bet on share prices falling and profit if they do.

The trouble with all the above strategies is that none are immune to stock market downturns. Most cautious funds have some stock market exposure (Investec Cautious Managed around 40% as at end of April - last published data) and absolute return managers usually fail to deliver consistently positive returns (It's a very tall order).

That's not to say holding funds like these is a bad idea, but it's important to adjust your expectations as to how much protection they'll provide in a downturn.

If stock markets do crash then gilts, high quality corporate bonds and gold are likely to fare well - as these tend to be favoured assets when investors are nervous or panic. However, all are currently riding quite high, in part due to stock market uncertainty in recent years and central banks buying gilts (or equivalents) as a mechanism for pumping billions into economies. If the stock market doesn't crash and economic confidence grows it seems likely gilts, bonds and gold could all take a hit.

Which basically leaves us in a conundrum. How to take a cautious approach without resorting to just holding cash?

There isn't a magical answer I'm afraid.

In practice the most sensible approach is to probably combine a variety of investments, including cautious and absolute return funds and accept that you could lose money if markets crumble. Provided you're looking to remain invested for 10+ years chances are you'll ride through any downturns to still end up in profit overall long term.

However, if any readers have other strategies I'd be really interested to hear.

As for corporate bond or strategic corporate bond funds, the latter gives fund managers more flexibility. In simple terms high quality 'investment grade' corporate bonds tend to be more influenced by interest rates and inflation than higher yielding bonds, which are often more correlated (i.e. move in a similar direction) to stock markets. Most plain vanilla corporate bond funds invest largely in investment grade bonds while strategic bond funds invest in both, with the manager adjusting the proportion based on their outlook.

Strategic bond managers who get it right should outperform conventional bond funds, but obviously the reverse holds true as well.

Read this Q and A at http://www.candidmoney.com/askjustin/876/where-to-invest-in-troubled-times

Do clean fund versions have better income yields?

Question
If a unit trust takes it`s annual management charge from income, am I right in thinking that post RDR the `clean version ` will produce a higher yield; as the AMC is lower?Answer
Yes, you're quite right.

Let's assume a fund charges 1.5% a year, which is taken from income before its paid out to investors. if the fund receives annual income equivalent to 4% of the fund, 2.5% (4 - 1.5) will be paid out to investors.

if the clean version of the fund charges 0.75% then 3.25% will be paid out (4 - 0.75).

Obviously, you may end up paying additional platform/discount t broker fees out of capital, potentially offsetting some of the benefit, but this is still a positive consequence of explicit clean charging.

Read this Q and A at http://www.candidmoney.com/askjustin/881/do-clean-fund-versions-have-better-income-yields

Should I use more than one fund platform for safety?

Question
After the financial crisis, people were advised to split their money between banks so that their money didn't go over the compensation limit of £85,000. Would you advise doing something similar with investments on fund supermarkets/investment platforms? What is the compensation limit in this case?Answer
Fund supermarkets/platforms, along with most stockbrokers these days, hold your money and investments in what's called a nominee account.

Nominee accounts are separate companies owned by platforms/stockbrokers that hold shares or funds on behalf of all their customers. While the nominee company owns the investment(s), it promises to pay customers what they're owed - i.e. dividends and proceeds when shares/funds sold, or the shares/units themselves if you move the nominee account to another broker. And the nominee company assets are ring-fenced from the main business , i.e. the platform/broker is not allowed to withdraw your money or investments for themselves.

So technically your money is safe. if the platform/broker goes bust the nominee account should be unaffected, save for a delay in finding another platform/broker to take on the nominee account or the investments being re-registered into your name.

However, in the event someone illegally dips their fingers into the nominee account you could lose money. While the chances are very slim when using an established, reputable company, I guess we should never say never.

In this event, assuming the platform/broker can't afford to make good the loss and goes bust then your claim would fall on the Financial Services Compensation Scheme (FSCS), giving you 100% protection on the first £50,000 invested per institution (i.e. platform/broker).

