Unit Trusts and Open Ended Investment Companies (OEICs)
Financial Advisers Advice Oct 06
“These collective investments offer access to specific actively managed funds.
Currently any gains enjoyed up to encashment will be subject to capital gains tax (C.G.T.), however you will be able to offset (either fully or partly) these gains with your personal C.G.T. allowance. The annual allowance ...
Financial Advisers Advice Oct 06
“These collective investments offer access to specific actively managed funds.
Currently any gains enjoyed up to encashment will be subject to capital gains tax (C.G.T.), however you will be able to offset (either fully or partly) these gains with your personal C.G.T. allowance. The annual allowance is currently £8,500, though you must bear in mind that tax benefits may be subject to changes in government policy.”
Expert’s view: Score: 1 out of 10. oct 06
Totally wrong.
The CGT allowance is £8800 and also the adviser forgot to point out that you could use losses elsewhere to offset against gains made in a unit trust or Oeic. The adviser also forgot to explain that you have the use of both indexation allowance and taper relief making a unit trust arguably the most tax efficient investment vehicle next to an Isa.
“These collective investments offer access to specific actively managed funds.
Currently any gains enjoyed up to encashment will be subject to capital gains tax (C.G.T.), however you will be able to offset (either fully or partly) these gains with your personal C.G.T. allowance. The annual allowance is currently £8,500, though you must bear in mind that tax benefits may be subject to changes in government policy.”
Expert’s view: Score: 1 out of 10. oct 06
Totally wrong.
The CGT allowance is £8800 and also the adviser forgot to point out that you could use losses elsewhere to offset against gains made in a unit trust or Oeic. The adviser also forgot to explain that you have the use of both indexation allowance and taper relief making a unit trust arguably the most tax efficient investment vehicle next to an Isa.
Investment Bonds
Financial Advisers Advice
(In this instance the adviser is extolling the virtues of an investment bond)
An Investment Bond is also a collective investment, which gives you access to a range of professionally managed funds enabling your capital to be invested over a spread of assets, thus spreading your investment risk. ...
Financial Advisers Advice
(In this instance the adviser is extolling the virtues of an investment bond)
An Investment Bond is also a collective investment, which gives you access to a range of professionally managed funds enabling your capital to be invested over a spread of assets, thus spreading your investment risk. However the investment manager does have more flexibility than a unit trust manager in the range of assets he can invest in.
Expert view: Score: 0 out of 10.
Totally incorrect. The range of funds available under an investment bond is considerably less than a unit trust. There are literally thousands to choose from.
(In this instance the adviser is extolling the virtues of an investment bond)
An Investment Bond is also a collective investment, which gives you access to a range of professionally managed funds enabling your capital to be invested over a spread of assets, thus spreading your investment risk. However the investment manager does have more flexibility than a unit trust manager in the range of assets he can invest in.
Expert view: Score: 0 out of 10.
Totally incorrect. The range of funds available under an investment bond is considerably less than a unit trust. There are literally thousands to choose from.
An Investment Bond Pays Tax on Capital Gains
Financial Advisers Advice
The Bond pays tax on capital gains this will tend to reduce the return you can expect as against a unit trust holding. Higher rate taxpayers may have to pay further tax on the profits from Bonds — we will look at this is greater detail when reviewing ...
Financial Advisers Advice
The Bond pays tax on capital gains this will tend to reduce the return you can expect as against a unit trust holding. Higher rate taxpayers may have to pay further tax on the profits from Bonds — we will look at this is greater detail when reviewing the Key Features documents.
Experts view: Score: 1 out of 10. Jan 07
Its true it will pay tax but the tax should have been listed. Its actually 20% but with 22% deemed to have been paid. A unit trust won’t pay that but you cant reclaim the 10% tax credit paid. Higher rate tax payers WILL have to pay further tax, rather than may, and that will be at 18% currently on the gain they make. The gain will include all withdrawals on encashment.
Moreover the adviser forgot to add that a basic rate taxpayer might pay a further 18% tax. They also forgot to mention that a person in retirement who encashes their bond will have their entire gain added to their income to decide if they lose their age allowance
The Bond pays tax on capital gains this will tend to reduce the return you can expect as against a unit trust holding. Higher rate taxpayers may have to pay further tax on the profits from Bonds — we will look at this is greater detail when reviewing the Key Features documents.
Experts view: Score: 1 out of 10. Jan 07
Its true it will pay tax but the tax should have been listed. Its actually 20% but with 22% deemed to have been paid. A unit trust won’t pay that but you cant reclaim the 10% tax credit paid. Higher rate tax payers WILL have to pay further tax, rather than may, and that will be at 18% currently on the gain they make. The gain will include all withdrawals on encashment.
Moreover the adviser forgot to add that a basic rate taxpayer might pay a further 18% tax. They also forgot to mention that a person in retirement who encashes their bond will have their entire gain added to their income to decide if they lose their age allowance
Income from Insurance Bonds - Financial Advisers Advice
Under current legislation governing insurance bonds, an annual income of up to 5% of the original amount invested can be taken without the threat of higher rate tax. Details need not even be entered on a tax return. Clearly, however, the higher the level of income taken, the greater the ...
Under current legislation governing insurance bonds, an annual income of up to 5% of the original amount invested can be taken without the threat of higher rate tax. Details need not even be entered on a tax return. Clearly, however, the higher the level of income taken, the greater the threat to capital growth there will be. You should bear in mind that tax legislation may be subject to change in government policy.
Insurance bonds are technically classified as “non income producing”. This has an important advantage in that an investor can be a higher rate taxpayer for a number of years during the time when a bond was held yet no higher rate tax is due unless the 5% referred to above is exceeded. If the investor is a basic rate taxpayer by the time more substantial withdrawals are made, provided withdrawals are managed so that the growth taken each tax year when added to other taxable income does not take the investor over the higher rate threshold, higher rate tax can be avoided altogether.
Where a bond is held jointly, withdrawals in excess of the 5% limit are split for tax purposes between the joint owners. This will aid a strategy to reduce the impact of income tax in circumstances where one of the bondholders is a basic rate taxpayer and well below the higher rate tax threshold.
Expert’s view: Score: 3 out of 10.
Contrived sales argument. You cannot take income form an investment bond. It is withdrawal of capital. The tax referred to is applicable to both a basic and high rate tax payer. They forgot to mention however that on death or encashment all the withdrawals are added back in to the investment and an assessment is created to assess whether or not high rate tax is paid. The 5% referred to is only 5% for 20 years. After that all the withdrawals are added to the person’s income for the year and taxed accordingly.
Insurance bonds are technically classified as “non income producing”. This has an important advantage in that an investor can be a higher rate taxpayer for a number of years during the time when a bond was held yet no higher rate tax is due unless the 5% referred to above is exceeded. If the investor is a basic rate taxpayer by the time more substantial withdrawals are made, provided withdrawals are managed so that the growth taken each tax year when added to other taxable income does not take the investor over the higher rate threshold, higher rate tax can be avoided altogether.
Where a bond is held jointly, withdrawals in excess of the 5% limit are split for tax purposes between the joint owners. This will aid a strategy to reduce the impact of income tax in circumstances where one of the bondholders is a basic rate taxpayer and well below the higher rate tax threshold.
Expert’s view: Score: 3 out of 10.
Contrived sales argument. You cannot take income form an investment bond. It is withdrawal of capital. The tax referred to is applicable to both a basic and high rate tax payer. They forgot to mention however that on death or encashment all the withdrawals are added back in to the investment and an assessment is created to assess whether or not high rate tax is paid. The 5% referred to is only 5% for 20 years. After that all the withdrawals are added to the person’s income for the year and taxed accordingly.
Is the FTSE 100 safe?
Financial Advisers Advice Feb 07
Is the FTSE 100 safe? Hardly. Pay real attention now if you have a tracker sold to you as a cheap investment. The FTSE 100 is a measure of the UK’s top 100 companies, however research by Schroders showed that 62% of the sales of Ftse ...
Financial Advisers Advice Feb 07
Is the FTSE 100 safe? Hardly. Pay real attention now if you have a tracker sold to you as a cheap investment. The FTSE 100 is a measure of the UK’s top 100 companies, however research by Schroders showed that 62% of the sales of Ftse 100 companies came from outside the UK. Thankfully the returns of the companies actually originate in the other countries as opposed to relying on exports. BP is often touted as a British company. 17% of its sales come from Britain according to Credit Suisse First Boston. It is effectively an American company as 46% of sales are in the US and 18% in Europe. So much so if BP and Shell were to list today they would probably list in the US. Vodafone is another prime example with only 14% of sales coming from the UK. Some companies have no sales exposure whatsoever such as BAT and also the mining companies Anglo American and Rio Tinto. On this basis the FTSE 100 is effectively a global index and is subject to a lot of the risks that you don’t want when investing in the UK namely: global interest rates, oil price, weakness/strength of the dollar as well political and legal/currency risks. And here you are investing in what you thought was a domestic index (same currency and economy you are living in).
You have to go a little further down to see a broad spread of the domestic economy. The FTSE 250 companies have 60% of their sales accounted for from the UK as opposed to 38% for the FTSE 100. It is probably more relevant to invest in the FTSE all share to achieve a more domestic index than the FTSE 100. I would also point out to you that the FTSE 100 index is weighty at the top. BP HSBC Vodafone and Glaxo completely distort the index due to their size. Small movements in their price will tilt the index one way or the other. Having recognised this the Ftse group recently created capped versions of the indices. Although the companies held will be the same there will be a cap of 5% on any one company in the index. Those of you have tracking funds tracking pensions and also UK based investments should reassess how much exposure you truly have to the UK and talk to your Independent Financial Adviser about this to review your risk and return going forward.
