Life cover payout less than expected?

Question
On 24th December 1985 My father took out a life insurance policy in his and my mum's name designed to pay out £100,000.00 on second death to assist with Inheritance Tax payments. Maturing after 29 years.

I believe it was a Trust Fund Policy in mine and my sister's name and so the payment made would not be part of his estate.

In January 2000 dad became unsure of the policy and asked for Death Claim illustration. This gave possible death claim value of £52,971.95.

He asked the company to reassure him of the value on death and he was sent a letter stating "this policy is designed to pay out a minimum sum of £99,000.00 until 24 December 2014".

My dad died in 2006 and mum died in March 2011, the company have only paid out £71,459.17.

We have queried this and have been told the policy had a temporary decreasing insurance element (not mentioned before) and final bonus rates have fallen in recent years.

My solicitor will argue this on my behalf but what is your advice please. We appear to have lost £30k in 10 years and none of this uncertainty was explained to dad when he asked the question for this reason.Answer
Apologies for the delay in replying, life's been hectic lately for various reasons.

I'm struggling to work out exactly what type of policy you father took out. The usual route for life insurance to cover inheritance tax is a whole of life policy - the reason being the policy lasts until the day you die (assuming you keep paying the premiums), so it's guaranteed to payout, even if you live for longer than expected.

Given his policy was due to mature after 29 years it was obviously not whole of life, so more likely to be some sort of 29 year plan paying a minimum agreed amount on death during that time, with the potential for more or a payment on maturity (if still alive) depending on investment performance. The money was likely invested in a 'with-profits' fund, which aims to smooth market ups and downs.

With profits investment performance has been poor over the last 10 years, so any extra amount over and above any minimum guaranteed payout will almost certainly have been less than originally expected. Whether or not the original projections were unrealistic is open to debate, but it's difficult to get compensation for poor investment performance unless the advice was inappropriate (e.g. a high risk investment is sold to a low risk investor).

Of more concern is the conflicting information given by the life insurance company regarding the level of cover. Having received a letter stating the minimum level of cover was £99,000 it's fair to assume this would be the minimum guaranteed payout on death during the policy's term. But this is at odds with the death claim value given in 2000 and eventual payout.

I'd start by looking at the original policy documents to find out exactly what the policy is and how much it promised to payout on death.

If the policy did include a decreasing element and did not have a £99,000 minimum guaranteed sum assured then the payout received may well have been correct. But you can certainly question the letter that mentions £99,000 and whether the original advice was appropriate (assuming your father received advice) as this type of policy doesn't sound especially sensible to cover an inheritance tax liability - especially if your father was not made aware of any decreasing element.

But if the policy document does confirm a £99,000 minimum guaranteed sum assured then you should have a valid claim. You may not even need a solicitor in that case as it should be black and white.

Good luck sorting this out and please feel free to ask any follow up questions below.

Read this Q and A at http://www.candidmoney.com/questions/question560.aspx

How does the LSE International Retail Service work?

Question
Please can you explain how the LSE's International Retail Service operates and how I can access it?Answer
The London Stock Exchange International Retail Service (IRS) provides access to around 350 large European and North American stocks as if they were listed on the London Stock Exchange. This means low cost UK dealing charges via stockbrokers and not having to mess around with buying stocks in foreign currencies, as they're traded in pounds sterling. Plus, any dividends are paid in pounds.

Of course, there'll still be currency risk (due to exchange rate movements) and foreign exchange costs, but the latter are absorbed into a share's bid/offer spread (difference between buying and selling price). Because it's a small market you might also expect slightly wider bid/offer spreads than if you purchased the same shares on their domestic markets, although I'd expect the difference to usually be minimal.

Most stock brokers offer access to IRS so using the service should be very straightforward - the same as buying a UK share. But as the companies listed on IRS are domiciled overseas you shouldn't have to pay any stamp duty when buying their shares.

Behind the scenes trading logistics are handled by the CREST settlement system, much like buying UK shares.

However, there's a difference as you don't physically own the shares themselves. CREST buys them and holds them in large 'pool' accounts in the countries where they're listed. You're (or more accurately, your stockbroker) is then given a CREST Depository Interest (CDI) - basically an electronic piece of paper that says you (technically your stockbroker's nominee account) have beneficial ownership of the shares.

Is this safe? Well not as safe as owning a physical share certificate, but probably safer than holding shares via a stockbroker nominee account which is the norm these days (and how you'd invariably hold the CDI's anyway).

