Why do best buy savings accounts become uncompetitive?

Question
I have just received the annual letter informing me that my cash ISA interest rate will be reduced to 0.5%. I will now check out other banks, building societies prior to switching my cash ISA. My question is simple, why do they do this? Is it in the hope that they will be left with a small number of customers who do not keep tabs on their interest rates. Surely it might just pay them to build up a loyal customer base by paying a decent ongoing rate. There again maybe I am missing something?Answer
Yes, it's a very annoying practice that banks and building societies persists in doing, most likely because it's very profitable.

The usual ploy is they offer a very competitive (potentially unprofitable) rate to attract lots of new customers. A year or two down the line, the rate will more often than not have become very uncompetitive, either due to introductory bonuses expiring or the rate simply being cut. Of course, some savers will do the sensible thing and more elsewhere, but many don't meaning the bank/building society makes a very healthy profit thereafter.

I suppose the issue is the most competitive rates offered these days are either unprofitable or not profitable enough for the banks/building societies concerned, they're just a carrot to tempt in new customers. If one bank decided to offer a rate it could afford to maintain long term, chances are it wouldn't look especially competitive, so would likely fail to attract scores of new customers. I can only see this working well if all banks and building societies followed suit, which sadly I doubt will ever happen.

On the bright side, if you're pro-active and play the game by transferring accounts when rates come off the boil, you'll likely benefit from this practice - at the expense of those less active savers who stay put.

One alternative for those who don't want the hassle of monitoring or switching accounts is the Investec High 5 Issue 2 account, which pays the average of the top 5 savings accounts (as per Moneyfacts best buy tables), although the account has a potentially restrictive 6 month notice period.

Read this Q and A at http://www.candidmoney.com/askjustin/818/why-do-best-buy-savings-accounts-become-uncompetitive

Suggestions to track fund performance?

Question
Can you recommend a good web site to check performance of funds, It would be nice to find one where you could have a list of the funds that you have on a default list that you click on rather than having to trawl though the thousands of fund to find your every time.?Answer
There are a few options I know of, as follows:

Citywire Virtual Portfolio - probably the most comprehensive and easy to use. Lots of information including news alerts on your holdings.

Interactive Investor Virtual Portfolio - I haven't used it, but appears comprehensive.

This is Money Power Portfolio - again, I haven't used it but seems pretty comprehensive.

Google Finance Portfolio - simple to use, although heavy US bias, not all UK funds appear to be covered.

If readers have feedback regarding the above or other suggestions, please post below.

Read this Q and A at http://www.candidmoney.com/askjustin/816/suggestions-to-track-fund-performance

What counts as cash in asset allocation models?

Question
I am formulating an asset allocation model for my fund portfolio and would like to ask you a question on this subject :

The usual asset model will include recommended percentages for equities, bonds, commodities, property and also cash. Please could you inform me if this element of cash is supposed to be just the part that the fund providers leave as cash; or is it supposed to be the total of one's own cash funds including cash ISAs, plus bank and building society accounts?

I would be grateful to receive clarification of this matter and thank you for your assistance.Answer
In general asset allocation models assume cash to be that in your investment portfolio, not your other savings. The rationale is that investors should have sufficient savings elsewhere to fall back on - so asset allocation focuses purely on investing.

The main decision when measuring cash weightings in portfolios is whether to include the cash balances held by the underlying fund managers. While doing so is more accurate, getting the data can be a hassle and it's usually at least a month out of date.

I tend not to bother (and just include a platform cash account and money market funds etc) as the majority of managers don't use cash strategically in any case. But it's good to be aware when holding funds where the manager does sometimes take big cash positions.

Read this Q and A at http://www.candidmoney.com/askjustin/815/what-counts-as-cash-in-asset-allocation-models

Is Saxo MWM good value?

Question
How would SAXO MWM now compare in your excellent ISA Discount Brokers Guide, especially in the Trail commission table? I have noticed that they now offer 100% discount on both the fund platform fee and the Trail commission since your reply to the question from starlight29 on 08/09/12. They are also discounting an annual fund fee of 0.5% to 0% until the 1st January 2014.Answer
Thanks for reminding me to add Saxo Modern Wealth Management (MWM) to the ISA Discount Broker Guide - have just done so!