Expert’s view: Score: 7 out of 10
Very good. Consider also that an exchange-traded fund is cheaper than a tracker if cost means more to you than performance and management.
Is the FTSE 100 safe? Hardly. Pay real attention now if you have a tracker sold to you as a cheap investment. The FTSE 100 is a measure of the UK’s top 100 companies, however research by Schroders showed that 62% of the sales of Ftse 100 companies came from outside the UK. Thankfully the returns of the companies actually originate in the other countries as opposed to relying on exports. BP is often touted as a British company. 17% of its sales come from Britain according to Credit Suisse First Boston. It is effectively an American company as 46% of sales are in the US and 18% in Europe. So much so if BP and Shell were to list today they would probably list in the US. Vodafone is another prime example with only 14% of sales coming from the UK. Some companies have no sales exposure whatsoever such as BAT and also the mining companies Anglo American and Rio Tinto. On this basis the FTSE 100 is effectively a global index and is subject to a lot of the risks that you don’t want when investing in the UK namely: global interest rates, oil price, weakness/strength of the dollar as well political and legal/currency risks. And here you are investing in what you thought was a domestic index (same currency and economy you are living in).
You have to go a little further down to see a broad spread of the domestic economy. The FTSE 250 companies have 60% of their sales accounted for from the UK as opposed to 38% for the FTSE 100. It is probably more relevant to invest in the FTSE all share to achieve a more domestic index than the FTSE 100. I would also point out to you that the FTSE 100 index is weighty at the top. BP HSBC Vodafone and Glaxo completely distort the index due to their size. Small movements in their price will tilt the index one way or the other. Having recognised this the Ftse group recently created capped versions of the indices. Although the companies held will be the same there will be a cap of 5% on any one company in the index. Those of you have tracking funds tracking pensions and also UK based investments should reassess how much exposure you truly have to the UK and talk to your Independent Financial Adviser about this to review your risk and return going forward.
Expert’s view: Score: 7 out of 10
Very good. Consider also that an exchange-traded fund is cheaper than a tracker if cost means more to you than performance and management.
What is Income?
Financial Advisers Advice
Income means many different things but in investment terms it means a reasonable yield from the capital invested. High yielding funds are very different than say fixed interests or cash or property when you know pretty much what you might expect at no real expense of capital. With ...
Financial Advisers Advice
Income means many different things but in investment terms it means a reasonable yield from the capital invested. High yielding funds are very different than say fixed interests or cash or property when you know pretty much what you might expect at no real expense of capital. With a high yielding fund as mentioned earlier the risk to capital could be great and I might suggest it’s outside the scope of the normal investor. Lets take Jupiter monthly income fund. It’s a pretty good fund that I would approve for the right person. Lets look at what it does though. At first light you might consider it to be 1. Jupiter – an excellent company 2. Managed by a successful and experienced fund manager and 3. A fund that provides a monthly income. At closer look you’ll find its fund substantially invests in a portfolio of investment trust shares (including income shares of split capital issues) and so capital returns are rather volatile.
The fund has provided a strong level of income over the past years, and was the highest yielding fund in the review. The high yield available on this fund partly reflects the fallout from the split capital investment trust crash in 2001/02. The investment trust market is slowly recovering and the targeted income yield has been reduced as a result. As recovery continues it is likely that the yield available to new investors will reduce and ultimately this vehicle may fall outside our definition of a High Yielding fund. However, if this scenario proves correct, investors buying into this fund as a high yield vehicle will have locked into a high income stream and will have made a significant capital gain. Unfortunately recovery is not assured, it is comparatively high risk and charges are high in comparison to other funds considered. So consider good advice before buying something that looks good on the shop window.
Expert’s view: Score: 7 out of 10
Very good. Income can come in many ways so make sure you seek Independent financial advice.
Income means many different things but in investment terms it means a reasonable yield from the capital invested. High yielding funds are very different than say fixed interests or cash or property when you know pretty much what you might expect at no real expense of capital. With a high yielding fund as mentioned earlier the risk to capital could be great and I might suggest it’s outside the scope of the normal investor. Lets take Jupiter monthly income fund. It’s a pretty good fund that I would approve for the right person. Lets look at what it does though. At first light you might consider it to be 1. Jupiter – an excellent company 2. Managed by a successful and experienced fund manager and 3. A fund that provides a monthly income. At closer look you’ll find its fund substantially invests in a portfolio of investment trust shares (including income shares of split capital issues) and so capital returns are rather volatile.
The fund has provided a strong level of income over the past years, and was the highest yielding fund in the review. The high yield available on this fund partly reflects the fallout from the split capital investment trust crash in 2001/02. The investment trust market is slowly recovering and the targeted income yield has been reduced as a result. As recovery continues it is likely that the yield available to new investors will reduce and ultimately this vehicle may fall outside our definition of a High Yielding fund. However, if this scenario proves correct, investors buying into this fund as a high yield vehicle will have locked into a high income stream and will have made a significant capital gain. Unfortunately recovery is not assured, it is comparatively high risk and charges are high in comparison to other funds considered. So consider good advice before buying something that looks good on the shop window.
Expert’s view: Score: 7 out of 10
Very good. Income can come in many ways so make sure you seek Independent financial advice.
Taking Income from an Investment
Financial Advisers Advice
Let’s look at two distinct methods of taking income from an investment:
One method is to invest the capital and allow for the income to be taken via stripping out a percentage of the capital on a year-by-year basis. This can be achieved through offshore bonds or indeed ...
Financial Advisers Advice
Let’s look at two distinct methods of taking income from an investment:
One method is to invest the capital and allow for the income to be taken via stripping out a percentage of the capital on a year-by-year basis. This can be achieved through offshore bonds or indeed onshore bonds by taking a set percentage of the overall value of the fund. Currently you can take 5% per year without any immediate liability to tax for 20 years from such an investment.
The advantage of taking income in such a way is that the underlying funds can be invested freely without regard to the need for income producing instruments. This means that you can invest in the best assets at the time to gain the best return as opposed to buying just a range of fixed interests when, say interest rates are rising, which may prove expensive in the long run.
A disadvantage may be that the underlying capital will fluctuate in value and you may well see capital reduction. Additionally the capital will be put further under pressure by the encashment of more and more units, whilst the fund has dropped. In such an instance I would always advise you don’t strip out the income in the first year and allow the capital to appreciate.
The second option is to buy income-producing assets such as gilts, corporate bonds, cash, and property.
The advantage is that you can calculate what the expected yield is, and strip that out. This is true income if it is taken without pressure on capital and is calculable (although approximate) in advance. The downside is, funny enough, a risk to capital, but in a different way. By investing in simply one sector, you are not fully diversified should interest rates rise or companies struggle. Capital could be put under pressure in a different way and we could see a reduction in capital value. For instance, companies could default on their coupon (the income) or even on capital repayment. Unlike equities, you cannot fall back on the dividend yield. Remember also that rising interest rates can have a beneficial effect on certain market sectors. Diversification across a range of assets would achieve this, but the underlying capital could fluctuate much more and we cannot predict whether the capital would perform better or worse. In short when building an income-producing portfolio with income producing instruments you are, but reasonably clear on what you will receive (although capital can still fluctuate) whereas with taking income from growth funds you are not. This is true in both the positive - rising income and capital and the negative – falling income and capital.
Over the long term you need to decide how much real income you need. If it is a high amount you need and your capital needs protection from inflation, you will need to take greater risk and potentially take the first approach. If a low income after inflation is required (2-3%) consider the second option.
Don’t mix up the yield from an investment and its true income. You may see a yield advertised at say 6% as above. At closer investigation this had a 1.25% charge per year and also an ingoing charge, which of course means the final number drops considerably and is hardly worth it over a cash investment. Always look at either a running yield or redemption yield, as this will give you a better idea. The latter accounts for both income generated and also the potential reduction in capital. It also assumes that the investment fund manager will hold all the assets in his fund to maturity, which will give you a better idea of the real expected return.
Expert’s view: Score 8 out of 10
Very good. Remember that inflation reduces buying power and as such this moves you away from the normal methods of producing income such as fixed interests and cash as they struggle to produce real buying power over and above inflation. With that comes the need to invest in other assets to beat inflation, which introduces fluctuation in your capital - both up and down.
Let’s look at two distinct methods of taking income from an investment:
One method is to invest the capital and allow for the income to be taken via stripping out a percentage of the capital on a year-by-year basis. This can be achieved through offshore bonds or indeed onshore bonds by taking a set percentage of the overall value of the fund. Currently you can take 5% per year without any immediate liability to tax for 20 years from such an investment.
The advantage of taking income in such a way is that the underlying funds can be invested freely without regard to the need for income producing instruments. This means that you can invest in the best assets at the time to gain the best return as opposed to buying just a range of fixed interests when, say interest rates are rising, which may prove expensive in the long run.
A disadvantage may be that the underlying capital will fluctuate in value and you may well see capital reduction. Additionally the capital will be put further under pressure by the encashment of more and more units, whilst the fund has dropped. In such an instance I would always advise you don’t strip out the income in the first year and allow the capital to appreciate.
