Emergency Budget = emergency action?

The new coalition government is due to announce tax changes in its 22 June emergency Budget. Is there anything you could or should do before to lessen the impact of any tax rises?.

Given we don’t know exactly what will be announced or when any changes will take effect, trying to base decisions on such woolly information seems a bit foolish.

Nevertheless, as there are only a few changes you can realistically plan for in advance we can guess enough to make some reasonably sensible judgements. Let’s take a look at the key areas:

Capital gains tax

Despite protests from some Tory backbenchers it seems likely that the tax on gains will rise from 18% to fall in line with income tax rates at 20%, 40% and 50% respectively. And there’s speculation the annual allowance will fall from £10,100 towards the £2,000 proposed by the LibDems, although I’m less convinced. We’ll also have to wait and see whether any taper relief (lower tax the longer an investment is held) is re-introduced, as per before when capital gains were taxed at marginal income tax rates.

As capital gains tax is calculated over a complete tax year it would be very unusual (and unpopular) to implement any changes from June. Backdating the changes to 6 April 2010 makes more sense logistically but would be very controversial and set a dangerous precedent, so the most likely option is for changes to commence from 6 April 2011.

If you’re sitting on investment gains then realising up to your annual £10,100 allowance before 22 June makes sense, as it’s highly unlikely there’ll be a retrospective reduction in the allowance. Remember, if you don’t hold investments jointly you can transfer some to your spouse, allowing them to use their allowance too.

Should you realise gains in excess of your allowance? i.e. take an 18% tax hit rather than a potential 40% or 50%? This is a high risk strategy, so be careful. If we assume the annual allowance will be more or less unchanged then consider whether you could strip out gains over several years, effectively tax-free. But if your gains are significant then there’s a plausible argument for paying tax now and hoping that any charges are not retrospective.

If you have a second home that you’re looking to sell at a profit then it’s probably too late to complete a sale before 22 June, but with any luck tax increases will be deferred until next tax year which buys you some time.

Pension Contribution tax relief

Under current proposals those earning £150,000 or more will no longer enjoy higher rate relief on pension contributions from 6 April 2011. And if you annual taxable income has exceeded £130,000 since April 2007 you could already lose higher rate relief if you increase regular contributions over £20,000 a year.

The danger is that higher rate tax relief on pensions might be abolished altogether. It would be unusual if this were introduced mid tax year, but never say never.

If you’re a higher rate taxpayer (not caught by the £130,000 rule) and want to make pension contributions this year then doing so before 22 June seems sensible. There is a chance of retrospective legislation, but I’d be surprised if this is the case.

VAT

This may well rise, so if you’re planning an expensive purchase then doing so before 22 June seems wise, provided you can afford it.

Finally, if you’re taking advantage of any tax loopholes (of which there seem to be very few left) then brace yourself for a further clampdown. There’s nothing like a whopping deficit to motivate a government to collect every last penny of tax it can.

Read this article at http://www.candidmoney.com/articles/article113.aspx

National Grid rights issue - buy?

Question
A few years ago I inherited some National Grid shares from my father. They've since done very well, but when the 2 for 5 rights issue was announced a week or two back the share price, of course, shot down. I've now received the bumph setting out my provisional allocation and am not sure whether to take up the offer. They say that the money is needed (inter alia) to replace major infrastructure - some press comment has suggested that they need to raise additional funds in order to do so without risking their credit rating.

I hate rights issues as I never know what to do for the best (although the cost to me is only in the low hundreds). My overall portfolio is reasonably well spread, based on one of bestinvest's models so since National Grid pays a half-reasonable dividend and is more or less a monopoly I'm inclined to think that this issue might be worthwhile, especially while interest rates are so low.

What's your opinion?Answer
National Grid is raising the money to contribute towards the £22 billion it reckons it needs to spend on upgrading the grid infrastructure over the next five years. It’s certainly peeved the markets by announcing a rights issue as it had previously said this wasn’t an option they’d consider.

The company announced profits of just under £2 billion over the year to the end of March, despite revenues falling by 10% (mainly due to a drop in US gas and electricity distribution), and has announced a full year dividend of 38.49p per share (the final dividend will be paid on 18 August).

