Cheaper option than Hargreaves Lansdown SIPP?

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

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

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

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

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

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

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

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

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

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

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

Investing for income and growth?

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

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

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

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

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

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

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

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

What types of investment might be suitable?

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

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

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

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

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

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

So where does that leave us?

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

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

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

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

How to invest a lump sum?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck!

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

Emerald Knight carbon credits a scam?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Budget 2012 - how will it affect individuals?

How will today's Budget affect you?.

Today's Budget was largely more of the same: cut business taxes to try and stimulate growth, put a brake on spending, grab some more tax in places and try to keep the majority of voters as happy (or maybe the least unhappy) as possible in difficult circumstances.

Income tax announcements look generally good news, except the increased age allowance will effectively be scrapped for those hitting 65 from 2013 and the allowances won't rise any further for those already enjoying them. There'll be a lot of noise about the top 50% rate falling to 45% from April 2013, but in my view it's pretty inconsequential. Of more concern for many will be the planned changes to child tax credits, which will see families on even modest incomes losing several hundred pounds a year.

The flat state pension of around £140 per week looks set to go ahead in 2016, but still no news of how those with decent existing SERPS/S2P pots (giving them a pension above £140) will be affected.

Let's take a look at the main changes affecting individuals (changes affecting business to follow).

Income Tax

As previously announced, the personal allowance will increase by £630 to £8,105 from 6 April 2012. The threshold for higher rate tax will fall from £35,000 to £34,370, meaning the income limit for 40% tax is unchanged at £42,475 (for those with the normal personal allowance). This means basic and most rate taxpayers should be around £126 a year better off.

Annual Income	Income Tax 2011/12	Income Tax 2012/13	Saving
£25,000	£3,505	£3,379	£126
£50,000	£10,010	£9,884	£126
Change in income tax bill from 6 April 2012.

The 50% tax rate for those earning above £150,000, introduced in April 2010, will fall to 45% from April 2013.

The personal allowance is still set to rise to £9,205 from April 2013 but the higher rate tax threshold will fall by £2,125 to £32,245, reducing the benefit for those on higher incomes.

The higher 'age-related' personal allowance given to those aged 65 and over will increase to £10,500 (£10,660 for those 75 and over) from April 2012, but remain at this level thereafter with no annual increases. It will also effectively be scrapped for those turning 65 after 5 April 2013, with these individuals receiving just the standard personal allowance, due to be £9,205.

National Insurance

Largely unchanged except for a small increase in the threshold when NICs become due.

Annual Income	NI 2011/12	NI 2012/13	Change
£25,000	£2,133	£2,089	£44
£50,000	£4,381	£4,337	£44
Change in employee Class 1 NIC from 6 April 2012.

VAT

No change to the rate, but from 1 November 2011 the limit for VAT-free imports from outside the EU will fall from £18 to £15 - which might have a small impact on some of the Jersey/Guernsey based internet shopping sites.

Capital Gains Tax

Rates and annual allowance will remain unchanged at 18%, 28% and £10,600 respectively.

Inheritance tax

No change to the rate or nil rate band, but from 6 April 2012 the rate will fall from 40% to 36% where 10% or more of a net estate is left to charity.

Flat state pension

The chancellor confirmed his intention to introduce a flat state pension of around £140 a week, probably in 2016. However, still no detail of how those with existing SERPS/S2P benefits in excess of this will be treated.

In light of this, the ability to contract out of S2P using a money purchase pension will be scrapped from 6 April 2012, but it will remain for final salary schemes, for now... (the latter will be a challenge, as scrapping would mean employees effectively having to pay the 1.4% in National Insurance that is currently waived when they contract out via a final salary pension scheme).

Child benefit

Will continue to remain frozen at £20.30 per week for the eldest child and £13.40 for each other child until April 2014.

If a parent has income exceeding £50,000 they will face a charge equal to 1% of the total child benefit received per £100 of income between £50,000 and £60,000, i.e. a parent earning £60,000 will end up receiving no child benefit. Where both parents earn above £50,000, the highest earner is subject to this charge.

Child tax credit

As per previous announcements, child tax credits will continue to increase from 6 April 2012 for families with incomes of around £25,000 or less, but fall for everyone else.

Annual Household Income	NI 2011/12 Child Tax Credit	NI 2012/13 Child Tax Credit	Change
£25,000	£2,145	£2,560	+£415
£35,000	£545	£0	-£545

See full details in my previous article.

Fuel

The delayed January 2012 3.02p per litre rise in fuel duty will happen this August, while the planned August inflationary increase will be scrapped this year.

Alcohol

Alcohol duty rates will increase by 2% above inflation (a 5% rise - based on actual RPI 6 months before Budget and estimated RPI 6 months after) on 28 March 2012.

	Beer (pint)	Wine (bottle)	Champagne (bottle)	Spirits (bottle)
Typical Change	+3p	+11p	+14p	+41p
Typical increase in price from 28 March 2012.

Cigarettes

From 6pm tonight tobacco duty will rise by 5% above inflation, typically increasing the cost of a packet of 20 cigarettes by 37p.