In terms of cost Saxo MWM doesn't fare too well in most scenarios. They rebate all sales commissions and platform fees, which is great, but the savings are somewhat offset by the steep 0.5% annual account fee, plus a further £35 a year for ISAs and £195 for SIPPs.

As you mention, the 0.5% annual fee is waived until 1 January 2014, but unless you plan to transfer to another platform within a year or so thereafter it's not something to really factor in when deciding whether to use Saxo MWM. If you do transfer out there's a fee of £15 per holding (for 'as is' in-specie transfers) which is not unreasonable compared to some competitors (Hargreaves Lansdown charges double this).

I haven't used Saxo MWM's fund/portfolio tools (only available to clients), but the brief videos on their website suggest they're probably above average, although I doubt they rival Bestinvest's.

Share dealing is available at £9.95 for UK shares on deals up to £75,000, but rise significantly for larger deals and trading on overseas markets.

Overall it looks a reasonable proposition that's simply too expensive in the current market. Saxo's fee needs to be nearer 0.25% if they're to be a serious contender.

If any readers have used Saxo MWM, I'd be keen to get your feedback regarding service and features.

Incidentally, I asked Saxo MWM a couple of weeks ago if they'd supply data for my new fund platform comparison site (www.comparefundplatforms.com) - still waiting for them to reply...

Read this Q and A at http://www.candidmoney.com/askjustin/813/is-saxo-mwm-good-value

Difference between designated accounts and bare trusts?

Question
What's the difference between 'assigning an account', 'designating an account' or putting the account into trust for a grandchild?Answer
These options exist because children are not allowed to hold most investments in their own name until age 18 (16 in Scotland). The restriction doesn't apply to savings accounts, although banks and building societies typically impose their own conditions on when an account can be held in the child's name, e.g. age 7.

Let's start with 'putting in trust' first, as it tends to be the best option. The trust is invariably a 'bare' trust - the simplest type of trust. This means assets are held in the name of a trustee(s) (e.g. parent/grandparent) for the benefit of a beneficiary (e.g. child/grandchild). The beneficiary receives all gains and income, on which they're personally taxable, and has the right to take legal ownership of the asset(s) at age 18 (16 in Scotland).

In other words, a grandparent can give money to a grandchild and for all intends and purposes the grandchild owns it, although it can't officially be held in their name until they reach age 18. This means the money is also treated as a gift for inheritance tax purposes, hence will fall outside of the grandparent's estate provided they live for at least 7 years after making it.

Setting up a bare trust requires a simple form, usually provided by the investment company concerned. More details in my earlier answer here.

Banks and building societies also use some form of simple trust like this when opening an account for children who are below the minimum age they're allowed to hold it in their own name.

A designated account means the money remains the grandparents, but they've flagged that it's intended to pass to the grandchild at age 18. This means the money continues to belong to the grandparent, hence is taxed as theirs and doesn't fall outside their estate for inheritance tax purposes. Setting up a designated account usually just means adding the child's initials to the application form. While very simple and flexible (the grandparents aren't obliged to hand over the money in future), it may not be very tax efficient, especially for larger sums.

Assigning an account usually refers to policies with life insurance companies, meaning that the policy is legally transferred from one person to another. It can be useful when a grandparent owns an investment bond that would trigger a large tax bill if surrendered. .Provided they're happy to give it to someone else (aged 18 or over), the bond could be assigned accordingly, potentially saving tax if the new owner is in a lower tax band.

In practice I'm sure there's quite a lot of confusion surrounding designated accounts and bare trusts, with many people using the former thinking they're not liable to tax. I suspect HMRC generally turns a blind eye, as it's hard to police and the sums usually small, but personally I'd use a bare trust where possible.

Read this Q and A at http://www.candidmoney.com/askjustin/809/difference-between-designated-accounts-and-bare-trusts

Will switching to clean fund units trigger CGT?