The second option is to buy income-producing assets such as gilts, corporate bonds, cash, and property.
The advantage is that you can calculate what the expected yield is, and strip that out. This is true income if it is taken without pressure on capital and is calculable (although approximate) in advance. The downside is, funny enough, a risk to capital, but in a different way. By investing in simply one sector, you are not fully diversified should interest rates rise or companies struggle. Capital could be put under pressure in a different way and we could see a reduction in capital value. For instance, companies could default on their coupon (the income) or even on capital repayment. Unlike equities, you cannot fall back on the dividend yield. Remember also that rising interest rates can have a beneficial effect on certain market sectors. Diversification across a range of assets would achieve this, but the underlying capital could fluctuate much more and we cannot predict whether the capital would perform better or worse. In short when building an income-producing portfolio with income producing instruments you are, but reasonably clear on what you will receive (although capital can still fluctuate) whereas with taking income from growth funds you are not. This is true in both the positive - rising income and capital and the negative – falling income and capital.
Over the long term you need to decide how much real income you need. If it is a high amount you need and your capital needs protection from inflation, you will need to take greater risk and potentially take the first approach. If a low income after inflation is required (2-3%) consider the second option.
Don’t mix up the yield from an investment and its true income. You may see a yield advertised at say 6% as above. At closer investigation this had a 1.25% charge per year and also an ingoing charge, which of course means the final number drops considerably and is hardly worth it over a cash investment. Always look at either a running yield or redemption yield, as this will give you a better idea. The latter accounts for both income generated and also the potential reduction in capital. It also assumes that the investment fund manager will hold all the assets in his fund to maturity, which will give you a better idea of the real expected return.
Expert’s view: Score 8 out of 10
Very good. Remember that inflation reduces buying power and as such this moves you away from the normal methods of producing income such as fixed interests and cash as they struggle to produce real buying power over and above inflation. With that comes the need to invest in other assets to beat inflation, which introduces fluctuation in your capital - both up and down.
Invest in an Investment Bond
Financial Advisers Advice
If you invest in an investment bond it gives you access to the best funds such as Fidelity special situations and it’s cheaper to invest that way. This way you can access all the best funds in one place.
Expert’s view: Score: 0 out of 10
Absolutely brutal and ...
Financial Advisers Advice
If you invest in an investment bond it gives you access to the best funds such as Fidelity special situations and it’s cheaper to invest that way. This way you can access all the best funds in one place.
Expert’s view: Score: 0 out of 10
Absolutely brutal and contrived advice.
Basically an Isa then a unit trust should be the choice for most customers. Both pay an adviser 3% commission whereas the default choice here is a bond, which pays 7.5% commission. Not suggesting that’s the reason but I’m sure the adviser can warrant that level of commission for the advice!!!
Advisers often sell it on the basis that there are external links within the bonds to outside quality fund groups like fidelity special situations for example. By and large this is not treating customers fairly. The customer will genuinely think they are buying the fidelity special sits fund but they are buying a so-called mirror version. What does that mean. The fund they are buying is simply a version of the real fund but with a different charging structure, which can be hidden inside the fund price as opposed to the explicit charge on unit trusts where you know what you are paying for. Moreover the tax will have a large impact. Although the bond wrapper is positioned to be cheaper the real charges are not exposed. Lets give you an example. If a customer bought a unit trust with fidelity special sits they would have enjoyed considerable return. If they bought a Canada life fidelity special sits plan within a bond they would have expected the same return – exactly the same return. They have a snowballs chance.
Evidence
The following Hindsight Chart (click to view larger) shows the performance of several life funds linked to the Fidelity Special Situations fund over the past 156 weeks (3y) or so. (Many life offices have links to this fund. As expected the underlying fund (i.e. the Fidelity Special Situations) has a both a higher performance and higher volatility. This can mostly be explained by differences in taxation; the life fund links include an accrual for the insurance company’s corporation tax liability whereas the underlying fund does not. Another factor is that life funds tend to include a small amount of liquidity so that a life fund may hold say 95% in Fidelity Special Situation Acc units and 5% in cash. And of course there are additional expenses to consider
Perhaps the more significant curiosity is not the difference between the life funds and the underlying vehicle but the spread of returns between the different life funds offering links themselves. Even accounting for differences in charging structure (i.e. what charges are included in the price of the life office units) there is a significant spread of returns (+56.8% to +64.5%) and volatilities.
As you can see Mr Jones who invested into the fidelity special sits fund has gained 78.13 %. Mr smith next door who invested into a bond and bought their version of fidelity special sits achieved 56.79 % even though he thought he had the same fund. The truth is he will never know. Whilst he sits over the bar with Mr Jones they will just talk about how well it’s doing but Mr Jones is over 12% per year better off – even though his adviser was concerned about charges!!
In real terms MrJones who was invested in Fidelity special sits achieved 37.8% more return than Mr Smith i.e. the difference in return expressed as a percentage better than AIG over 3 years.
Investment into a Managed Fund
Financial Advisers Advice
I recommend you invest into a managed fund to achieve the best returns over the medium to long term.
Expert’s view: Score: 3 out of 10
Managed funds work on the basis that you give your capital to a company and they maximise the return from your investment ...
Financial Advisers Advice
I recommend you invest into a managed fund to achieve the best returns over the medium to long term.
Expert’s view: Score: 3 out of 10
Managed funds work on the basis that you give your capital to a company and they maximise the return from your investment and minimise the risk. They do this by spreading your capital across a wide range of different assets. What do I mean by assets? I think most people are comfortable with the fact that equities (stocks and shares) are an area where you can make the best returns. They are also an area where if invested inappropriately you can make the most losses too. Equity is an asset, as is property.
I would expect to see a managed fund spread across a wide range of assets such as equities, fixed interests (loans to companies and governments – which are generally low risk) cash and property to name the main ones. Furthermore, within that, I would expect to see a further spread by geographically changing the assets held. So, for instance, I might expect to see uk equities as well as overseas equities. There are two main reasons why I might see more capital held in uk assets than in overseas assets: The main reason is currency risk. What I mean by that is a foreign equity purchased in sterling could see a double whammy loss. The first is the obvious drop if the market goes down. The second is the currencies moving against each other. Not only could you lose on the market but the currency could devalue and you could lose again – not nice reading at valuation time; another main reason is that most uk fund groups don’t invest heavily in staff overseas to understand the foreign markets. Their expertise generally lies in the uk and as such an investment overseas is less understood.
One thing to be mindful of is the amount of capital held in managed funds. With profits is a disguised managed fund and currently there is over £400 billion invested in them – how times will change.
So are they any good? Well, not really in my opinion. How can one manager know what the best uk, Japanese, Chinese, and Indian stocks are? How do they know what the best foreign properties are? On that basis we have always advised investors to choose the best funds and fund managers in each particular region. So for example I might say that Jupiter have a brilliant uk fund and Legg Mason, a good Japanese fund. I therefore invest accordingly picking the best of breed in each area. There are some fund groups who do that for you, as most financial advisers don’t have the expertise. And so commence the birth of multi manager funds. Expect to pay more but don’t for one second think they are good because they call themselves multi managers, for they are not. I often look at the funds they hold within their group and scratch my head with disbelief. When you see the eventual numbers appear you can see they are indeed expensive as they are not adding value over other similar investments. Jupiter Merlin Growth is an example of excellent management and performance but of course take advice before you invest.
Some sight Tracker funds as an alternative but I do not. In falling and sideways markets trackers do exactly that. They are sold on the basis of cheapness. You wouldn’t take the cheapest food (out of a bin) so why take the risk with your capital?
During the last 5 years your capital would have been down had you held a tracker fund as the market is down. If you had held a fund that moved your capital around this would have lessened the impact and in bad times you may have held more defensive assets (fixed interests) and when the market became more buoyant you could have held more boisterous assets such as equities.
I recommend you invest into a managed fund to achieve the best returns over the medium to long term.
Expert’s view: Score: 3 out of 10
Managed funds work on the basis that you give your capital to a company and they maximise the return from your investment and minimise the risk. They do this by spreading your capital across a wide range of different assets. What do I mean by assets? I think most people are comfortable with the fact that equities (stocks and shares) are an area where you can make the best returns. They are also an area where if invested inappropriately you can make the most losses too. Equity is an asset, as is property.
I would expect to see a managed fund spread across a wide range of assets such as equities, fixed interests (loans to companies and governments – which are generally low risk) cash and property to name the main ones. Furthermore, within that, I would expect to see a further spread by geographically changing the assets held. So, for instance, I might expect to see uk equities as well as overseas equities. There are two main reasons why I might see more capital held in uk assets than in overseas assets: The main reason is currency risk. What I mean by that is a foreign equity purchased in sterling could see a double whammy loss. The first is the obvious drop if the market goes down. The second is the currencies moving against each other. Not only could you lose on the market but the currency could devalue and you could lose again – not nice reading at valuation time; another main reason is that most uk fund groups don’t invest heavily in staff overseas to understand the foreign markets. Their expertise generally lies in the uk and as such an investment overseas is less understood.
One thing to be mindful of is the amount of capital held in managed funds. With profits is a disguised managed fund and currently there is over £400 billion invested in them – how times will change.
