My pension has deducted too little PAYE tax?

Question
I have just received my first monthly pension payment from a previous employment, which has been taxed as if it is my only income. I am still working and paying tax at higher rates on my salary. How will this be adjusted on PAYE or will it only be resolved with my annual return?Answer
It sounds as though your previous employer's pension administrator is using the wrong tax code - it should have been the same code as used by your current employer.

If you pay too little tax via PAYE then your first step should be to contact HMRC and tell them. They will normally revise your tax code for the current tax year to ensure the correct amount of tax is deducted moving forwards then adjust your tax code for the following tax year to collect the underpayment(s) (effectively by reducing your personal allowance). There is also the option to pay the tax owed as a lump sum now, which would probably mean the tax code used by your current employer being unaffected.

Either way, once you've sorted this with HMRC you should tell the pension administrator the tax code to use so that they deduct the correct amount of tax in future.

Yes, you could instead pay the tax owed via your tax return, but in this instance it's probably simpler to just get a revised tax code.

Just for reference, underpayments of £2,000 or more can't be collected via PAYE, HMRC will likely ask you a lump sum or series of instalments in such cases.

Note: it's not unknown for HMRC to make mistakes when issuing tax codes, so it's always worth checking any codes they send you. Read my article here on how to do this.

Read this Q and A at http://www.candidmoney.com/questions/question403.aspx

JPM UK Active Index Plus Review

When you buy an actively managed UK stockmarket fund your goal should almost always be to beat the index, for example the FTSE All Share. The trouble is, many such funds charge 1.5% or more in annual fees and fail to deliver. The alternative is low cost tracking funds, but then you're unlikely to ever beat the index after charges.

JP Morgan appears to be trying to plug the gap, if there is one, with its new UK Active Index Plus fund (by renaming its existing UK Active 350 fund on 1 February 2011 and revising charges and investment strategy etc).

The idea is simple - offer a low cost fund that generally tracks the FTSE All Share Index but let an active manager make a few tweaks here and there to try and beat it.

Let's start with the charges. The annual management charge is 0.25% but other costs push total annual costs (as measured by the total expense ratio - TER) to 0.4%. There is also a performance fee calculated as 10% of returns above the index, but this is capped at 0.15% a year so the TER can't exceed 0.55%.

The 0.4% annual charge is a bit more expensive than the cheapest FTSE All Share trackers, which are available with TERs of 0.3% or less these days, but very low compared to the typical 1.5% actively managed charge.

The performance fee doesn't have a 'high watermark', which means you could end up paying it even if the fund is losing you money (but falling by less than the index). However, you won't pay a performance fee if the manager is simply 'clawing back' earlier periods of underperformance versus the index.

JP Morgan's aim is for the fund to have a 1% - 1.5% tracking error - that is to perform up to 1.5% better or worse than the FTSE All Share each year. It looks as though the manager is trying to achieve this by more or less tracking the FTSE All Share but increasing/decreasing exposure to some companies/sectors in an attempt to beat it.

At the time of writing the fund's factsheet suggests around 5% of the fund is held in cash and a 2.7% underweight position in the financial sector versus the index. Otherwise the variances look minor.

All told, this fund looks little different to quite a few so-called 'closet trackers' in the UK All Companies sector (i.e. funds where the manager takes only small bets against the index). The key difference being this fund is not trying to get away with steep 'active management' charges.

So is the JPM UK Active Index Plus fund a good idea?

The answer boils down to whether the manager, Michael Barakos, can consistently beat the index. If he can then this fund will prove great value, even after the performance fee. If he can't then the fund will end up little more than a slightly overpriced tracker or, more worryingly, a 'dog' if his bets against the index mostly backfire.

However, judging Michael Barakos's abilities is difficult as he currently has little track record of managing investment funds. And JP Morgan's generally indifferent track record of running funds in the UK All Companies sector doesn't fill me with confidence.

Overall I think JP Morgan deserves credit for trying to bring down the costs of active fund management. But the manager's bets against the index will be small and as he's yet to demonstrate he can consistently beat the index using this technique I'd be more inclined to opt for a low cost FTSE All Share tracker fund instead. Nevertheless, this is one to watch and I'd welcome similar fund launches with more proven managers at the helm.