Question
In view of the new clean fund classes, it will often make sense to switch existing fund investments into the new clean class because of the lower AMC. However, if you sell the old fund class and buy the same amount of the new clean class of the same fund, does this trigger a gain for CGT purposes?

You would think that it would count as repurchasing the same shares within 30 days, so the new investment will just be treated as having the same cost as the old investment. You would also think that it would be treated as a share reorganisation, similar to the treatment when you switch from accumulation units to income units or vice versa.

Either way, there should be no gain triggered. However, is this correct, and does it depend on whether you convert or switch?Answer
My understanding is that switching between different unit classes of the same fund is treated as a share reorganisation - that is, it won't trigger a gain for capital gains tax purposes.

There are two HMRC references that appear to confirm this. The first CG57709 says:

"Any switch from one class to another within the same unit trust should be treated as a share reorganisation."

The second is CG51700 which says:

"For capital gains purposes a share reorganisation is not treated as a disposal of the taxpayer's existing shares or an acquisition of any new shares and new shares issued are treated as though they were acquired at the same time as the existing shares."

So, in layman's terms. If you switch from Fund A Retail units (e.g. charging 1.5% a year) to Fund A Clean units (e.g. charging 0.75% a year) it won't trigger a capital gain. But when you eventually sell the Clean units the purchase price to calculate the gain will be the original price you paid for the Retail units.

Read this Q and A at http://www.candidmoney.com/askjustin/808/will-switching-to-clean-fund-units-trigger-cgt

View on JPM Healthcare fund?

Question
I'm looking for a new fund to add to my ISA portfolio, as a result of one of my current funds intending to close. I would like to diversify into a healthcare fund and rather fancy JPMorgan Funds – Global Healthcare A (dist) - GBP. However, other than the analysis on Morningstar, I can't seem to find out much independant information about the fund, or whether it is available to me on the Cofunds platform.

The information includes the following, which I'm not sure I understand the implications of: "On 01/10/02 the benchmark for this Fund was changed from a gross dividends reinvested basis to net dividends reinvested as this better reflects the tax status of the Fund."

Can you also tell me what the "(dist)" suffix means?Answer
JPM Global Healthcare is a Luxembourg domiciled fund (i.e. 'offshore') that invests in biotechnology, pharmaceutical and healthcare companies.

There's no real downside to investing in offshore funds provided they have 'distributor' or 'reporting' status, as this means they'll be taxed in the same way as onshore funds (otherwise gains will be taxed as income, which is seldom desirable). This is what the 'dist' suffix is referring to, it's highlighting that the fund pays out its income (which usually means it'll have distributor/reporting status).

The fund isn't available via Cofunds (yet, at least), nor any of the other main platforms that I can find. You can however buy it via JPM's own Wealth Manager 'mini platform' with no initial charge and annual charges (total expense ratio) of 1.9%, the latter being a bit steep.

The information regarding the benchmark (against which JPM compares performance on the fund factsheet etc) means that it now assumes dividends are paid with some tax deducted rather than gross. This is just reflecting what happens in practice for distributor funds, so not something to be concerned about.

Looking through the fund factsheet, everything on the surface is as you'd expect from this type of fund. There's a heavy bias towards the US and larger companies, the 10 largest holdings are mostly household names and there's a reasonably diverse range of companies held. The management team also has a good performance track record since launch just over three years ago.

I'm afraid I've never done any research on this fund, but on the surface I can't see any obvious reason not to invest if you're happy it meets your needs and fits well into your portfolio. Just bear in mind healthcare type funds can suffer high volatility at times, especially when biased towards biotechnology companies. Similar funds you might also consider include Polar Capital Healthcare Opportunities and AXA Framlington Health (the latter is available on Cofunds).

Read this Q and A at http://www.candidmoney.com/askjustin/807/view-on-jpm-healthcare-fund

Is my broker charging too much?

Question
I was interested to read your comparator of Discount Brokers as referred to in the Sunday Times recently.