So are they any good? Well, not really in my opinion. How can one manager know what the best uk, Japanese, Chinese, and Indian stocks are? How do they know what the best foreign properties are? On that basis we have always advised investors to choose the best funds and fund managers in each particular region. So for example I might say that Jupiter have a brilliant uk fund and Legg Mason, a good Japanese fund. I therefore invest accordingly picking the best of breed in each area. There are some fund groups who do that for you, as most financial advisers don’t have the expertise. And so commence the birth of multi manager funds. Expect to pay more but don’t for one second think they are good because they call themselves multi managers, for they are not. I often look at the funds they hold within their group and scratch my head with disbelief. When you see the eventual numbers appear you can see they are indeed expensive as they are not adding value over other similar investments. Jupiter Merlin Growth is an example of excellent management and performance but of course take advice before you invest.
Some sight Tracker funds as an alternative but I do not. In falling and sideways markets trackers do exactly that. They are sold on the basis of cheapness. You wouldn’t take the cheapest food (out of a bin) so why take the risk with your capital?
During the last 5 years your capital would have been down had you held a tracker fund as the market is down. If you had held a fund that moved your capital around this would have lessened the impact and in bad times you may have held more defensive assets (fixed interests) and when the market became more buoyant you could have held more boisterous assets such as equities.
Investment Bonds
Financial Advisers Advice oct 06
I was advised by a financial adviser to choose an investment bond and he mentioned that 103% of my money would be invested. He said it was the cheapest way to invest and it was tax-free income.
Expert’s view : 2 out of 10 Oct 06
An investment ...
Financial Advisers Advice oct 06
I was advised by a financial adviser to choose an investment bond and he mentioned that 103% of my money would be invested. He said it was the cheapest way to invest and it was tax-free income.
Expert’s view : 2 out of 10 Oct 06
An investment bond or insurance bond as they are often called is a method used by many investors to invest their cash. There are three ways to measure them: charges, tax, and performance.
The charges are often hidden or at best disguised. The allocation rate you mentioned above is a lure and if you have ever used a lure when fishing you will realise there are a number of sharp hooks which apparently don’t hurt the fish. Instead of taking an upfront charge of x% you will be charged this fee over a period of 5 years typically.
Don’t believe that’s a bargain as the charge is reasonably steep. Ask your adviser if you took the cash out the day after investing what the charge would be and you’ll see the true impact of the charges.
The tax is not advantageous and you’ll see that the tax break you are being offered is 5% of your investment as an income per year over 20 years (that’s just your money back and is hardly a break). What you also don’t see is that the fund is disadvantaged by paying tax as it grows and you can’t reclaim that. That’s more of a brake than a break. There are other tax problems such as when an over 65 year old encashes the investment, the gain is added to their income. That could cost them to lose their age allowance and an immediate tax charge of up to £524.70.
If you are encashing the investment consider also that the gain will have to be calculated to assess if further tax is payable. The rate could be a further 18% if not planned correctly.
From a performance point of view it’s worth pointing out that most insurance bonds have a limited range of funds, which are at the very best average. Some companies realise this and offer a large range of funds. One I looked at above had over 150 funds to choose from, but when I researched the actual performance, not one of the funds was on our buy list. They were simply a range of cheap funds.
The more preferable options to consider are an isa or unit trust. An isa allows for the investments inside it to grow free of capital gains tax but you are limited to just £7000 per person. A unit trust has numerous breaks. You are allowed a capital gains allowance each year of £8800. This means that you can access £8800 each year without any liability to capital gains tax. If the gain is more than that you can delay it for a year and use next year’s allowance. Remember that the allowance is per person and both husband and wife have one. There is also the added advantage of taper relief to reduce the gain as well as previous indexation relief. Moreover on death the unit trust’s gain is wiped out so there will be no further tax to pay.
Using the annual CGT allowance, you could take 5% per year per couple from £352,000, which would be completely tax-free.
Lastly a unit trust allows you to offset any gains or losses you have made elsewhere. If you have made a gain on your 2nd property and your unit trust had gone down you could simply encash both in the same year and offset the loss against the gain.
An investment bond would not give you that break at all.
I should hope it wouldn’t be a consideration of the adviser but you will find that some insurance bonds do pay up to 7.5% commission whereas a unit trust and isa typically pay 3%. Your adviser will have to display this to you anyway.
I was advised by a financial adviser to choose an investment bond and he mentioned that 103% of my money would be invested. He said it was the cheapest way to invest and it was tax-free income.
Expert’s view : 2 out of 10 Oct 06
An investment bond or insurance bond as they are often called is a method used by many investors to invest their cash. There are three ways to measure them: charges, tax, and performance.
The charges are often hidden or at best disguised. The allocation rate you mentioned above is a lure and if you have ever used a lure when fishing you will realise there are a number of sharp hooks which apparently don’t hurt the fish. Instead of taking an upfront charge of x% you will be charged this fee over a period of 5 years typically.
Don’t believe that’s a bargain as the charge is reasonably steep. Ask your adviser if you took the cash out the day after investing what the charge would be and you’ll see the true impact of the charges.
The tax is not advantageous and you’ll see that the tax break you are being offered is 5% of your investment as an income per year over 20 years (that’s just your money back and is hardly a break). What you also don’t see is that the fund is disadvantaged by paying tax as it grows and you can’t reclaim that. That’s more of a brake than a break. There are other tax problems such as when an over 65 year old encashes the investment, the gain is added to their income. That could cost them to lose their age allowance and an immediate tax charge of up to £524.70.
If you are encashing the investment consider also that the gain will have to be calculated to assess if further tax is payable. The rate could be a further 18% if not planned correctly.
From a performance point of view it’s worth pointing out that most insurance bonds have a limited range of funds, which are at the very best average. Some companies realise this and offer a large range of funds. One I looked at above had over 150 funds to choose from, but when I researched the actual performance, not one of the funds was on our buy list. They were simply a range of cheap funds.
The more preferable options to consider are an isa or unit trust. An isa allows for the investments inside it to grow free of capital gains tax but you are limited to just £7000 per person. A unit trust has numerous breaks. You are allowed a capital gains allowance each year of £8800. This means that you can access £8800 each year without any liability to capital gains tax. If the gain is more than that you can delay it for a year and use next year’s allowance. Remember that the allowance is per person and both husband and wife have one. There is also the added advantage of taper relief to reduce the gain as well as previous indexation relief. Moreover on death the unit trust’s gain is wiped out so there will be no further tax to pay.
Using the annual CGT allowance, you could take 5% per year per couple from £352,000, which would be completely tax-free.
Lastly a unit trust allows you to offset any gains or losses you have made elsewhere. If you have made a gain on your 2nd property and your unit trust had gone down you could simply encash both in the same year and offset the loss against the gain.
An investment bond would not give you that break at all.
I should hope it wouldn’t be a consideration of the adviser but you will find that some insurance bonds do pay up to 7.5% commission whereas a unit trust and isa typically pay 3%. Your adviser will have to display this to you anyway.
Investment Risk
Financial Advisers Advice December 06
We described your risk as 4 out of ten and you should therefore invest into a range of funds to achieve a return of 6% over the medium term.
Experts view: Score 3 out 10 for the advice. December 06
4 out of ten? What on earth ...
Financial Advisers Advice December 06
We described your risk as 4 out of ten and you should therefore invest into a range of funds to achieve a return of 6% over the medium term.
Experts view: Score 3 out 10 for the advice. December 06
4 out of ten? What on earth does that mean? Its like painting with numbers, as opposed to investing with science. Risk is about identifying what return you desire and ascertaining what fluctuation you are comfortable with in pursuit of that gain.
Investing money is about understanding what you are doing and in turn accepting what comes with that. Investment carries risk and the more risk you take the more the potential reward or loss – simple really. Loss is often referred to as total loss but its better described as a fluctuation in your capital i.e. one day its worth one amount and the next day lower or higher. It is rare that your capital will and should ever be placed anywhere that really puts it at risk of total loss. Prices in the stock market fluctuate and that, believe me, is very good. It is precisely that fluctuation which creates the opportunity to make money. Whilst some may buy their new TV on Xmas eve, others may buy in January in the sales and sell on again before the world cup. There is an aptitude to fluctuation that you will feel comfortable with depending on how you understand your investment.
Lets first look at why you might want to invest at all. Last week I did a phone-in giving advice to a lottery winner on the radio. A question was asked: ‘How much would a million make me per week?’ I asked what the lottery winner (who had won £3.9 million) did for a living and what her earnings were. I then broke the news to her of her potential income. She had spent some money on capital outlay (most noticeably breast implants for her two sisters). She asked what she could invest into apart form the up front assets she had bought. She had noticed ING was paying 4.5% per year and proudly announced that this would bring in a cool £14,625 per month. Happy days we all might think.
Aaaah, but first the matter of tax. The income will straddle one tax bracket slightly but for the purpose of simplicity we will say that the whole income is taxed at 40%. This would bring the net income down to 2.7%.
Problem number two – inflation. If her capital does not increase in line with inflation it will lose value year on year. Inflation currently runs at 2.4% and is rapidly rising. (I wouldnt be surpised to see it leap through the government upper target of 3%).This will mean her net income is 0.3% or in real terms £975 per month or £225 per week – less than she actually earns now. Amazingly every week she still buys that £10 ticket! We can see from this that we have to navigate two issues: inflation and tax. Tax can be mitigated by choosing an efficient investment vehicle such as an isa, unit trust or offshore bond. Inflation can only be taken care of by introducing your capital to the potential for extra returns, which of course includes risk.