Read the full review at http://www.candidmoney.com/candidreviews/review54.aspx

Latin Amereica fund within Skandia?

Question
I recently asked a question about a Skandia Capital and Income Bond which you answered in simple and understandable laguage for which I thank you. Posted on the your site at the same time was a question concerning a forthcoming fund launch for Aberdeen Latin American Equity for which you gave a quite favourable review. Having recently returned from South America I decided to instruct my IFA to switch funds within the Skandia Bond to hold some of the aforementioned Aberdeen LAE stock.

The IFA forwarded the necessary paperwork to document and affect the switch which was duly signed and returned.

To my dismay I have just received the current allocation list direct from Skandia to discover that my instructions were not carried out. My IFA latterly informing me that the Aberdeen LAE Fund could not be accessed as it was not available as mirror structured holding. This explanation I find to be perplexing as I already hold within the Skandia CAB a percentage of Aberdeen Emerging Markets stock.

Would it be possible to shed some light here?Answer
I'm afraid the answer is very simple, Skandia doesn't currently offer the Aberdeen Latin America fund within its investment bonds (or ISAs and pensions). Your financial adviser really should have spotted this before sending you a form to switch, but I suppose mistakes do sometimes happen.

As it's a recent fund launch Skandia might feature Aberdeen Latin American Equity in future, but if you want to invest in the region meanwhile within your bond then your options are limited to Invesco Perpetual Latin American Growth and Threadneedle Latin America. Invesco Perpetual's fund is probably the better of the two, but I wouldn't rate the management team as highly as Aberdeen's.

Bear in mind Aberdeen Emerging Markets is around 30% invested in Latin America at the moment, so you do already have some exposure to the region.

Read this Q and A at http://www.candidmoney.com/questions/question401.aspx

How will RDR affect charges and service?

Question
This question is about the effects on the consumer of the impending so called "Disribution Review" : I hope I have got the right term for these changes. As I understand it ,at present , with investment like unit trusts , the monies gained from the consumer as charges are split 3 ways : between firstly the fund manager , secondly the fund supermarket (if there is one) and thirdly the discount broker (if there is one) . I appreciate that this split may not always apply to every customer but it I think it is quite a common arrangement.

With this set up the fund supermarket gets the smallest slice ( I think) . From a consumer perspective they are , arguably at least , doing the most work . So should we feel fairly lenient towards them and forgive them the numerous mistakes that will inevitably occur as they are covering so much ground , and working for the smallest slice of the cake?

This complicated structure effects not only charges but also the way complaints or mistakes are handled . Mistakes or anomalies can occur as broker feeds his "analysis" into one holdings in a fund supermarket so that you get 2 potential sources of analysis : firstly the fund supermarket's own analysis and secondly the broker's own feed into the fund supermarket which provides a second source of analysis . An example of an anomaly ( or mistake) that could occur under these circumstances would be where the fund supermaket shows an individual fund holding as , for example , say 1% of the portfolio whereas the brokers analysis shows it as 10%. When pressed for an explanation the answer may be something like "well we can only work with the information we are given: And we will let you know if we ever get an answer" . Its not seriuos because I spotted it . But what would happen if an investor made serious investment decisions on the basis of incorrect information . Who would be responsible , the investor , the discount broker or the fund supermarket?

So the customer's relationship with supermarkets and brokers is a bit like that of a patient in the NHS . You would only seriously complain if there was a (death) serious anomaly or fraud and anything else is relatively OK.

Will the Distribution Review re-establish consumer priorites and control or will the financial services industry distribution priorites continue to predominate? Is the apportionment or the "split" of the charges likely to change significantly?Answer
The main objective of the FSA’s Retail Distribution Review (RDR) appears to be preventing remuneration from product providers (i.e. sales commissions) biasing financial advice.

A key proposal is replacing sales commissions with ‘customer agreed remuneration’. This means that if a financial adviser takes their fees from the product they sell (rather than you paying them directly) customers will need to agree this in writing beforehand. In theory their fee for specific advice should be the same regardless of the product sold, removing the risk of bias that inherent with the existing commission system.