I have an allied question. Let's suppose I have a portfolio worth £800k of which £300k comprise ISAs. Most are blue chips and most years dealing is restricted to approx 5-6 sales and 5-6 purchases pa.

I have til now employed a traditional broker who charges per transaction plus a fee for ISAs' management (approx 1% ISAs' worth), the annual cost coming in at roughly £4000 pa. Their discretionary service includes taking heed of my annual CGT and ISA allowances and they provide a tax pack for my accountant. The shares are held in a nominee account. From my point of view, it's effortless.

My broker has recently indicated that their fee structure is shortly to switch such as to charge an annual management fee of 1% of the portfolio's worth altho' no longer will there be a seperate ISA fee. As such, their annual charge will at least double and yet the service will be otherwise unaltered.

Perhaps not surprisingly, I am discontent and wondered whether there were brokers who'd provide the same service as I currently enjoy without charging twice the traditional fee? I'm assuming the Discount Brokers would not so oblige?Answer
1% a year is fairly typical for discretionary investment managers, regardless of whether investments are held within an ISA or not. For this you would expect them to take full charge of your investments, making all the investment decisions, optimise use of your tax allowances and provide the necessary paperwork for your accountant. Some discretionary managers only use investment funds, some only shares and others a mix of the two.

In this respect it sounds as though you've been charged less than the going rate to date, albeit still a significant sum of money. A truly good discretionary manager should be able to more than justify their fees by delivering excellent performance but, let's face it, most probably don't.

But therein lays perhaps the biggest issue with discretionary managers - analysing portfolios and comparing performance is very difficult. Although it's not uncommon for discretionary managers use similar portfolios for their clients where appropriate, it's rare that they freely publish typical portfolios with performance figures. So trying to compare the investment skills of different discretionary managers can be complex, if not impossible.

As for discount brokers, they won't provide advice (they just transact fund purchases with discounts), so you'll need to make your own investment decisions. Provided they use an investment platform (almost all do these days) then a tax voucher covering income will be standard, keeping your accountant happy. However, capital gains tax reporting isn't normally provided, so you or your accountant will need to do this, although it should be very straightforward as all the necessary details will be provided via a transaction history.

One thong to bear in mind if you transfer elsewhere is that the non ISA investments will need to transferred 'as is' to avoid triggering gains and potentially landing you with a big capital gains tax bill. Such 'in-specie' transfers are normally straightforward, although the existing broker will likely charge for doing so.

I think the bottom line is whether you want someone to run the portfolio for you. If so, a discretionary manager probably remains the most sensible route, albeit you need to ensure you're getting value for money, which means examining the performance of your current manager. A newer entrant to market, Nutmeg, runs discretionary portfolios of tracker funds and would charge around 0.6% a year on a portfolio of your size. While too new to judge performance wise and arguably not really a bargain given they only invest in trackers, it's still an interesting development in an otherwise staid marketplace.

Using a discount broker could save you thousands of pounds a year, but you'd have to take a more active role, selecting and monitoring investments yourself. If you have the time and inclination, by all means consider it.

Read this Q and A at http://www.candidmoney.com/askjustin/806/is-my-broker-charging-too-much

How will the flat state pension affect me?

Question
I am 58 and have been contributing to a company pension for 34 years but have been 'contracted out' of SERPS/SP2 for over 25 years and paying a lower NI contribution. How will the value of my state pension be affected when I reach 66 years? Answer
It all depends on whether the Government's proposals to introduce a flat state pension by April 2017 go ahead (which looks likely if they remain power).

Assuming they do, then based on the information provided so far this is what will happen:

In April 2017 a calculation will be made to work out your 'foundation' amount of state pension, as follows:

(Number of pre 2017 qualifying years NI contributions / 35) * £144 - 'rebate derived amount'.

The '35' refers to the number of qualifying NI contribution years required for a full pension. The £144 is the intended flat rate weekly pension. The rebate derived amount is a deduction because you contracted out of SERPS/S2P, reflecting the fact you paid a lower NI contributions while contracted out, although the Government has so far given no indication of how this will be calculated.