Perhaps the only other thing to consider is trading times. You can only buy and sell IRS shares while the London Stock Exchange is open, which means periods of time when you can't trade the shares even though the underlying stock markets are open. For example, US shares traded on IRS can only be traded for a few hours in the afternoon. This might be a problem if you want to trade during periods of high volatility.

In summary, IRS is a good thing and makes trading in certain large foreign companies very straightforward. I can't think of a significant reason not to use it unless you plan to trade very actively, in which case limited trading times and wider bid offer spreads potentially reduce the appeal.

Read this Q and A at http://www.candidmoney.com/questions/question558.aspx

Ways to reduce tax bill via a limited company?

Question
I have changed to a limited company from being a sole trader to reduce tax(50%).I am the earner with my wife and 2 children(age 24 and 17)as additional shareholders and employees.What can I do to reduce tax?

I am very happy to pay my wife and children pensions(all three have SIPPwith Alliance Trusts) or any other contributions such as dividends.My wife is a 40% taxpayer and son not yet but will be in 2 years.

Can I pay my daughter any dividends to help with school fees and uni fees later? Me and my wife have NHS jobs and NHS pensions and SIPPs with Alliance Trust.Answer
Companies are generally subject to lower tax rates than individuals, for example companies with annual profits of up to £300,000 pay 20% corporation tax, much lower than the 50% you'd pay as a sole trader.

However, that's only of benefit if the money stays in your company. If you want to spend it personally you'll need to withdraw it (via a salary or dividends) and it then becomes subject to the usual rates of personal income tax, i.e. up to 50%. So, on the surface, there's not much tax benefit unless you plan to leave profits in the company - not very practical if you need the money to live on. And, in any case, unless the company will use the money to expand or invest it'll be of little use just sat there as cash (banks tend to pay low rates of interest on corporate deposits - see my answer to this earlier question).

You can avoid National Insurance Contributions by withdrawing money as dividends rather than salary, but the taxman will need to be convinced you're not trying to evade tax. This used to be a popular route with IT contractors - maybe they'd earn £100,000 a year, pay themselves a £20,000 salary and the rest as dividends, avoiding NICs on £80,000 of income. But HMRC has clamped down on this and general wisdom seems to be that you should pay yourself a salary that is commensurate with what you'd earn if you carried out the same job as an employee for another company. So perhaps the contractor might instead pay themselves £60,000 a year and take £40,000 as dividends.

Employing family members is another way to try and save tax if they're in a lower income tax bracket than you. Plus, you can pay them dividends if they're shareholders. However, you should again be careful you're not seen to be evading tax. You'd need to able to demonstrate that family members are bona fide employees carrying out work that justifies the salary you're paying them. For example, you can't just pay a spouse £20,000 a year for typing a handful of letters, they'd need to carry out a role in the company that justifies the salary. Again, a good benchmark is how much they'd earn if they carried out the same tasks for another company.

Paying dividends to family members who are shareholders is feasible, but bear in mind a dividend distribution must be applied across the board. So, if you decide to pay £40,000 of dividends then each shareholder will have to receive their share based on the number of shares owned. For this to be worthwhile the family members will need to own quite a large proportion of the company, which risks the taxman viewing this as tax evasion unless you can justify why they have such a large shareholding.

As ever with the taxman, the key is to do what would seen as reasonable. Try to push things too far and you could risk a tax investigation, demands for unpaid tax, fines and possibly even imprisonment. I'd strongly advise speaking to an accountant to gauge what they think would be allowable in your position, so that you can try to save tax without risk of upsetting the taxman.

Otherwise, allowable deductions for business expenditures are broadly similar for both companies and sole traders, as is the pension position. You can pay pension contributions on behalf of your wife and children regardless of whether they're employees of your company. However, tax relief will be subject to the usual rules, i.e. non-taxpayers get basic rate tax relief on annual contributions of up to £3,600 while taxpayers enjoy tax relief on the lower of their annual earnings and £50,000 (including any employer contributions).

If any readers know of other (legitimate) ways to avoid tax using a limited company please post below.

Read this Q and A at http://www.candidmoney.com/questions/question557.aspx

How safe is a SIPP?

Question
I have accumulated a significant pension pot spread accross multiple houselhold name providers and am approaching the point of taking benefits. I am in no doubt that a self invested SIPP based income drawdown pension suits my needs.

The low cost internet based options (such as SIPPdeal) look good value, compared with the household names (who won't speak to me unless I give an IFA £15k to tell me what I know already). However I can't help feeling concern about taking my life savings to a small relatively unknown organisation.