The funds you hold within the platform should also be covered by the FSCS giving £50,000 of protection per fund management company. So if fraud occurs at the fund level (rather than the platform) you'll be separately covered, Cash accounts (for example, within a SIPP) are likewise covered up to £85,000.

Should you use more than one platform for this reason when larger sums of money are involved?

I'm torn. In general I'd say no, as it rather defeats the point of using platforms in the first place (which is to make administration simple). However, when there's a risk, albeit very small, that someone could theoretically walk off with your life's savings it does seem sensible to ensure full FSCS protection.

I think this ends up being a personal choice, based on how much you value total peace of mind over convenience.

You can read more about nominee accounts in my article here.

Read this Q and A at http://www.candidmoney.com/askjustin/880/should-i-use-more-than-one-fund-platform-for-safety

Transfer from Hargreaves Lansdown to Cavendish Online?

Question
Thanks for your brilliant and informative website which I have only just discovered. I have substantial (for me) ISA and SIPP investments on the H-L Vantage Platform.

My ISA is in 9 different funds, as is my SIPP. I can see from your website that I am no longer getting the best value from using this platform. It would appear that as things stand that I would be better off using Cavendish for my ISA, not so sure about my SIPP.

However, is it worth waiting to see what H-L have up their sleeves as far as RDR is concerned or should I just take the jump and move to a cheaper platform like Cavendish now. Cavendish seem to have been good value for some time now and one would perhaps expect this to continue.

Anyway, keep up the good workAnswer
Thanks for the kind words, glad you like the site.

Cavendish online is very good value for ISAs provided you're comfortable with a straightforward no-frills service.

The main issue moving your ISA away from Hargreaves Lansdown (HL) is their steep £25 per fund charge (the previously charged VAT has recently been removed) to move your investments 'as is' (called 'in-specie') to another platform such as Fidelity FundsNetwork (as used by Cavendish) - on your 9 ISA funds this means a £225 bill. You can avoid the charge by selling the funds and transferring cash, but this means being out of the market for maybe a week or more.

HL has already said they'll likely charge a percentage fee of some sorts when they finally introduce their RDR charging (which must be by 6 April 2014 at the latest). Given their commission margin (after the loyalty bonus) averages about 0.6% a year it's not unreasonable to expect the average fee under the new charging to be similar.

This gives HL a big potential headache - customers may view the cost as too high once laid out in black and white. HL's response appears to be trying to negotiate lower fund charges than rivals, so they can add their healthy fee and not end up excessively expensive overall. Whether they manage to pull it off remains to be seen. But I suspect that even if they do negotiate rock bottom fund charges competitors will demand the same deals from fund managers and HL could still end up looking relatively expensive.

Since Cavendish Online (and underlying platform FundsNetwork) will also have to amend their charging I'd sit tight for now, especially given the high in-specie charge HL will impose. Provided Cavendish Online can negotiate the same current ISA deal via explicit fees - that is you'll pay 0.2% to FundsNetwork, 0.05% to Cavendish and 'clean' fund charges - the proposition should remain very competitive and well worth considering. But for the sake of a few months probably better to wait until the platforms and discount brokers have announced their new charging structures so you can compare the whole market.

Cavendish Online's SIPP proposition is a bit clunky and less appealing than some other rivals - take a look at my comparefundplatforms site to compare costs for the specific funds you hold.

Read this Q and A at http://www.candidmoney.com/askjustin/878/transfer-from-hargreaves-lansdown-to-cavendish-online

Are retail corporate bonds a good deal?

There's been a trend in recent years for some companies to offer 'retail' corporate bonds direct to the public, rather than the more usual route via markets. The Jockey Club and Nuffield Health being the latest examples. Although the interest rates on offer often look tempting versus savings accounts, are there catches? And should you take the plunge?.

What are corporate bonds

In simple terms an IOU from a company. In return for lending them money, they promise to pay you a fixed rate of interest for a fixed period of time and then repay the money you originally lent them (referred to as 'redemption'). You can read more on our Fixed Interest investments page.