If your foundation amount is less than you'd be entitled to under the current system, then it will be increased to match the latter. If your foundation amount is lower than the flat state pension of £144, you'll get 1/35th of the flat pension (£4.11) for every further qualifying year worked until you reach state pension age, the pension obviously capped at £144 overall. Your contracted out pension is unaffected, you can take this as originally intended.

Trying to put some figures to the above for your situation:

If you started work at 18, your qualifying years in April 2017 will likely be around 44 years. Divide this by 35 and multiply by £144 and we get £181 per week. We don't yet know how the rebate derived amount will be calculated, but it'll leave you in one three scenarios:

1. The end result is less than £107 a week (the current state pension), in which case £107 will be your foundation amount and this will increase by £4.11 a year until you reach state pension age at 66.

2. The result is above £107 but below £144, in which case it'll be your foundation amount, again increasing by £4.11 a year until you reach state pension age (up to a maximum £144).

3. The result is above £144 per week, in which case the excess over £144 will be 'protected' and increase with inflation each year (measured by CPI).

Note: the £144/foundation amount/£4.11 will all increase by the higher of earnings growth, inflation (CPI) or 2.5% moving forwards, but I've shown them in today's terms to keep things simple.

Read this Q and A at http://www.candidmoney.com/askjustin/801/how-will-the-flat-state-pension-affect-me

When's the best time to sell investments?

Question
When is the best time to sell an investment?Answer
I suppose the obvious answers are either when its value peaks or when you need the cash.

Although the latter is self-evident, successfully predicting investment peaks (consistently at last) is nigh on impossible. Some investors follow a disciplined approach by selling investments when they've had a good run (e.g. risen by 10%-20%), happy to take some profit rather than risk losing it. Others are more happy to invest for the long haul and ride out volatility in the hope the price keeps rising overall.

Both the above scenarios have had their share of winners and losers - there's little clear evidence one strategy is better than the other. Pity those who sold shares in a fledgling Microsoft after making a 20% profit and those who held on to HMV shares too long losing their shirts.

Other factors that might prompt you to sell include portfolio weightings and capital gains tax.

Suppose you buy £100 of shares in Company A and £100 in Company B. Your portfolio is split 50:50 between the two companies. Company A's share price soars and your shares are now worth £300, while Company B remains at £100. Your portfolio is now split 75:25 in favour of Company A - meaning you might want to sell some shares to reduce being overly exposed to the fortunes of one company.

Or suppose you have £100,000 invested across several companies that increases by about 10% a year. Sell shares worth around £10,000 every year and you can offset the gains against your annual capital gains tax allowance, i.e. no tax to pay. Neglect to do this and when you eventually cash in the portfolio you may face a big tax bill.

Read this Q and A at http://www.candidmoney.com/askjustin/800/whens-the-best-time-to-sell-investments

Which 30 year investments for pension?

Question
I don't have a pension and am 33, I have a small amount in a Shares ISA and wanted to use this to build up a retirement fund. Do you have any advice on which shares to invest in for around 30 years? I'm going to try put £200 away each month and top it up with extra money when I can.Answer
The answer largely depends on how much risk you're comfortable taking. If the thought of seeing your investment fall in value will give you sleepless nights, then better to take a more cautious approach. Conversely, if you're quite comfortable with this on the basis you should end up with a decent profit after 30 years you can probably afford to be more adventurous.

If I were taking a bet over 30 years, two areas spring to mind: emerging markets and commodities. The former will very likely continue to outpace lethargic Western economies while commodities should prosper overall thanks to growing global demand and their scarcity.

Of course, it's not that simple. There are plenty of unexpected events that could hit both these investment areas over the next 30 years - so high volatility is more or less a given. But looking at the big picture I struggle to see scenarios that would prevent both these areas delivering good longer term investment returns.

So, if you're comfortable with the risk, I'd be inclined to consider emerging markets and commodity funds. You might offset risk a little by holding a UK equity income fund or shares in large companies paying high dividends. And perhaps include commercial property or corporate bond funds if you want to dial down risk another notch or two.

