Have I been sold funds of funds?

Question
I read in Money Mail an article on "funds of funds". I have seven Standard Life funds invested with Skandia
on the advice of my Financial Adviser
.
Could these be thought of as "funds of funds"?Answer
Standard Life offers 25 funds (at the time of writing) via the Skandia fund platform, but none of these are funds of funds.

The simplest way to think of Skandia is as a company providing a 'wrapper' around funds from numerous different fund managers (of which Standard Life is one). This wrapper makes it straightforward to switch investments from one fund group to another and mix lots of different funds within an ISA or pension. Skandia charges for the privilege, charging customers £68.50 a year for use of the wrapper and charging the fund providers around 0.25% a year.

This is not the same thing as a fund of funds, which is when a fund manager invests their fund into a number of other funds, rather than directly into shares or corporate bonds etc.

In effect, the aim of a fund of funds is to try and offer a ready-made fund portfolio, saving you (or your financial adviser) from having to select and monitor a range of funds yourself. In this respect, they're not necessarily a bad idea.

However, customers end up paying for the privilege, as they have to pay management charges levied by both the fund of funds manager and the underlying funds held. Typically this means an annual fee of 1.5% to the fund of funds manager plus around 0.75 - 1% to the underlying funds (which tend to be charged at cheaper 'institutional' rates), so total annual charges will usually be between 2-3%, which is steep.

My other gripe is that some financial advisers use these funds because it makes their lives easier, not because it's best for their customers. Researching and recommending funds of funds is far easier than building bespoke portfolios of conventional funds. Yet financial advisers generally receive the same amount of sales commission whichever route they choose. It's not surprising some take the easier option.

Anyway, Skandia is a decent wrapper/platform on which to hold your funds and it doesn't look like you own any funds of funds. But I'm a bit surprised your adviser has recommended seven Standard Life funds. Yes, they have a few good funds, but a key benefit of using a wrapper is the ease with which you can spread money across different fund providers, i.e. pick the best funds for the job rather than being shackled to just one company. So it's strange your adviser seems so loyal to Standard Life. I'd ask him/her to justify their advice.

Read this Q and A at http://www.candidmoney.com/questions/question580.aspx

How to invest in REITs?

Question
I wish to start investing into Commerical Proeprty REITS, however, I am not sure how best to go about this - i.e. to actually start trading.

I am looking to invest approx £200 per month on REITS, as I have knowledge in Commercial Property.

Are you able to reocommend how I go about this process - all these different / brokers (etc) confuse the hell out of me !!Answer
As I'm sure you already know, REITs (Real Estate Investment Trusts) are simply a special type of investment company that invest in commercial property. The key benefit over traditional property companies is that provided they adhere to a set of rules (primarily that they distribute at least 90% of income to shareholders) then the company is exempt from corporation tax and capital gains tax on its property portfolio.

REIT investors receive 'Property Income Distributions' (PIDs) instead of dividends. They're paid net of basic rate tax, with higher and top rate taxpayers having to pay the balance at their marginal rate, e.g. if a higher rate taxpayer receives £80 they'll have to pay a further £20 of tax (gross PID was £100, £20 basic rate deducted then £80 paid out, further 20% of £100 owed). However, PIDs can be received gross, hence tax-free, by pension funds and ISAs.

As REITS are companies traded on the stock market you can buy and sell them via a stockbroker. As you want to save on a monthly basis I'd consider a broker who offers a low cost regular monthly dealing option, such as Interactive Investor or Halifax Sharedealing, who charge £1.50 and £2 per monthly trade respectively. Alternatively you could trade ad-hoc with low cost stock brokers like x-o.co.uk or jpjshare who charge under £6 per trade, although this would obviously add up on a £200 monthly investment.

I guess my main word of caution regarding REITs is that although they're fundamentally property investments, they're more correlated to stock market movements than bricks and mortar, i.e. the share price of the underlying property companies might be affected by general stock market movements independently from the value of the underlying property portfolio.

Many UK REITs are (at the time of writing) trading at a discount to their net asset value (NAV), i.e. the value of the company based on share price is lower than the value of the property it owns. The average discount to NAV is around 17% (you can view details on the REITA website). If the discounts narrow this will be good news for existing investors, but if there's a downturn in sentiment for the sector, or stock market generally bomb, they may widen further.

Rather than buy a specific REIT you also have the option to track an index of REITs, either in the UK or overseas. There are a number of Exchange Traded Funds (ETFs) that do so, for example take a look at iShares.

Finally, you can also invest in managed funds that in turn invest in a selection of REITs. This provides diversity and makes investing in overseas property straightforward (as does the ETF route), but you'll have the pay the fund manager around 1.5% or more in annual fees and they might have bad judgement.

I hope my answer points you in the right direction.

Read this Q and A at http://www.candidmoney.com/questions/question577.aspx

View on DB Capital bonds?

Question
I have received following message from Interactive Investor. It is too good to be true. Your suggetion please
Invest in High Yield Two Year Bonds*

Minimum investment £2,000

Click here to register FREE on the exclusive DB Capital plc Private investor Platform

DB Capital is authorised and regulated by the Financial Services Authority and Registered with the information Commissioner's Office

Registering does not commit you to anything at all now or in the future.