If you are not comfortable with that, you will simply have to accept an extremely low income or that your capital will fall in value. Don’t necessarily fret about risk as I mentioned above, as its by using that adversity how a fund manager makes you money.
Consider also that inflation is low at the moment. In periods of high inflation your capital can be eroded considerably. In order to obtain the best returns and minimise the risk, use a qualified investment IFA who really explains risk to you so that you know what potential fluctuation to expect followed by what potential upside. If you know that, there will be no surprises, either up or down. Do not get drawn into contrived arguments about being pro Asia or Technology or the latest lemming widget – it will only cost you money. Few advisers are appropriately trained to understand any sort of macro-economics. Instead, stay with a well balanced portfolio spread between a range of different funds and managers and you wont go too far wrong.
We described your risk as 4 out of ten and you should therefore invest into a range of funds to achieve a return of 6% over the medium term.
Experts view: Score 3 out 10 for the advice. December 06
4 out of ten? What on earth does that mean? Its like painting with numbers, as opposed to investing with science. Risk is about identifying what return you desire and ascertaining what fluctuation you are comfortable with in pursuit of that gain.
Investing money is about understanding what you are doing and in turn accepting what comes with that. Investment carries risk and the more risk you take the more the potential reward or loss – simple really. Loss is often referred to as total loss but its better described as a fluctuation in your capital i.e. one day its worth one amount and the next day lower or higher. It is rare that your capital will and should ever be placed anywhere that really puts it at risk of total loss. Prices in the stock market fluctuate and that, believe me, is very good. It is precisely that fluctuation which creates the opportunity to make money. Whilst some may buy their new TV on Xmas eve, others may buy in January in the sales and sell on again before the world cup. There is an aptitude to fluctuation that you will feel comfortable with depending on how you understand your investment.
Lets first look at why you might want to invest at all. Last week I did a phone-in giving advice to a lottery winner on the radio. A question was asked: ‘How much would a million make me per week?’ I asked what the lottery winner (who had won £3.9 million) did for a living and what her earnings were. I then broke the news to her of her potential income. She had spent some money on capital outlay (most noticeably breast implants for her two sisters). She asked what she could invest into apart form the up front assets she had bought. She had noticed ING was paying 4.5% per year and proudly announced that this would bring in a cool £14,625 per month. Happy days we all might think.
Aaaah, but first the matter of tax. The income will straddle one tax bracket slightly but for the purpose of simplicity we will say that the whole income is taxed at 40%. This would bring the net income down to 2.7%.
Problem number two – inflation. If her capital does not increase in line with inflation it will lose value year on year. Inflation currently runs at 2.4% and is rapidly rising. (I wouldnt be surpised to see it leap through the government upper target of 3%).This will mean her net income is 0.3% or in real terms £975 per month or £225 per week – less than she actually earns now. Amazingly every week she still buys that £10 ticket! We can see from this that we have to navigate two issues: inflation and tax. Tax can be mitigated by choosing an efficient investment vehicle such as an isa, unit trust or offshore bond. Inflation can only be taken care of by introducing your capital to the potential for extra returns, which of course includes risk.
If you are not comfortable with that, you will simply have to accept an extremely low income or that your capital will fall in value. Don’t necessarily fret about risk as I mentioned above, as its by using that adversity how a fund manager makes you money.
Consider also that inflation is low at the moment. In periods of high inflation your capital can be eroded considerably. In order to obtain the best returns and minimise the risk, use a qualified investment IFA who really explains risk to you so that you know what potential fluctuation to expect followed by what potential upside. If you know that, there will be no surprises, either up or down. Do not get drawn into contrived arguments about being pro Asia or Technology or the latest lemming widget – it will only cost you money. Few advisers are appropriately trained to understand any sort of macro-economics. Instead, stay with a well balanced portfolio spread between a range of different funds and managers and you wont go too far wrong.
With Profits
Financial Advisers Advice
I still think a with profits has a place to play in investments and it is a low risk method for you to invest in the markets.
Expert’s view: Score 3 out of 10
Complete twaddle in my view. I have long been of the view that with profits ...
Financial Advisers Advice
I still think a with profits has a place to play in investments and it is a low risk method for you to invest in the markets.
Expert’s view: Score 3 out of 10
Complete twaddle in my view. I have long been of the view that with profits are the equivalent of your parents giving you spending money for your summer holidays but drip feeding it to you over the summer and of course giving you less back than you thought you had. It is an ill thought out concept that fell over at the first time of asking. Be careful before exiting such a plan though. The case of whether or not you should exit a with profits investment or pension revolves around what weight you put on potential pain and potential gain.
The obvious potential pain of leaving a with profits plan is the market value reduction that will apply if you encash as well as any potential penalties. There are other little hidden aspects to this to consider guarantees: guaranteed annuity rates, guaranteed bonus levels and standard bonuses. Lets look at some of these painful aspects:
You should check any MVR (market value reduction – just a nice sounding word for a hefty penalty) that is being applied. It has been known that providers do not have the right to levy the MVR at all. Some insurance companies are finding it difficult to keep track of their legacy contracts so be sure they have the right to hit you with that MVR axe by assessing the policy documentation. Some companies provide an MVR guarantee at a specific date. Norwich union for instance provide this at normal retirement date of the policy or at 10 years for the investment bond. If you don’t use the MVR free option at normal retirement date you will have lost this until age 75 and cannot encash MVR free until then – financial suicide. In any event, I personally believe MVRs are there to keep people in the investment and don’t really represent the true state of the investment. If the MVR was true why has it not come own anywhere near the dramatic rises in the market over the last 3 years.
I still think a with profits has a place to play in investments and it is a low risk method for you to invest in the markets.
Expert’s view: Score 3 out of 10
Complete twaddle in my view. I have long been of the view that with profits are the equivalent of your parents giving you spending money for your summer holidays but drip feeding it to you over the summer and of course giving you less back than you thought you had. It is an ill thought out concept that fell over at the first time of asking. Be careful before exiting such a plan though. The case of whether or not you should exit a with profits investment or pension revolves around what weight you put on potential pain and potential gain.
The obvious potential pain of leaving a with profits plan is the market value reduction that will apply if you encash as well as any potential penalties. There are other little hidden aspects to this to consider guarantees: guaranteed annuity rates, guaranteed bonus levels and standard bonuses. Lets look at some of these painful aspects:
You should check any MVR (market value reduction – just a nice sounding word for a hefty penalty) that is being applied. It has been known that providers do not have the right to levy the MVR at all. Some insurance companies are finding it difficult to keep track of their legacy contracts so be sure they have the right to hit you with that MVR axe by assessing the policy documentation. Some companies provide an MVR guarantee at a specific date. Norwich union for instance provide this at normal retirement date of the policy or at 10 years for the investment bond. If you don’t use the MVR free option at normal retirement date you will have lost this until age 75 and cannot encash MVR free until then – financial suicide. In any event, I personally believe MVRs are there to keep people in the investment and don’t really represent the true state of the investment. If the MVR was true why has it not come own anywhere near the dramatic rises in the market over the last 3 years.
Investment into a Guaranteed Product
Financial Advisers Advice Feb 07
You can invest into a guaranteed product that ensures your money will never fall and at the end you will receive a return of at least the Ftse 100 or a guaranteed return of your money back.
Expert’s view: Score 5 out of 10
I confess to ...
Financial Advisers Advice Feb 07
You can invest into a guaranteed product that ensures your money will never fall and at the end you will receive a return of at least the Ftse 100 or a guaranteed return of your money back.
Expert’s view: Score 5 out of 10
I confess to not being a lover of these schemes, which I believe, are generally for people who haven’t really understood risk. There are few five-year periods when you will have invested into the market but not received your capital back at the end, so what is the real value of the guarantee that you will be paying for. Also if you try and access your capital during the 5 years you will not benefit from any guarantee and you will get back less if the market has fallen. The biggest issue is that by investing in these guaranteed plans you will miss out on the dividend yields of the market, which over 5 years would work out to be over 16%. So it is therefore wrong to say that you will get at least the returns on the Ftse 100, as you will be disadvantaged by at least the dividend loss.
You can invest into a guaranteed product that ensures your money will never fall and at the end you will receive a return of at least the Ftse 100 or a guaranteed return of your money back.
Expert’s view: Score 5 out of 10
I confess to not being a lover of these schemes, which I believe, are generally for people who haven’t really understood risk. There are few five-year periods when you will have invested into the market but not received your capital back at the end, so what is the real value of the guarantee that you will be paying for. Also if you try and access your capital during the 5 years you will not benefit from any guarantee and you will get back less if the market has fallen. The biggest issue is that by investing in these guaranteed plans you will miss out on the dividend yields of the market, which over 5 years would work out to be over 16%. So it is therefore wrong to say that you will get at least the returns on the Ftse 100, as you will be disadvantaged by at least the dividend loss.
Invest into a Venture Capital Trust
Financial Advisers Advice
You should invest into a VCT as a method of mitigating tax as well as achieving a fair return for your investments.
Expert’s view: 6 out of 10. Fair enough a VCT is tax efficient!
What an interesting world it would be if things happened the wrong way ...
Financial Advisers Advice
You should invest into a VCT as a method of mitigating tax as well as achieving a fair return for your investments.
Expert’s view: 6 out of 10. Fair enough a VCT is tax efficient!