Good luck!

Read this Q and A at http://www.candidmoney.com/askjustin/799/which-30-year-investments-for-pension

How to get advice for my SIPP?

Question
I have recently sacked my financial adviser and have engaged an Actuary who is helping me to run my SIPP, but cannot give me any advice on investing.

I have not been very impressed with financial advisers and have not got much faith in them, therefore I am having to learn how to invest the money in my SIPP myself. How do I go about getting the best advice? as well as reading your excellent web site.Answer
As it stands, there are three main options open to you:

1. Make investment decisions yourself. Whether this is practical (or wise) depends on how keen you are to get involved, the amount of money in your SIPP and your needs going forwards. For example, investment management might be especially challenging if you're already retired and drawing an income, as your investment strategy would need to avoid the risk of the pension fund running dry. If you take this route use a platform or discount broker who refunds sales commissions (or uses funds without this built in) to cut costs.

2. Use a financial adviser. The adviser will make recommendations to you, most likely funds, with you having the final say on whether to enact them. Financial advisers tend not to be investment specialists, often preferring to recommend funds of funds or outsource to a discretionary manager for larger sums.

3. Delegate to a discretionary manager. This means giving someone full discretion on running your money. You'll agree objectives and the level of risk to be taken, then let them make all day to day investment decisions. Such services tend to invest in funds and shares.

Finding a good investment adviser/discretionary investment manager who provides value for money is sadly very difficult - if I knew a sure fire way of finding one I'd have put details on this site long ago.

The key things to look out for are a good track record at what they do (can the adviser/manager show you examples of the work they've done for other clients?), ability to give a sound explanation of how they decide on the split of different assets and select investments, along with a clear explanation of exactly what you'll pay and the service you'll receive in return.

If the actuary you've engaged is making the decisions on what proportions of your SIPP to invest in different asset classes (i.e. trying to match potential risk/returns to your needs) then the job of investing the money should be somewhat easier, as you'll just need to focus on worthwhile investments in each area. This isn't too difficult provided you're willing to spend some time gauging the better funds for various assets/geographical areas. Taking a straw poll of the funds rated by various research/broker websites wouldn't be a bad start.

Otherwise you may well be better off taking advice, if you can find someone you trust.

Read this Q and A at http://www.candidmoney.com/askjustin/796/how-to-get-advice-for-my-sipp

Change to common law rules?

Question
Do you know whether the laws surrounding common law relationships are likely to change? I understand that at present separated unmarried couples are only entitled to properties in their name or properties they can prove they have paid towards. Thanks. Answer
Common law partners, i.e. those living together who are not married/civil partners, have no automatic right to each other's property, regardless of how long they've lived together.

While it's clear some individuals are probably treated unfairly under the current system, as far as I know there are no plans to change this.

I think change would be unlikely in any case, as trying to enforce common law rights could get very messy. It would likely involve having to prove how long you've lived with someone, which might be straightforward in some circumstances (e.g. a joint rental agreement) but far harder in others (e.g. living rent free in a partner's property).Then there'd probably need to be proof of ownership for assets etc. All this would be great for solicitors to rack up some fees, but maybe less so for the individuals concerned.

Read this Q and A at http://www.candidmoney.com/askjustin/792/change-to-common-law-rules

Can my company invest in shares?

Question
Can I invest my limited companies' monies in equities or property? If yes, are there any specialised brokers/platforms who deal with limited companies? For my own money I currently use Alliance trust savings for Investment Trusts and Hargeaves Lansdown for unit trusts.Answer
Yes, companies can invest in shares and property. However, many low cost stockbrokers and platforms don't offer this facility - Alliance Trust Savings and Hargreaves Lansdown among them.

Barclays Stockbrokers and TD Direct Investing do offer company trading accounts, allowing your company to trade both shares and funds. Just bear in mind that companies don't enjoy capital gains tax allowances. Any gains made from investing will count towards company profits - hence subject to corporation tax.

Read this Q and A at http://www.candidmoney.com/askjustin/791/can-my-company-invest-in-shares