EITHER Earn high interest of 12%+ per annum**

OR Earn 6%+ interest per annum **
Plus a capital gain from the RISE or FALL in
Gold, Silver, Oil, FTSE, Dow Jones, DAX, CAC, Euro, US$, Yen**

OR Earn 6%+ interest per annum, inflation protected **
With the capital and interest index linked to the UK RPI or CPI **Answer
I'm struggling to find any information about this supposed investment opportunity. DB Capital Plc has applied to cancel its FSA authorisation and the company's website is 'under construction'. So I think it's fair to say it's no longer trading, at least as a FSA authorised investment company.

Based on the sketchy details in the email it does all look a bit too good to be true, with the advertised returns suggesting a fair amount of risk may be involved.

From the limited amount of information available on the Internet it appears the company was aiming to raise money from private investors and lend to businesses, using the interest paid by businesses to provide returns for investors (although the email extract above suggests an artificially constructed investment element too). Lending to businesses can be as safe or risky as the prospects for those businesses, I suspect this might have been at the higher risk end of the scale.

Anyway, looks like the company never got off the ground...probably just as well given the spurious nature of the product they were trying to flog. Interactive Investor is a decent website, so it's disappointing to see them pushing junk emails like this.

Read this Q and A at http://www.candidmoney.com/questions/question574.aspx

Should I sell my investments?

Question
I have four investments. One with halifax (just a small stocks ISA) one with Co funds, one with Aberdeen and one with the cooperative. All have lost considerably over the last few months, what is the the best action to take, or do I sit tight? they are all small lump sums, I am not currently paying in to any of the funds.Answer
It's difficult to give a fuller answer without knowing the specific funds you own, but I guess the bigger picture question is should you remain invested in stock markets while they're so volatile?

On the one hand, better to get out now if markets are likely to fall, on the other remaining invested means you'll benefit if they rise.

Trying to accurately predict whether markets will rise or fall over shorter periods of time (i.e. a year or two) is something of a fool's game - it's very hard to get right. But, at the risk of being proved a fool, I can't see much upside for stock markets over the next year. The Eurozone likely still has some big problems in store and many global economies remain fragile.

However, common sense and markets don't always go hand in hand. My views have been unchanged for at least a couple of years (and nothing much has really changed since then) during which time stock markets have generally risen - proving me wrong. Nevertheless, I still feel there's another downturn on the cards, which will probably be triggered by further Eurozone economies hitting the rocks.

Should you sell? If you were intending to invest for 10+ years then I'd be inclined to sit tight and ride the storm. Selling now might avoid future falls, but if markets surprise with healthy rises you'll lose out. And even if you sell now and markets do fall, timing your re-entry can also be difficult, as large rises often happen quickly.

It would certainly be worthwhile reviewing the specific funds you own, switching to potentially better alternatives if appropriate.

Read this Q and A at http://www.candidmoney.com/questions/question578.aspx

Can I save for children without access at 18?

Question
I'm a little confused over the best way to invest for our children. We are looking for a long term investment so guess stocks and shares the best option and to pay a monthly sum to try and balance the ups and downs of the market. We aren't interested in the new Junior ISAs as we know how we would have wasted money if we had access to it at 18!

At the moment I'm a bit blinded by the variety of options out there and not sure where to start!

Do you have any suggestions?

Answer
It sounds as though the key point is preventing your kids from blowing the money when they turn 18. Unfortunately, the only practical ways to stop them getting access to the money at 18 are to either hold it via a trust or hold it in your name (then gift it to them when you decide).

Using a trust will allow you to name the age at which the children will have access to the money. There are various types of trust available, but a discretionary trust is the most common for this purpose. However, using one will incur expense (you'll need a solicitor to set it up, which could cost a few hundred pounds) and any interest/income within the trust will be taxed. Your children may be able to reclaim the tax when income is distributed, but it means time consuming form filling. Unless the sums involved are large, a discretionary trust would probably be overkill and certainly not very cost effective.

Holding investments in your name is much simpler and cheaper, the main downside being that you'll be liable for any tax until the money is gifted to your children - although you could avoid this by holding savings/investments for your children via your own ISA allowance, if available. Another issue (from your children's point of view) is that you might change your mind in future and decide not to give the money to them!

You could make pension contributions on behalf of your children, which has worthwhile tax perks and can be cost effective using a stakeholder pension. However, they won't then be able to get their hands on the money until age 55 (and this might increase in future), which I suspect is longer than you have in mind.

Personally I'd use a Junior ISA or hold shares/funds in a simple 'bare trust' (just needs a simple form and savings/investments taxed as child's to make use of their allowances). Both give the child access to the money at age 18, but with a bit of money education hopefully they won't squander it all - especially if the money is invested as withdrawals won't be as easy as popping to an ATM.

Whichever route you use, the big decision is then what to invest in. I could write pages on this, but to keep things simple perhaps consider combining a low cost UK tracker fund with modest exposure to an emerging markets fund (assuming you have 10+ years until the children reach 18). It might be a roller coaster ride over the next few years but, as you point out, a monthly saving could help smooth this.

Read this Q and A at http://www.candidmoney.com/questions/question575.aspx

Make pensions personal

.

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

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

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

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

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

Euro doom & gloom, will we see recovery?

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

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

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

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

Are gifts taxable?

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

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

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

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

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

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

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

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

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

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

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