As you point out, the company effectively has a monopoly in the UK which should ensure a steady flow of business and bodes well for the future. My main concern is that it might struggle to continue delivering its pledge to keep increasing annual dividends by 8% until 2012 – the infrastructure investment could take its toll on cash flow hence put a lid on dividend increases – in which case the share price might suffer.

There’s also a question mark over whether the business will need to borrow or raise more money in future to fund its planned £22 billion of expenditures, especially if costs go over budget or revenues fall. National Grid seems loathe to borrow more at present so as not to harm its credit rating (net debt is currently about £22 billion), but it may have to do so in future.

While I’m no expert on National Grid, on balance I think my inclination would be the same as yours, i.e. buy the rights. This isn’t the type of business that is likely to crash so the downside should be quite limited and in this climate stable businesses paying attractive dividends make sense.

Incidentally, the banks underwriting the issue stand to pocket over £100 million in fees between them, so there’ll be some bankers somewhere celebrating!

Read this Q and A at http://www.candidmoney.com/questions/question205.aspx

How can I study to be my own adviser?

Question
My financial situation has recently improved due to various personal factors and I now have quite a large lump sum that I would like to learn to manage myself for growth and income.

(I've used various Financial Advisors in the past but I'm beginning to see through the obvious self interest in what they advise!)

I would like to take a course in Financial Planning/Managing personal finances so I can at least understand the basic prinicples of different financial products and learn how to develop an investment strategy/portfolio for myself.

Is there anything you can recommend? I live in London.Answer
Congratulations on deciding to take a more active interest in managing your money.

There are really five key aspects to saving and investing.

1. Get a clear idea of what you want to achieve, including how long you can tie up the money, how much income you’ll need and how much risk you can tolerate (i.e. how much could you stomach losing if markets fall).

2. Work out a sensible mix of savings and investments in line with the answers to (1) – called ‘asset allocation’.

3. Consider tax efficient ways to hold the savings and investments, for example within ISAs and pensions, as well as bearing in mind annual income and capital gains tax allowances.

4. Choose the actual products, savings, investments themselves. For example, funds or shares and, if relevant, the ISA or pension in which they’re held.

5. Once the savings and investments are in place review regularly to check whether any changes might be worthwhile (for example, a fund manager might quit affecting a fund you own or maybe your income requirements might change).

There’s no reason you can’t do this yourself with some effort and willingness to learn. And let’s face it; experience suggests a number of financial advisers make a hash of this anyway as they’re more concerned about making themselves rich rather than you.

You should be more than capable of answering (1) without too much help. The main thing is to map out a general plan of your income and expenditures over the next five to ten years to get a feel for how big a margin for error (i.e. losses) you have. If things are tight you’ll probably want to take very little risk, but if you can afford the possibility of losses it allows you to take more risk in pursuit of higher profits. It’s basically a balancing act and the correct balance is the one that allows you to sleep comfortably at night.

Working out a sensible mix of savings and investments is a bit harder, but not impossible if you use a good dose of common sense. If you’re likely to need any money within the next five years then put it in a savings account where it can’t fall in value. Any balance can then be used for investing over a realistic timescale of at least five to ten years (although you may obviously switch between investments during that time). As a starting point I’d suggest reading the investment pages on this site which should give you a good feel for the various investment (or asset) types. Most investors will tend to have a mix of stockmarket, fixed interest, commodity and property investments with proportions depending on their income requirements, risk appetite and views on markets.

To get a feel for what proportions might be appropriate you could take a look at those suggested by financial advisers and used by ‘fund of fund’ managers. For example, Bestinvest shows its suggested allocations on its website and you can look at www.trustnet.com to find the portfolio breakdowns for unit trusts – try looking at funds in the Cautious Managed sector.

When it comes to tax efficiency the investment, pension and tax pages on this site should tell you pretty much all you need to know.

Choosing the actual investments themselves is probably the hardest part and something that even professionals regularly get wrong. I’d start off by looking at funds rather than shares, as there’s less chance of making an expensive mistake. And maybe consider using low cost tracker funds where appropriate. A good way to get a feel for which actively managed funds are probably better than not is to see what investment advisers such as Bestinvest and Hagreaves Lansdown are recommending and also see which funds fund of fund managers are holding (you can use Trustnet for this). If a fund consistently appears across these mediums then it means the experts must reckon its worthwhile - no guarantee of success but a more sensible approach than simply picking what’s done well in the past.