If they are just acting as a broker and adminstrator maybe there is nothing to worry about? Are their hidden couterparty risks in using such a service? Can I mitigate risks by using two SIPP providers in drawdown? Answer
Ignoring investment performance, the main risks when using a SIPP are someone illegally dipping their fingers into your pension fund and an underlying bank going bust if you hold cash. Both are small risks, but ones nevertheless to be aware of.

When you hold assets within a SIPP, the SIPP provider (e.g. Sippdeal) will hold them in trust for your benefit. This means your pension pot should be unaffected if the provider goes bust. However, if the provider has illegally taken money from your pension fund and can't afford to repay it, Financial Services Compensation Scheme (FSCS) cover would be limited to £50,000.

Any underlying investment funds also hold your money in trust for your benefit, so are ring fenced from the underlying fund providers going bust. Again, the FSCS would cover up to £50,000 per fund provider.

If you hold cash in your SIPP and the underlying bank or building society goes bust you'll normally be covered for up to £85,000 per institution - but check with the SIPP provider as in theory they might bundle everyone together so that the £85,000 applies to all SIPP clients combined - meaning the protection is effectively worthless.

The FSCS protection for SIPPs is different to that of conventional insurance based pensions (which invest in insurance company funds), where the compensation level is 90% of an unlimited amount. This causes much confusion, not helped by the FSCS failing to publish clear information on their website - under pensions they just say 'it's complex so contact us for details'.

Should you be unduly worried? I don't think so. The underlying investment risk is the same whichever SIPP provider you use. So the real issue is whether a specific SIPP provider is likely to commit fraud and steal your money. While we can never say never, I think the likelihood is very low provided you use an established company that's been running for a few years. So I'd be fairly relaxed about using one provider for your pension fund. In any case, to ensure full FSCS protection you'd need to use a different SIPP provider for each £50,000 invested, which would be rather impractical in your case.

Best wishes for a happy retirement.

Read this Q and A at http://www.candidmoney.com/questions/question555.aspx

Tax on UK investments if I move abroad?

Question
I have some unit trusts in a portfolio that I don't want to sell at the moment. I am considering moving abroad for a job opportunity and this would be a permanent move with no intention to return to the UK.

If I keep my unit trusts, what tax would I pay on the "income" amounts that appear on my statements and are reinvested into the plan?

Also, would I be able to make changes to the funds (switches) without having to pay UK capital gains tax on any gains that selling the old funds makes?Answer
Assuming you become non UK tax resident (more details in my answer to http://www.candidmoney.com/questions/question95.aspx this question) then you won't be liable to UK tax on dividends or interest paid out by your funds.

However, dividends can never be truly tax-free as they're paid out of taxed company profits. As a concession basic rate taxpayers don't have to pay any further tax on the dividends they receive, but non-taxpayers (or those holding the shares/funds in an ISA or pension) can't reclaim any tax (Gordon Brown stopped this back in 2004). But becoming non resident would mean no longer having to pay any extra UK tax on dividends if you're a higher rate taxpayer.

If you have funds that pay interest rather than dividends (e.g. corporate bonds) then complete HMRC Form R105 (AUT.1) to ensure no UK tax is deducted in future.

As for capital gains tax, you'll still be liable until you've been non resident for five full tax years, although as your usual annual allowance (currently £10,600) will still be available this may not be a problem.

If any of the funds are held within an ISA they can remain there which makes life simpler (as no income or capital gains tax will be deducted), although you can't add to these holdings while non resident. If you haven't used this year's ISA allowance (£10,680) consider transferring some of your existing funds into it.

Finally, bear in mind that you might be liable to tax in your new country of residence instead, so I'd seek advice locally as appropriate if you end up moving.

Read this Q and A at http://www.candidmoney.com/questions/question556.aspx

Bet on stock market recovery?

Question
Like most poeple my funds have lost money at present, as the index is down I was thinking of getting a tracker fund which will hopefully go up when the index improves. Do you think this is a good idea, and if so could you suggest a fund. I normally go through Hargreaves Landsdown.Answer
It's very difficult gauging when stock markets will stabilise and subsequently rise (so that we all start making some money again!). My concern is that the root causes - worries over debt and sluggish economies - won't vanish overnight and could be here to stay for several years.

By all means consider betting on a recovery, but just be prepared for lots more volatility over coming months and potentially well into next year and beyond. I think you'll probably be fine if you can invest for 5-10 years and, of course, there's always the chance you'll turn a decent profit far more quickly. But, as you can probably tell, I'd be inclined to err on the side of caution.

