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