What an interesting world it would be if things happened the wrong way round. Rivers ran up mountains, people walked backwards and on their heads and also tails wagged the dogs. It is often that the financial world looks like this and as much as I might see the effect on the fish of being dragged up a hill backwards others don’t necessarily see my point of view – heigh ho! Do we let the tax tail wag the investment dog?
Yep, sure you do, particularly if you want to lose the shirt off your back. PEPS ISAS and VCTs (venture capital trusts) are my topic of delight today. In the main, products rather than advice can obsess financial advisers. This trend is reversing thankfully and the good adviser section is widening, particularly as the trend moves more toward Independent Financial Advice, rather than the tied products sold by banks and tied agents. So how suitable are the above products today?
A PEP or ISA is simply a wrapper that means that whatever is held inside it grows free of capital gains tax – a tax levied on any gains you have realised in any particular tax year. That’s really it as there are no longer any income tax benefits as the 10% tax credit that used to be claimed ceased in April 2004.
An investor in a PEP/ISA who holds fixed interests (bonds) will still see a 20% tax reclaim associated with an interest distribution shown on their statements from providers.
HOWEVER, as much as the capital gain is a benefit, there is no point in thinking that the PEP/ISA is good. It is a wrapper and that is all. Inside the wrapper there could be a diamond or a fine bucket of frogs. Depending on your tastes one of these two options may not be favourable. In short, stop looking at the tax and have the funds reviewed.
VCTs, on the other hand, are the next product that the Financial Services Authority will be looking at. They are often positioned as very attractive tax vehicles for investors to consider and the VCT providers are awash with tax ideas on how to lure the capital away. First the tax breaks: Individuals can claim income tax relief on the capital invested in a VCT in this tax year. Great! The income tax relief is fine but what happens if you lose all your capital beneath.
A VCT provides development capital to companies. They have been in existence for about 11 years with the intent to incentify investment in small and medium sized enterprises with a source of capital. The returns achieved to date are far from sexy and the cap is hung on their tax breaks. The performance may be due to a number of items. High costs in the early years volatile markets and a very long investment horizon.
Remember that you are investing in a company that can either cash burn for a long time as it develops or go out of business. The fact is that it is high risk (on a scale of 1-10 it’s a fat 10), will also mean that the potential returns are very high, but you need to know what you are buying.
5 key areas to look at before buying a VCT are Specialism, Experience, Performance, Costs, and return of capital. Ensure when picking a firm for your VCT you can see that they have a track record of raising VCT funds gaining Inland Revenue approval, and also maintaining the fund value. They should also be able demonstrate their proficiency and dedication to VCTs. Have a close look at what the managers have been investing in both now and in the past and study their performance. Try and achieve an annual fee of 2% or less with total annual running costs of less than 3%. The manager’s incentive fee should represent a fair reward for exceptional performance as opposed to above average performance. The company should also have a policy of distributing the capital back to investors fairly.
You should invest into a VCT as a method of mitigating tax as well as achieving a fair return for your investments.
Expert’s view: 6 out of 10. Fair enough a VCT is tax efficient!
What an interesting world it would be if things happened the wrong way round. Rivers ran up mountains, people walked backwards and on their heads and also tails wagged the dogs. It is often that the financial world looks like this and as much as I might see the effect on the fish of being dragged up a hill backwards others don’t necessarily see my point of view – heigh ho! Do we let the tax tail wag the investment dog?
Yep, sure you do, particularly if you want to lose the shirt off your back. PEPS ISAS and VCTs (venture capital trusts) are my topic of delight today. In the main, products rather than advice can obsess financial advisers. This trend is reversing thankfully and the good adviser section is widening, particularly as the trend moves more toward Independent Financial Advice, rather than the tied products sold by banks and tied agents. So how suitable are the above products today?
A PEP or ISA is simply a wrapper that means that whatever is held inside it grows free of capital gains tax – a tax levied on any gains you have realised in any particular tax year. That’s really it as there are no longer any income tax benefits as the 10% tax credit that used to be claimed ceased in April 2004.
An investor in a PEP/ISA who holds fixed interests (bonds) will still see a 20% tax reclaim associated with an interest distribution shown on their statements from providers.
HOWEVER, as much as the capital gain is a benefit, there is no point in thinking that the PEP/ISA is good. It is a wrapper and that is all. Inside the wrapper there could be a diamond or a fine bucket of frogs. Depending on your tastes one of these two options may not be favourable. In short, stop looking at the tax and have the funds reviewed.
VCTs, on the other hand, are the next product that the Financial Services Authority will be looking at. They are often positioned as very attractive tax vehicles for investors to consider and the VCT providers are awash with tax ideas on how to lure the capital away. First the tax breaks: Individuals can claim income tax relief on the capital invested in a VCT in this tax year. Great! The income tax relief is fine but what happens if you lose all your capital beneath.
A VCT provides development capital to companies. They have been in existence for about 11 years with the intent to incentify investment in small and medium sized enterprises with a source of capital. The returns achieved to date are far from sexy and the cap is hung on their tax breaks. The performance may be due to a number of items. High costs in the early years volatile markets and a very long investment horizon.
Remember that you are investing in a company that can either cash burn for a long time as it develops or go out of business. The fact is that it is high risk (on a scale of 1-10 it’s a fat 10), will also mean that the potential returns are very high, but you need to know what you are buying.
5 key areas to look at before buying a VCT are Specialism, Experience, Performance, Costs, and return of capital. Ensure when picking a firm for your VCT you can see that they have a track record of raising VCT funds gaining Inland Revenue approval, and also maintaining the fund value. They should also be able demonstrate their proficiency and dedication to VCTs. Have a close look at what the managers have been investing in both now and in the past and study their performance. Try and achieve an annual fee of 2% or less with total annual running costs of less than 3%. The manager’s incentive fee should represent a fair reward for exceptional performance as opposed to above average performance. The company should also have a policy of distributing the capital back to investors fairly.
Child Trust Fund
Financial Advisers Advice
I believe the child trust fund is ill thought out and should not be the default method to save for your children’s future.
Expert’s view: Score 7 out of 10.
Couldn’t agree more.
The child trust fund (CTF) is now upon us in much the same way as ...
Financial Advisers Advice
I believe the child trust fund is ill thought out and should not be the default method to save for your children’s future.
Expert’s view: Score 7 out of 10.
Couldn’t agree more.
The child trust fund (CTF) is now upon us in much the same way as the evening summer flies. Faced with the government threat of - if you don’t invest it for your children we will – many parents are put in a position to invest that they would not have been before.
The CTF gives a minimum of £250 to any child born on or after 1/9/02 where parents are in receipt of child benefit. A further voucher will be received at age 7, expected to be c£250.
Parents relatives friends are allowed to pay a further £1200 per year aggregate into the scheme and the benefits are free of tax to the child. Its difficult to know what the motivation is for the governments action here (no change there then): on one side they are commended for encouraging children to save and parents to save for them but on the other they are ridiculed as the children will receive the proceeds at age 18 whether you want them to or not.
Further criticism is levied at the fact that the children will be means tested for benefits at age 18 and because capital has been placed into their name they will have to pay for university fees etc – who could be so cynical! My own view is that my children will have their £250 applied to the account but any further saving will be done directly by us as parents until such times as we believe it is right to give them the money.
The financial services industry has all but shunned the contracts citing lack of consumer interest and an aversion to administering large numbers of small contributions. According to the Association of Investment Trust companies 50% of parents say the CTF will make no difference to their saving habits.
Parents have a choice of a cash deposit CTF (normally provided by a bank), a stakeholder plan or non-stakeholder plan. The stakeholder plan will invest mainly in equities, have a cap on charges of 1.5% per year and will start to move the child’s money into safer assets at age 13. The non-stakeholder contract can do all of the above but doesn’t have to. Normally a non-stakeholder plan will have a wider range of fund options.
Many investment experts fear that the CTF may become a damper squid than it is and investors unwittingly end up with a cash CTF for the whole 18 years. Bear in mind that to beat inflation you will need equities. By their very nature they can benefit from inflation. Cash struggles to beat inflation over long periods of time and as we will have 15-18 years with the money invested the fluctuations will be ironed out.
The government claimed 75 companies would offer CTFs but at the time of writing this is closer to 30. It was really difficult for me to research these products as most arrived at the last minute dragging their wares to the table. Of those offering the scheme, two flicker a tiny ray of hope for the bewildered investor. In number one spot offering a fairly decent range of funds is Children’s Mutual. In second is Liverpool Victoria.
I believe the child trust fund is ill thought out and should not be the default method to save for your children’s future.
Expert’s view: Score 7 out of 10.
Couldn’t agree more.
The child trust fund (CTF) is now upon us in much the same way as the evening summer flies. Faced with the government threat of - if you don’t invest it for your children we will – many parents are put in a position to invest that they would not have been before.
The CTF gives a minimum of £250 to any child born on or after 1/9/02 where parents are in receipt of child benefit. A further voucher will be received at age 7, expected to be c£250.
Parents relatives friends are allowed to pay a further £1200 per year aggregate into the scheme and the benefits are free of tax to the child. Its difficult to know what the motivation is for the governments action here (no change there then): on one side they are commended for encouraging children to save and parents to save for them but on the other they are ridiculed as the children will receive the proceeds at age 18 whether you want them to or not.
Further criticism is levied at the fact that the children will be means tested for benefits at age 18 and because capital has been placed into their name they will have to pay for university fees etc – who could be so cynical! My own view is that my children will have their £250 applied to the account but any further saving will be done directly by us as parents until such times as we believe it is right to give them the money.