Trackers would be a cost effective way to bet on a recovery, just bear in mind that around 20% of the FTSE 100 is accounted for by the oil/gas sector and about the same again by financials, so big movements in these sectors will have a large impact on the index. Given financial stocks have borne the brunt of recent falls this may be no bad thing when markets do pick up.

Alternatively, you could consider investing in an aggressively run actively managed fund on the basis they've probably been harder hit by the recent downturn hence may have more upside during recovery - albeit this is obviously a higher risk route and you may well hold such funds already.

Or, if you'd rather be more cautious, consider high yielding equity income funds. You might not benefit as fully from any upturn (versus the index or more aggressive growth funds), but the dividends and nature of the underlying investments (probably fairly dull cash rich companies) might help better weather any shorter term storms.

While Hargreaves Lansdown have their merits they don't cater that well for trackers, because most trackers don't pay trail commission meaning HL will charge you 0.5% a year (capped at £200). Nevertheless, according to their website you can invest in HSBC trackers (which charge 0.25% a year) without having to stump up the extra 0.5%, so this could prove a viable option.

Read this Q and A at http://www.candidmoney.com/questions/question554.aspx

Whatever next?

Do recent market falls and the economic outlook leave investors with nowhere to run and nowhere to hide?.

Like many others, I suspect, I am inclined to despair at the Stock Market, which has gone precisely nowhere in the ten years since I shuffled off the employment scene and topped up my equity holdings with my tax free cash. Desperate for any sort of good news, I hung on every word from a chap on Bloomberg, who said that the 20 years up to 1990 had been really good, and that after this long pause equity returns would revert to their longer term trend: six or seven per cent per annum.

All well and good, except that some of us won’t be here in the long term. And, of course, the future may not be like the past. In any event, if you come out of the equity market, where do you put the cash? If we’d all bought gold at under $400 an ounce we’d be sitting pretty, but we didn’t and we aren’t.

The economic outlook, globally and domestically, is not very sunny, and many of the problems seem to be associated with a striking weakness in our western democracies. Voters want better public services, and they don’t want to pay more tax. Politicians get elected by promising the people what they want.

So the politicians get power, spend the proceeds of the taxes, find that they’d like to spend more, and borrow so that they can, as Gordon Brown was fond of saying “invest in our public services”. The growing public debt doesn’t matter, because it won’t hit the hustings at the next election. But the public finances become less resilient.

In theory, faced with an economic shock, Governments can use monetary policy. They can lower interest rates. Or they can use fiscal policy. They can lower taxes. Or they can spend big on public works. They have to borrow a bit to tide them over, but the increased spending power in the economy creates the growth that increases the tax take that pays off the extra borrowing. Or they can grit their teeth and actually cut public spending.

Even before the last election, it was fairly clear that none of these options was a runner. Interest rates were at rock bottom and public borrowing was already sky high. And you couldn’t get elected even if you promised to maintain the funding of the three so called National Health Services (or is it four, I’m not sure how it works in Northern Ireland).

So public spending continues to increase, in nominal terms. Public debt therefore continues to increase. With a fair wind, in four years’ time, the budget will balance, but only if you exclude interest payments on debt. In other words, it still won’t balance. And the debt will still be rising.

The Tories, the Labour Party and the Liberal Democrats all know that the Government has precious little room for manoeuvre. They also all agree that it is right to use inflation to redistribute wealth from the prudent to the profligate. They all know, but don’t appear to care, that inflation will also demolish whatever advantage we may have gained from devaluation. There are no dissenting voices, doubtless because the voting public actually want to continue to inhabit a dream world. No wonder the Chinese aren’t that impressed with democracy.

I believe that we can only spend what we earn. Put it another way: the budget has to balance over the economic cycle, and national debt shouldn’t exceed 40% of GDP. Right wing nonsense? Maybe, but it’s where Gordon Brown started from. I never did understand why he changed his mind.

The bottom line is that I wrote here earlier this year that interest rates would have to rise before we saw 2012. I was wrong. I thought enough of the suits in power would remember what inflation did to us in the 70s and 80s. I was wrong. We’ll have to get used to 5% inflation.

Does that mean that we should change our approach to managing our money? Probably not. Real assets are usually a better bet than financial assets when inflation is running high, but remember that housing is still almost certainly overpriced.

Should we be sucked into really big risks to try to beat the inflation rate? I don’t think so. Some gamblers win. Most lose.

So perhaps we should just hang on to the equities, try not to be upset by the current volatility, and remember that there are plenty of people in the world who would swap their lifestyle for ours.

Read this article at http://www.candidmoney.com/articles/article242.aspx