As for courses, it’s not something I’ve ever looked at (aside from university, I've found learning from books/the web works best for me). The Chartered Institute of Insurers offers courses aimed at those studying for financial adviser exams, but they do look quite pricey and might not arm you with that much useful knowledge in practice. You could try looking on http://www.hotcourses.com, although having just had a quick search I’ve struggled to find any relevant courses.

Perhaps start by following my suggestions above then feel free to ask me any follow up questions you might have along the way.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question204.aspx

Perth gold certificates safe?

Question
I am considering buying gold. The Perth Mint unallocated certificates seem the best (I think I can trust OZ govt.!) but I will have to buy through Goldcore .com who are in Dublin. How do I check if Goldcore are OK (will not send me fake certificates, or none!). Are there any tax implications? Also, as I intend to keep these longterm, what would happen if I should die while still owning them? Answer
Just a quick recap for those who don’t know, gold certificates give you legal title to gold and are normally backed by physical gold held in storage. The Australian Government backed Perth Mint Certificate Program offers the most widely recognised certificates nowadays – they’re backed by both physical gold bars and the Western Australian Government.

As Goldcore is the approved Perth Mint Certificate Program dealer for the UK and Ireland I think there’s negligible risk of you not getting a genuine certificate. Nevertheless, once received it would be sensible to contact the Perth Mint directly with your certificate number to verify its authenticity.

The minimum initial investment is US$ 10,000 and US$ 5,000 thereafter. When you buy there’s the option for allocated and unallocated accounts. Allocated means there’s a piece of gold held specifically for you, but you’ll have to pay initial fabrication costs and storage costs of 1% a year. Unallocated means you have an interest in a large pool of gold rather than owning a specific piece of gold. Although not as safe as allocated gold, the risk appears small given the scheme is backed by the Western Australian Government.

Any gains you make when selling the certificates will be subject to UK capital gains tax in the normal way. At the moment that means tax of 18% on any gains above an annual allowance of £10,100, but the new Government has said it intends to raise the capital gains tax rate to bring it in line with income tax rates.

If you hold the certificate jointly then full ownership will automatically pass to the survivor upon first death. If held in your name only then it will pass into your estate and be dealt with according to your will (e.g. sold with the proceeds being paid into your estate).

The certificate contains a transfer form allowing you to pass ownership to someone else by completing the form and returning it to Perth Mint. If you do this you’ll still be liable to capital gains tax on any profits unless transferring to a spouse.

Finally, remember that the government guarantee relates to your ownership and not the gold price. If the price of gold falls you'll lose money.

Hope you make a mint!

Read this Q and A at http://www.candidmoney.com/questions/question203.aspx

Why ebay buyer protection fails

This is a bit off piste, but I’d like to share why ebay’s inadequate buyer protection scheme has really ‘piste’ me off..

It started when I ordered a new pedestal sink from a business seller on ebay who had good feedback. When the sink arrived it was somewhat shorter than as described in the seller’s ebay listing, and basically useless unless you happen to be very short (I’m not).

I alerted the seller who said he’d send me a refund provided I paid to return the sink (about £30). I pointed out that under the Sale of Goods Act 1979 the cost of returning the sink was his responsibility, not mine, but this fell on deaf ears.

No problem I thought, I’ll file a claim under the ebay buyer protection scheme – which is always prominently displayed on its website (I assume to ‘re-assure’ buyers). I entered the details and the seller responded saying he’ll only refund if I returned the sink. A couple of weeks later and ebay still hadn’t responded, so I called their customer services to get an update. It was impossible to have a worthwhile conversation with both the customer services rep and then his manager as they simply read from a script that didn’t cover the questions I asked them. Anyway, bottom line, it became evident that the buyer protection scheme only pays out the original purchase cost and postage if the buyer foots the bill for returning the offending item to the seller (and this cost cannot be reclaimed).

I put down the phone thinking they must be wrong. After all, a buyer protection scheme that makes buyers pay for returning goods that are either faulty or not as described is pointless (as well as being at odds with the Sale of Goods Act). But on checking the small print, this is the case.

Just to re-iterate, if you buy an item on ebay and it arrives faulty or not as described then, unless the seller does the right thing, you’ll end up having to pay the return postage costs to get a refund from ebay (excluding those return postage costs). In my case I’d be left £30 out of pocket through no fault of my own.