The financial services industry has all but shunned the contracts citing lack of consumer interest and an aversion to administering large numbers of small contributions. According to the Association of Investment Trust companies 50% of parents say the CTF will make no difference to their saving habits.
Parents have a choice of a cash deposit CTF (normally provided by a bank), a stakeholder plan or non-stakeholder plan. The stakeholder plan will invest mainly in equities, have a cap on charges of 1.5% per year and will start to move the child’s money into safer assets at age 13. The non-stakeholder contract can do all of the above but doesn’t have to. Normally a non-stakeholder plan will have a wider range of fund options.
Many investment experts fear that the CTF may become a damper squid than it is and investors unwittingly end up with a cash CTF for the whole 18 years. Bear in mind that to beat inflation you will need equities. By their very nature they can benefit from inflation. Cash struggles to beat inflation over long periods of time and as we will have 15-18 years with the money invested the fluctuations will be ironed out.
The government claimed 75 companies would offer CTFs but at the time of writing this is closer to 30. It was really difficult for me to research these products as most arrived at the last minute dragging their wares to the table. Of those offering the scheme, two flicker a tiny ray of hope for the bewildered investor. In number one spot offering a fairly decent range of funds is Children’s Mutual. In second is Liverpool Victoria.
Encash your With Profit Bond
Financial Advisers Advice
I recommend you encash your with profit bond and move your money into a Canada life property bond to achieve a low risk return?
Expert’s view: 0 out of 10.
(For the reader’s benefit, this customer was told to go into the with profit bond by the same ...
Financial Advisers Advice
I recommend you encash your with profit bond and move your money into a Canada life property bond to achieve a low risk return?
Expert’s view: 0 out of 10.
(For the reader’s benefit, this customer was told to go into the with profit bond by the same adviser telling her to go out!!)
Interesting advice really! The last few years have seen an interesting approach by some financial advisers.
Back in 2000, with profit bonds were being sold as low risk investments when they were as low risk as someone polishing the cat’s-eyes on the motorway at 8.00am.
Suffice to say I have documented this well and the proof has been in the pudding. Despite a few large institutions employing outside consultants to independently talk up their future they have the bright future of a dodo. To move or not to move is a difficult subject to cover without really going into each specific case and what the individual bonus, MVR, maturity dates etc will be.
Think of it in the following way. Could any investment bring me a fair return over a risk free asset (cash) that is worth the risk? I have applied that formula (Sharpe ratio) to every investment decision I make- even as far as should I go to the pub or not! I concluded 14 years ago that endowments didn’t meet this criteria and banned them and the without profit bond was no exception back in 1998.
What is really interesting is the columnists who extolled their virtues, as great investments in financial columns, with their with-profits-and-chips approach to financial planning, are now telling people to get out and pay early redemption charges as well as large MVRs, even though they advised them to go in there!
Seek advice from an independent adviser who is not motivated by commission and you are more likely to have an accurate view on what to do. As for commercial property funds: I have to liken this to the man cleaning the cat’s-eyes who has had traffic whizzing by his ears for an hour and is rewarded with the option of moving onto the fast lane or alternatively L’arc De Triumphe (Ever driven round there?)
These are once again being sold as low risk – hardly. Consider:
Many of the large property funds are currently invested heavily in cash, as the fund managers believe that commercial property is too expensive yet advisers are telling people to pile their cash into such funds.
Apply the above ratio and you’ll get your answer. I will use Canada life as an example but the yields are pretty much the same across the board. The current yield after charges on the Canada Life property fund is broadly the same as cash.
What’s the point in investing in it then?
What are the risks? Property is a very illiquid asset (i.e. in difficult times they can be very difficult to sell. In my considered opinion, commercial property is at its price peak.
We know bankruptcies are at an all time high and how long will it be before tenants are leaving their leases behind them. What happens when the sparkle moves out of such arrangements and investors want to realise their cash as they see their returns dropping. Here we have a fund invested in something we cannot sell quickly. If we really need to sell it, we are into nose diving prices as the buyer now has the power.
It’s a very brave man that says commercial property will increase in value and this means you are relying on the rental yield as your reason for investing – why bother.
I recommend you encash your with profit bond and move your money into a Canada life property bond to achieve a low risk return?
Expert’s view: 0 out of 10.
(For the reader’s benefit, this customer was told to go into the with profit bond by the same adviser telling her to go out!!)
Interesting advice really! The last few years have seen an interesting approach by some financial advisers.
Back in 2000, with profit bonds were being sold as low risk investments when they were as low risk as someone polishing the cat’s-eyes on the motorway at 8.00am.
Suffice to say I have documented this well and the proof has been in the pudding. Despite a few large institutions employing outside consultants to independently talk up their future they have the bright future of a dodo. To move or not to move is a difficult subject to cover without really going into each specific case and what the individual bonus, MVR, maturity dates etc will be.
Think of it in the following way. Could any investment bring me a fair return over a risk free asset (cash) that is worth the risk? I have applied that formula (Sharpe ratio) to every investment decision I make- even as far as should I go to the pub or not! I concluded 14 years ago that endowments didn’t meet this criteria and banned them and the without profit bond was no exception back in 1998.
What is really interesting is the columnists who extolled their virtues, as great investments in financial columns, with their with-profits-and-chips approach to financial planning, are now telling people to get out and pay early redemption charges as well as large MVRs, even though they advised them to go in there!
Seek advice from an independent adviser who is not motivated by commission and you are more likely to have an accurate view on what to do. As for commercial property funds: I have to liken this to the man cleaning the cat’s-eyes who has had traffic whizzing by his ears for an hour and is rewarded with the option of moving onto the fast lane or alternatively L’arc De Triumphe (Ever driven round there?)
These are once again being sold as low risk – hardly. Consider:
Many of the large property funds are currently invested heavily in cash, as the fund managers believe that commercial property is too expensive yet advisers are telling people to pile their cash into such funds.
Apply the above ratio and you’ll get your answer. I will use Canada life as an example but the yields are pretty much the same across the board. The current yield after charges on the Canada Life property fund is broadly the same as cash.
What’s the point in investing in it then?
What are the risks? Property is a very illiquid asset (i.e. in difficult times they can be very difficult to sell. In my considered opinion, commercial property is at its price peak.
We know bankruptcies are at an all time high and how long will it be before tenants are leaving their leases behind them. What happens when the sparkle moves out of such arrangements and investors want to realise their cash as they see their returns dropping. Here we have a fund invested in something we cannot sell quickly. If we really need to sell it, we are into nose diving prices as the buyer now has the power.
It’s a very brave man that says commercial property will increase in value and this means you are relying on the rental yield as your reason for investing – why bother.
Encash your With Profit Bond and move to a Property Fund
Financial Advisers Advice
...you should encash your with profit bond and move to a property fund or to a distribution fund.
Expert’s view: score 2 out of 10 (once again the adviser recommending the switch recommended the original with profit bond).
Oh dear another one. If you are in search of ...
Financial Advisers Advice
...you should encash your with profit bond and move to a property fund or to a distribution fund.
Expert’s view: score 2 out of 10 (once again the adviser recommending the switch recommended the original with profit bond).
Oh dear another one. If you are in search of a dead duck or indeed an asset at the peak of its price you may well have found your destination with property funds.
As for distribution funds: Not a bad idea. The first of this type of arrangement was launched way back when I had darker hair in 1979. The aim was to provide a low to medium risk to investment whilst maximising the returns to the investor. Nice idea. It was first aimed at income producing investors but over time has become popular for growth investors in the same risk bracket.
Axa Sunlife have had the run of this plan for some years before the competition twigged and entered the market. Differentiating one from another is complicated because of how they are put together. In basic terms a distribution bond invests in a mix of, property, equities, cash and fixed interests – the latter two providing the lower risk element. 8 years ago I looked at the performance and risk of these funds and wondered how they could be so different. In truth what you were looking at was a real bucket of shells. Their make up was so different you couldn’t compare them.
The ABI decided to lay down a standard and today for a fund to be listed in the ABI Distribution Life sector it is allowed to invest up to 60% in equities and must have a minimum of 50% invested in sterling based assets. The fund must provide a yield (a return) of at least 125% of the FTSE All Share Index gross yield before management charges are taken into consideration and must be capable of distribution.
Up to 1998 one fund could have had a high percentage in uk equities producing a high risk and potential return and of course another might be the opposite. Today the manager reduces risk and maximises return by moving up and down the scale of what equities fixed interests etc they hold as well as making excellent decisions within the fund as to which particular stocks to hold.
Having got to this stage we can now decide which funds to buy based on their expected performance but also the most tax efficient way to hold the fund. Consider firstly that an investment held inside an insurance bond is not treated tax favourably. A bond is often sold as offering 5% tax-free income. This is twaddle. It allows you to take 5% per year over 20 years (your money back) tax-free. The fund pays basic rate tax (special rate) as it grows and if you encash after retirement you could find yourself losing out on your age allowance as well as potentially a further 18% tax on any gain.
If you held a fund inside a unit trust or ISA the benefits including your annual capital gains allowance could be much more favourable. I have yet to see a situation where an investment bond was more suitable than a unit trust or Oeic for a Uk investor.
After deciding this you may then look at the best fund to suit you. If a lower than normal risk is important, you may wish to choose a fund with a low standard deviation (measure of risk) and low equity content. If not, choose one with the normal equity content.