Vehicle Duty

To increase by inflation for vehicles in VED band D an above, adding between £5 and £15 to the cost of a standard annual tax disc.

Company car fuel benefit charge

If you receive a company car and free fuel you'll pay some tax on the fuel benefit. The £18,800 multiplier figure currently used to calculate this will increase to £20,200 from 6 April 2012. What difference will it make? Probably an extra £100 of tax per year for basic rate taxpayers and £200 for higher rate based on a typical 2 litre diesel car.

Air Passenger Duty

Increase between £1 and £14 depending on distance and class of travel.

EIS/VCT

Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) will benefit from being able to invest in larger companies (changing from maximum of 50 employees and less than £7m of gross assets before investment to 250 employees and £15m of gross assets) and make bigger investments per company (changing from £2 million to £5 million) from 6 April 2012.

The annual amount individuals can invest into an EIS will double to £1 million from 6 April 2012, while the current £500 minimum will be scrapped.

The £1 million limit on investment by a VCT in a single company will be lifted on 1 April 2012.

Stamp duty on property purchases

A new 7% rate will be introduced on 22 March 2012 for residential property purchases of £2 million and above - rising to 15% when purchased via companies in order to try and avoid tax.

Qualifying policies e.g. endowments

From April 2013 the maximum annual contribution for new policies (or existing where term is extended) will be limited to £3,600.

Overall limit for uncapped income tax relief

An overall limit the greater of £50,000 and 25% of income will apply to income tax reliefs that are not subject to an annual limit - this could include charitable donations, loss relief and qualifying loan interest.

Read this article at http://www.candidmoney.com/articles/article252.aspx

Budget of hot air?

Will Wednesday's 2012 Budget be full of anything but hot air?.

I doubt anyone is enjoying the rumours and all the LibDem kite flying that is preceding next week’s event. Did Vince convince Nick to press Dave to introduce his mansion tax in return for dropping the 50p top rate of income tax? Did Nick dream up his tycoon tax all by himself. Is George listening to the siren voices that want to see the end of higher rate relief on pension contributions? Is there a way to resolve the problems surrounding the withdrawal of child benefit from higher rate taxpayers?

My prediction is that Mr Osborne will produce some eye catching headlines, but that there will really be very little in the Budget. Those of us dreaming about all income being taxed at the same rate, and about the phased abolition of all reliefs - just think, no more ISAs, no more pensions – can dream on. The current policy which has all party support is to screw the prudent to spare the profligate. Expect no change.

Confusion heaped upon confusion

We have had regulators for nearly 25 years. All of them have said that consumers are confused.

A premium bond is a bet with The Treasury. An investment bond is a single premium life policy, which may be written offshore or onshore. A distribution bond is an investment bond where your money is in a particular type of fund. A Bank or Building Society bond is – usually – a deposit account with a fixed term. An income bond is the same as a deposit account, except that it does not have a fixed term and is offered by National Savings. A plain bond is an iou issued by a sovereign country. It is also an iou issued by a corporate entity. A greek bond is a turkey. The tax treatments of these vehicles are as different as the vehicles themselves.

I could go on. My word is my bond, and my word is that the regulator could help by forcing everyone to sort out this messy nomenclature.

Read this article at http://www.candidmoney.com/articles/article251.aspx

Will polticians improve NEST?

The new NEST workplace pension needs to allow transfers in and out of the scheme if it's to be effective. But will the politicians get their heads around this and make the necessary changes?.

Justin is back, so I’ve come back too. And, just this once, I have something good to say about politicians. Not all politicians, of course.

Cast your mind back a couple of years. Alastair Darling was at No 11 when his boffins came up with NEST, the new pension scheme that everyone is going to be enrolled in, unless they are already in an ‘exempt’ scheme, or decide to opt out. I wrote to the Chancellor:

“I am however especially concerned about the decision not to allow transfers in or out of NEST. This seems to run counter to everything that has been done to create flexibility for savers. I guess any employer running a Stakeholder will simply switch to NEST. This will leave the members with mostly trivial pension pots charged at 1.5% or 1% of the fund value annually………I think the Government has a duty to the people in the original Stakeholder target market. It would be fairly easy to allow anyone enrolled in NEST to transfer in up to say £20,000 from a Stakeholder or any other personal pension.

It would be equally easy to recognise that circumstances change, and that NEST members may subsequently become much better off and want to manage their growing pension savings in, for example, a SIPP.

Transfers in would help the NEST finances in the early years. Transfers out would not happen for some time, and their impact on NEST finances would then be negligible.

Will you ask NEST to reconsider this part of the rules?”

Needless to say, I got an anodyne reply from some junior assistant numbtie to the effect that they knew what they were doing.

A new report from the Work and Pensions Select Committee says…. the ban on transfers in will stop savers consolidating small pots in Nest, which it says is the “obvious” vehicle for aggregating small pots. Hooray for the Work & Pensions Select Committee.

Read this article at http://www.candidmoney.com/articles/article250.aspx