RDR will also probably affect the way investment products are priced. At the moment a typical unit trust might charge 3% initially and 1.5% a year, from which 3% initial and 0.5% annual sales commission is paid to financial advisers. Fund supermarkets/platforms might also receive about 0.25% a year, leaving the fund provider with 0.75% annual revenue.

Based on FSA announcements so far it looks like private investors might be offered funds at ‘institutional’ pricing (basically stripped of commissions/platform fees), typically no initial charge and a 0.75% annual fee (with any platform fees payable on top), or at existing levels with the potential for built in ‘commissions’ to be rebated in the form of extra units (net result is similar to reduced charges).

The FSA’s original proposals would have prevented funds from building in fund platform costs, instead charging consumers directly if they opt for this route. But they’ve now u-turned so the c0.25% annual cost can continue to be incorporated within fund charges. I find this disappointing and illogical – far better to have ‘clean’ fund pricing and let consumers choose if they want to pay more for extra services like fund platforms.

Coming to your point about who does/is responsible for what. Always assume that fund platform information is the most accurate. If they make mistakes (e.g. they list wrong fund or number of units), which sometimes happens, then there’s likely a problem with your underlying investments which needs to be sorted out.

Some financial advisers/discount brokers plug this information into their own systems rather than simply re-badging the fund platform web pages/paper valuations as their own. While useful for adding extra information or consolidating holdings from several platforms, it gives scope for errors. These are more likely to be a glitch in the adviser’s/broker’s system rather than actual underlying errors, but can be annoying.

In my view if you use an adviser or broker then they should take responsibility for sorting out all errors and glitches, liaising with fund platforms where necessary. While fund platforms appear to do a lot, the tasks are mostly administrative and should, to a large degree, be automated. Fund managers and financial advisers have the greatest scope to provide good or bad value for money depending on what they deliver in return for their potentially hefty fees.

Read this Q and A at http://www.candidmoney.com/questions/question395.aspx

Question
if profits are taken from investment funds within a tax year up to the tax free allowance of 10,100, for capital gains. Are the profits taken then still liable to ordinary income tax? If they are can any losses from investment funds be used to reduce any gains and tax owed.

Regards

Simon.Answer
Capital gains tax and income tax are two separate taxes, I can’t think of any situations when both would apply to the same profit – it’s either one or the other.

The gains you make when selling most investments, e.g. shares, funds and second homes, are subject to capital gains tax. Gains up to the annual £10,100 allowance are tax-free, any excess is taxed at 18% or 28% depending on whether you’re a basic or higher/top rate taxpayer.

Income tax is more likely to apply to any income you receive from the investments, e.g. dividends, interest or rental income.

[note: income tax can apply to gains from some offshore fund investments that don’t have ‘reporting’ or ‘distributor’ status, but you’re generally unlikely to encounter these with the exception of some exchange traded funds (ETFs)].

If you make losses on investments then they can be offset against future gains, but you must notify the taxman (HMRC) of the losses if they occurred in a tax year previous to the one in which they’re being used to offset gains. Take a look at my answer to this earlier question for more details about this.

Read this Q and A at http://www.candidmoney.com/questions/question399.aspx

Are FSA regulated currency brokers safe?

Question
Since Crown Currency went into liquidation I have been searching for a safe way to transfer funds abroad safely and at a reasonable cost.I have posted a question before on the subject and if I remember correctly your advice was to look for a company that is FSA authorised rather than registered.

I came across a company called Caxtonfx and they are both regulated and authorised.All seems ok until I came to the link-About Us and security.Under the heading "Is my money safe?" I was troubled when I read that only money from businesses are segregated.

For individuals the money is not segregated.This is a copy of the sentences that I find alarming: "It is important to note that spot and forward foreign exchange transactions are not regulated activities. This means that during the actual settlement process for your fx transaction, your funds are not held in segregated Client Money accounts and is not deemed to be Client Money at that time.

I think what I want to do is buy foreign currency and transfer to an account abroad.This would be classed as spot foreign exchange transaction and is not segregated.Therefore not safe if the company should fail like Crown.