Be careful also of the type of fixed interests used. A well-known organisation launched a distribution fund two years ago with a high percentage of junk bonds for fixed interests – that could be expensive. The ability to know what equities and what fixed interests to buy is everything.
...you should encash your with profit bond and move to a property fund or to a distribution fund.
Expert’s view: score 2 out of 10 (once again the adviser recommending the switch recommended the original with profit bond).
Oh dear another one. If you are in search of a dead duck or indeed an asset at the peak of its price you may well have found your destination with property funds.
As for distribution funds: Not a bad idea. The first of this type of arrangement was launched way back when I had darker hair in 1979. The aim was to provide a low to medium risk to investment whilst maximising the returns to the investor. Nice idea. It was first aimed at income producing investors but over time has become popular for growth investors in the same risk bracket.
Axa Sunlife have had the run of this plan for some years before the competition twigged and entered the market. Differentiating one from another is complicated because of how they are put together. In basic terms a distribution bond invests in a mix of, property, equities, cash and fixed interests – the latter two providing the lower risk element. 8 years ago I looked at the performance and risk of these funds and wondered how they could be so different. In truth what you were looking at was a real bucket of shells. Their make up was so different you couldn’t compare them.
The ABI decided to lay down a standard and today for a fund to be listed in the ABI Distribution Life sector it is allowed to invest up to 60% in equities and must have a minimum of 50% invested in sterling based assets. The fund must provide a yield (a return) of at least 125% of the FTSE All Share Index gross yield before management charges are taken into consideration and must be capable of distribution.
Up to 1998 one fund could have had a high percentage in uk equities producing a high risk and potential return and of course another might be the opposite. Today the manager reduces risk and maximises return by moving up and down the scale of what equities fixed interests etc they hold as well as making excellent decisions within the fund as to which particular stocks to hold.
Having got to this stage we can now decide which funds to buy based on their expected performance but also the most tax efficient way to hold the fund. Consider firstly that an investment held inside an insurance bond is not treated tax favourably. A bond is often sold as offering 5% tax-free income. This is twaddle. It allows you to take 5% per year over 20 years (your money back) tax-free. The fund pays basic rate tax (special rate) as it grows and if you encash after retirement you could find yourself losing out on your age allowance as well as potentially a further 18% tax on any gain.
If you held a fund inside a unit trust or ISA the benefits including your annual capital gains allowance could be much more favourable. I have yet to see a situation where an investment bond was more suitable than a unit trust or Oeic for a Uk investor.
After deciding this you may then look at the best fund to suit you. If a lower than normal risk is important, you may wish to choose a fund with a low standard deviation (measure of risk) and low equity content. If not, choose one with the normal equity content.
Be careful also of the type of fixed interests used. A well-known organisation launched a distribution fund two years ago with a high percentage of junk bonds for fixed interests – that could be expensive. The ability to know what equities and what fixed interests to buy is everything.
The Unclaimed Assets Register
Financial Advisers Advice
If you are looking for investments or shares where you have lost the original document, try the unclaimed assets register.
Expert’s view: Score 8 out of 10. Excellent.
Many people over the years have lost documents or have taken out investments only to forget about them. Interestingly there ...
Financial Advisers Advice
If you are looking for investments or shares where you have lost the original document, try the unclaimed assets register.
Expert’s view: Score 8 out of 10. Excellent.
Many people over the years have lost documents or have taken out investments only to forget about them. Interestingly there is currently an estimated £15.3 billion in assets currently unclaimed.
Whilst financial institutions usually make every possible effort to find their customers, they can lose contact with them for many reasons:
• People make investments without telling their spouse. The surviving partner is unaware that funds are due to the estate.
• Customers do not notify them of address changes.
• Customers forget about their investments, and that forgetfulness becomes permanent.
• Companies change their names.
In much the same way as finding £10 in your old jeans is a bonus the unclaimed assets register (0870 241 1713) should be a port of call for you. It’s very easy for the elderly to lose documents and forget. If you are dealing with a deceased’s estate it may well be worth checking the register to see if there is a holding.
There is over £300 million sitting there from lotteries and other smaller holdings but the largest is perhaps the most alarming. £5 billion lies in dormant accounts. It’s easy to see how that can happen. Perhaps someone might have thought about windfalls and spread their capital across a wide range of accounts only to forget all about them and move and lose the paperwork.
The fees for the service stretch to a minimal £18 per search and the firm does not charge a percentage cut for any success.
Some companies still haven’t signed up to it for some reason so you may have to check with them direct. For example the Axa group of companies and The Abbey are noticeable absentees, and for the life of me I cant imagine why they wouldn’t be there – they’ve only had 7 years.
If you want to chase any assets yourself, you can do so by contacting the following organisations direct:
• Dormant bank accounts call 020 7216 8909 – it’s a free service.
• Dormant Building Society Accounts 020 7437 0655 – free service.
• Occupational Pensions 0845 600 2537.
• National Savings & Premium Bonds 0845 964 5000 You will need your Holders Number to check for unclaimed premium bond prizes.
At your next financial review it’s well worth making a detailed electronic note of your assets and storing them with your solicitor. When you change your assets you would just update the information and record with your will.
For the elderly you should consider a power of attorney to give you the ability to manage the assets now before such times as they become too hard to find.
Perhaps the largest development in financial services that will benefit you in this respect is the advent of Wrap. Wrap is simply a one-stop service that holds all your assets in one place and values them at a glance. Every day, when you turn on your wrap you can see your pensions, shares, isas, unit trusts, and peps all in one place with one valuation. If you or the companies make any changes, the information changes immediately online. No longer can you lose your assets as they are all held in one area. If you do it correctly the service should cost you no more than you are paying now with all its benefits.
Perhaps one of its other biggest benefits is your ability to transact any investments online either yourself or via your adviser. The paperwork is minimal and in fairness, valuations can be accessed electronically without the need for mindless mounds of paperwork that mean little anyway.
Speak to your Independent Financial adviser if you have investments in many places and they will gladly talk to you about wrap and its suitability for your scenario. Also see our wrap section.
If you are looking for investments or shares where you have lost the original document, try the unclaimed assets register.
Expert’s view: Score 8 out of 10. Excellent.
Many people over the years have lost documents or have taken out investments only to forget about them. Interestingly there is currently an estimated £15.3 billion in assets currently unclaimed.
Whilst financial institutions usually make every possible effort to find their customers, they can lose contact with them for many reasons:
• People make investments without telling their spouse. The surviving partner is unaware that funds are due to the estate.
• Customers do not notify them of address changes.
• Customers forget about their investments, and that forgetfulness becomes permanent.
• Companies change their names.
In much the same way as finding £10 in your old jeans is a bonus the unclaimed assets register (0870 241 1713) should be a port of call for you. It’s very easy for the elderly to lose documents and forget. If you are dealing with a deceased’s estate it may well be worth checking the register to see if there is a holding.
There is over £300 million sitting there from lotteries and other smaller holdings but the largest is perhaps the most alarming. £5 billion lies in dormant accounts. It’s easy to see how that can happen. Perhaps someone might have thought about windfalls and spread their capital across a wide range of accounts only to forget all about them and move and lose the paperwork.
The fees for the service stretch to a minimal £18 per search and the firm does not charge a percentage cut for any success.
Some companies still haven’t signed up to it for some reason so you may have to check with them direct. For example the Axa group of companies and The Abbey are noticeable absentees, and for the life of me I cant imagine why they wouldn’t be there – they’ve only had 7 years.
If you want to chase any assets yourself, you can do so by contacting the following organisations direct:
• Dormant bank accounts call 020 7216 8909 – it’s a free service.
• Dormant Building Society Accounts 020 7437 0655 – free service.
• Occupational Pensions 0845 600 2537.
• National Savings & Premium Bonds 0845 964 5000 You will need your Holders Number to check for unclaimed premium bond prizes.
At your next financial review it’s well worth making a detailed electronic note of your assets and storing them with your solicitor. When you change your assets you would just update the information and record with your will.
For the elderly you should consider a power of attorney to give you the ability to manage the assets now before such times as they become too hard to find.
Perhaps the largest development in financial services that will benefit you in this respect is the advent of Wrap. Wrap is simply a one-stop service that holds all your assets in one place and values them at a glance. Every day, when you turn on your wrap you can see your pensions, shares, isas, unit trusts, and peps all in one place with one valuation. If you or the companies make any changes, the information changes immediately online. No longer can you lose your assets as they are all held in one area. If you do it correctly the service should cost you no more than you are paying now with all its benefits.
Perhaps one of its other biggest benefits is your ability to transact any investments online either yourself or via your adviser. The paperwork is minimal and in fairness, valuations can be accessed electronically without the need for mindless mounds of paperwork that mean little anyway.
Speak to your Independent Financial adviser if you have investments in many places and they will gladly talk to you about wrap and its suitability for your scenario. Also see our wrap section.
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Registered office; The Old Carriage Works, Moresk Road, Truro, Cornwall, TR1 1DG. Registered in England and Wales No. 3533548. Contact info@wwfp.net or 01872 222 422
© 2007 Worldwide Financial Planning - this site is intended for UK investors only
By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'
Registered office; The Old Carriage Works, Moresk Road, Truro, Cornwall, TR1 1DG. Registered in England and Wales No. 3533548. Contact info@wwfp.net or 01872 222 422
© 2007 Worldwide Financial Planning - this site is intended for UK investors only
By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'