Why do companies issue corporate bonds?

Because they want to borrow money. Alternatives include floating on the stock market (or, if they already are, issuing more shares) and bank loans. Issuing a bond can be attractive to companies who can't borrow money as cheaply from a bank and/or whose owners don't want to dilute their stakes.

How do retail corporate bonds differ from conventional?

The main difference is that retail corporate bonds are targeted at private investors, whereas conventional bonds are largely held by big institutional investors such as investment and pension funds. And while conventional corporate bonds may be traded via markets, some retail bonds forbid a change of owner, i.e. you must hold the bond until redemption. Retail bonds also tend to run over shorter periods of around 5 years, whereas 10+ years is more typical for conventional.

Why do companies issue retail corporate bonds rather than conventional?

Being cynical, companies turn to private investors when they think they stand a better chance of either raising the money or paying a lower rate of interest versus targeting intuitional investors. In fairness, the cost of issuing retail bonds is usually lower than conventional, so it can make more sense for companies to take this route when trying to raise more modest sums.

What happens if the company can't afford to pay me back?

You'll very likely lose some or all of your money. And, unlike savings accounts, such losses are not covered by the Financial Services Compensation Scheme (FSCS). The same holds true if the company can't afford to pay you interest. Bonds vary as to where they rank in the creditor pecking order if a company goes bust, but in general don't expect to get much, if anything back should the company become insolvent.

What are the risks?

The main risk is that company can't afford to pay you interest and/or repay the sum borrowed. As above, this could mean losing some or all of your money. The trouble is, it's very difficult to gauge the likelihood of this. Without having an in depth knowledge of the company and industry concerned you'll probably have to take a leap of faith based on the information within the bond's prospectus - far from satisfactory.

Rising inflation and/or interest rates are also a threat. High inflation will reduce the amount future interest payments and your capital at redemption can buy. While higher interest rates could make the fixed interest payments you receive look less appealing.

What else should you watch out for?

If a bond is non-transferable then you've no choice but to hold until redemption, bad news if you need to get your hands on the money meanwhile. If a bond may be traded then you could sell before redemption, but might get back a higher or lower amount than your original investment depending on its market price at that time.

Some retail bonds include a gimmick within a high headline interest rate. For example, the Jockey Club bond quotes 7.25% annual interest (before tax), but 3% of this is paid via credits to spend at the races - not much use unless you're a keen racing fan - and 4.25% a year sounds far less appealing.

Never invest in a retail bond without reading the prospectus cover to cover. Yes, it's mostly dull as dishwater, but it may highlight specific risks or issues you'll otherwise miss. And keep an eye out for potential liabilities that could hit the company in future, for example debts that need repaying or a final salary pension scheme in deficit.

Does the interest on offer outweigh the risks?

This is something you'll have to judge yourself. However, if the retail bond term is 5 years then compare the interest offered to the rate on a 'best buy' 5 year fixed rate savings account - about 3% at the time of writing. The savings account is 'risk-free' (in so far as the first £85,000 is covered by the FSCS if the bank can't repay you), so any bond interest in excess of that is effectively the 'premium' you're getting to take some risk.

In the case of the Nuffield Health retail bond paying 6%, you're getting an extra 3% a year to compensate for the potential risks. Some might find this acceptable, others probably not.

Should you buy retail bonds?

Never buy them as a direct alternative to a savings account - there are risks involved and you could lose some or all of your money.

Otherwise you'll need to weigh up the risks versus the potential return on offer. And this is perhaps the big stumbling point. Most private investors, me included, would struggle to gauge the potential risks with any degree of accuracy. Without the ability and/or time to thoroughly understand a company's business, accounts and bond terms and conditions, investors (to varying degrees) end up having to take a punt.

On balance I don't think retail bonds are necessarily bad (each must be judged on its merits), but if one of these bonds does go belly up in future we can expect a lot of investors moaning they didn't have a clue what they were buying!

Read this article at http://www.candidmoney.com/articles/272/are-retail-corporate-bonds-a-good-deal