Unsurprisingly I haven’t used ebay since and don’t intend to again, I feel it’s just not worth the risk. Meanwhile I’m speaking to trading standards, who might be able to help, but maybe the only way I’ll get my money back will be to take the seller to court. I’m inclined to do this out of principal, but it’s a hassle I wouldn’t have to endure if ebay buyer protection wasn’t so flimsy.

Do any of you, whether ebay buyers or sellers, have any experience or views on the buyer protection scheme? If so, please post your comments below.

Read this article at http://www.candidmoney.com/articles/article112.aspx

How to cancel credit card?

Question
Just a quick question.

I am very near to paying off my credit card. When I have made the last payment, I wish to close the credit card account. Is closing my mastercard as simple as phoning my bank and saying I wish to close the account or is there a procedure or anything I need to look out for?

I borrowed money on my credit after I was declined a career development loan. I was blowed if I was going to let the banks decide my education / future career (and in anycase, the interest rate was not too dissimilar).Answer
Well done on paying off your card!

Yes, it is as simple as calling the credit card provider, although you might want to tell them in writing too just to make sure as it’s not unknown for call centres to make mistakes. Nevertheless, bear in mind that the credit card company will probably leave the account in place for a while longer in case any outstanding payments come through, so it’s a good idea to call again after three months and ensure that the account is fully closed.

However, before you cancel, consider whether you’ll find it useful to have a credit card in case of financial emergency. If so then keeping, but not using, this card could make sense if you don’t want the hassle of applying for another in future or require money at very short notice.

Good luck with your new career.

Read this Q and A at http://www.candidmoney.com/questions/question202.aspx

Out of pocket from bank fraud?

Question
On two occasions the representative of the British Bankers' Association repeated, on Working Lunch, that banks must prove that customers were negligent, in the case of fraud, in order to avoid refunding the money stolen.Yet recent newspaper reports show that banks are flouting the Law and the FSA seem unwilling to act against the banks.That leaves the customer with the only option to take the banks to court.

That is not feasible to many people.What is the point of the FSA when they can't or won't uphold the Law? They seem to let financial businesses do what they like instead of protecting the public! There does not seem to be an organisation that can or willing to protect customers.This is worrying because anyone can be subject to fraud and banks ignore the Law and the FSA is not interested.Answer
Banks and building societies are subject to the FSA’s Banking Conduct of Business Sourcebook (BCOBS), which replaced the Banking Code last November (although banks had until 1 May this year to implement a few of the changes).

BCOBS, which you can view here if you want, states:

If you deny authorising a payment then it’s up to the bank to prove that it was authorised. If unauthorised then they must, within a reasonable period of time, refund in full.

However, if an unauthorised payment arises from lost/stolen bank account details/cards then you can be liable for up to £50 of losses incurred before you made the bank aware of the issue. The bank can only hold you liable for all losses if it can prove you acted fraudulently.

If you think a bank or building society has acted against these rules by not refunding unauthorised payments then you can take your complaint to the Financial Ombudsman Service who will, hopefully, apply some common sense and uphold valid complaints.

But you’re right; there have been some horror stories of individuals suffering unauthorised payments and having to resort to the courts before their bank repays their money. I guess the reason banks are sometimes reticent or slow to re-instate losses is that there are criminals seeking to profit from such claims – as usual it’s the actions of a minority who spoil things for the majority.

This is all worrying as bank fraud continues to grow according to CIFAS, the UK’s fraud prevention service. It identified 80,125 instances of bank account fraud over 2009, an increase of 7,117 on the previous year, although credit card fraud fell by about the same amount over the period to 63,396 cases.

The best piece of advice I can give is to be careful and inform your bank or building society ASAP if you suspect an unauthorised payment or believe that your security has been compromised (e.g. passwords/account details/cards have been lost or stolen).

You can buy identity theft/fraud insurance if you’re especially worried, although given your loss should be no more than £50 these policies are of questionable value.

I agree that the FSA should police its rules more stringently. Given fraudulent claims are no doubt rising I can understand the banks wanting to investigate some claims, which can delay re-imbursement. But sadly what often seems to be lacking in these large corporations is common sense, a problem that’s all too common these days with the growth of call centres and scripted staff.

Read this Q and A at http://www.candidmoney.com/questions/question201.aspx