My understanding of the two sentences may not be correct.I would therefore appreciate your understanding of the sentences and if you would still consider foreign exchange companies that are authorised as safe for individuals?Answer
Caxonfx should be one of the safer foreign currency brokers given they are authorised and regulated by the FSA. And they appear to be following FSA rules by holding client money in a segregated client account. But your question highlights a loophole as far as the security of your money is concerned. And I believe this applies to all foreign currency brokers, not just Cantonfx.

The problem arises when Cantonfx passes your money across to a third party (called a ‘counterparty’) in settlement for the foreign currency purchased. At this point it is no longer held in the ‘safe’ segregated client account so if either Cantonfx or the counterparty supplying the foreign currency were to go bust you could, in theory, lose your money. This is what the terms and conditions you’ve highlighted refer to.

Is this likely? In the case of Cantonfx. probably not. They appear to a sensibly run company and currently use Royal Bank of Scotland as the counterparty for their foreign exchange transactions. But this is a worrying issue nonetheless, as any losses will not covered by the Financial Services Compensation Scheme (FSCS) and if there’s one thing to be learned from the last few years it’s never assume never when it comes to large financial companies collapsing.

So, just to clarify. When you send money to Cantonfx it will initially be held in their client bank account, where it should be safe in the event they go bust. Once the foreign exchange transaction takes place with RBS then your money leaves the client account and is sent to RBS for settlement, at which point it is potentially at risk if Cantonfx or RBS goes bust. Once RBS sends your foreign currency back to Cantonfx it will once again be held in the client account, ready to be paid to you.

I hadn’t thought through this issue before so many thanks for raising it with your question. While it might not be sufficient reason to avoid using foreign currency brokers, it does highlight just how careful you need to be when choosing one if you’re not getting your cash over the counter.

Read this Q and A at http://www.candidmoney.com/questions/question396.aspx

Why is the FSA banning fund cash rebates?

Question
What's the logic behind the proposed FSA ban on cash rebates suggested by this Money Marketing article?

I presume this refers to commission rebates that platforms such as Cofunds and H-L provide. It strikes me that rebates are in the clients' interest so what are the downsides of rebates for the client? Answer
This is all part of the FSA’s Retail Distribution Review (more info in my article here) which, amongst other things, aims to stop financial advisers from receiving commission as payment for financial advice.

In an ideal world this would mean private investors enjoying ‘institutional’ fund charges (i.e. without commission built in) and then paying an explicit fee to an adviser for advice, if required. For example, fund A might charge 3% initially and 1.5% annually from which 3% initial and 0.5% annual commission is paid, as well as a 0.25% annual fee to fund supermarkets/platforms (where relevant). The institutional version of fund A would probably have no initial charge and a 0.75% annual management fee (i.e. 1.5 – 0.5 – 0.25).

But life might not be that simple. For starters, the FSA will allow fund providers to continue paying fund supermarkets/platforms for their services, which would likely continue to be incorporated into fund charges. So there would need to be another fund share class in addition to institutional units (which don’t normally incorporate platform fees). Institutional units also tend to have minimum deal sizes, which might not be practical for platforms when dealing low volume niche funds.

So it seems the FSA is happy for providers to continue building ‘commissions’ into their fund charges, but this will not be allowed to be paid to customers in the form of a cash rebate for fear some advisers might then take that cash as their advice fee – i.e. the commission system would basically persist. Allowing this system risks advisers recommending funds with the biggest rebates then taking that as their fee.

The FSA instead proposes that rebates may be given in the form of extra fund units, which achieves a similar result to reduced fund charges. So in the above example fund A could charge 3% initially and 1.5% a year but rebate 3% initially and 0.5% a year via additional fund units, effectively giving zero initial charge and a 1% annual charge (which is a similar net result as using the cheapest discount brokers currently).

Bottom line, you should still be able to benefit from using discount brokers, but rather than cash rebates you’ll receive additional units (assuming institutional funds aren’t used).

In my view it would be far simpler to ban extra potential fees from being included within fund charges altogether and simply offer rock bottom cost institutional units to everyone. Any platform fees etc would then be paid directly by consumers, which should create greater competition between platforms and provide better overall transparency.

Read this Q and A at http://www.candidmoney.com/questions/question394.aspx