Your investment questions answered
Q: Is an investment bond right for me?
My wife and I are both pensioners. We’ve made full use of our individual savings account allowances and have good pension provision.
Apparently, a life insurance
investment would be outside our
assets with regard to residential home charges, should the need for one for either of us ever arise.
The adviser also says it’s better to pay a set fee rather than a percentage when setting up the bond, because if we invest £100,000 in such a bond it will immediately grow to about £109,000.
Surely there must be a downside to this? It all seems too good to be true.
A: Matt Pitcher, a wealth adviser at Towry Law, says:
An investment bond may well be wrong for you for several reasons.
The rate of tax deducted at source from an investment bond is often higher than the rate of tax deducted at source from a unit trust. The added benefit of the unit trust is that it can be converted into an ISA each tax year.
Investment bonds continue to be sold for reasons more connected to commission payments to advisers than their suitability for investors, although in this case the adviser is waiving the commission and charging a fee. The 109% allocation is not a benefit, however, as it will be clawed back through exit penalties and higher annual charges in the first five years.
One problem is that you are taking advice from a tied adviser. Seek
independent advice and ask for an ISA and unit trust portfolio.
Q: How can I move my stocks and shares ISA?
I wish to change an
existing stocks and shares ISA investment, which is not doing well at all, for one that is doing reasonably well. Is this possible and how do I go about this? Would I lose my ISA status (similar to a cash ISA withdrawal)? Is there anything else I should be aware of?
A: Caroline Hawkesley, a certified financial planner and director of Evolve Financial Planning, says:
You will need to check with your existing provider as to the choice of alternative funds that it offers, together with any charges or penalties for making a change.
You could potentially transfer your ISA to an alternative provider without losing the ISA status (but again be aware of any charges for doing so).
You need to weigh up your appetite for risk, as well as the costs of the ISA/funds, when considering a potential move. Whenever you invest in the stockmarket, your investment may well fluctuate, and you need to be prepared for this
If I were you I would consider investing in a cost-effective index fund. Transfers can be easily dealt with: you need to request the relevant forms from your existing ISA provider and the new provider.
Q: Is my stockbroker safe?
Can you tell me if investments with stockbrokers are protected by the Financial Services Authority (FSA)? I was thinking of buying stocks through the Bank of Scotland sharedealing service as I have a current account with the bank.
I thought my investments would be better protected with a bank rather than another company, although I know there are cheaper commissions available with other stockbrokers.
A: Philip Pearson, a partner at P&P Invest, says:
If you purchased shares through a UK stockbroker, the firm would normally be authorised through the FSA. The purchase can either be undertaken with you owning the shares directly or through a nominee account.
Financial legislation requires the stockbroker to separate clients’ funds from the firm’s assets. This is to give you the reassurance that in the event of the firm going into liquidation your money will not be at risk.
Likewise, if you purchase shares through a nominee account, a stock-broker will be your first point of contact for registering the shares, but you’ll retain ownership of them and should not be at risk should the firm fail.
If you have little experience of buying and selling shares, I strongly recommend you seek professional
financial advice, or undertake some thorough research to gain a greater
understanding of the risks associated with share ownership before investing.
Q: Why have my aggressive funds deflated?
In 2000 I invested £30,000 in a Skandia multi-managed fund. However, the investment now stands at around £18,000. Should I switch into an alternative investment fund, or leave it where it is for another five years until I retire, in the hope that it will have picked up by then?
Also, I will be 60 this year and will be able to either take up my full state pension of £112 a week or defer it. I intend to work until I’m 65, and am unsure what’s the best thing to do. If I take the pension when I turn 60, I’ll be taxed. But if I save it until I retire, is there any other way to boost my income in the meantime?
A: Matt Pitcher, wealth adviser at Towry Law, says:
You must have selected fairly aggressive funds for your investment to be worth 40% less after nearly a decade.
You should always have a good spread of funds – but more than this, a good spread of asset classes. You’ve taken the right approach by not restricting your investment to the funds of one firm, but you should use this facility to rebalance your portfolio.
To achieve proper diversification, you should invest not only in UK equities but also in overseas equities, global bonds, gold, corporate bonds, gilts and commercial property. This mix should give you a smoother ride.
However, as you have now lost quite a lot of money you face a difficult decision: whether to maintain an aggressive approach to try and recoup some of your losses, adopt a more balanced approach, or revert to cash. Much will depend on your attitude to risk and on the other investments you hold. You need to be aware of the pitfalls of each option.
It’s not worth postponing the state pension unless you are going to be highly taxed on the income now. The increase in pension if you defer might seem generous, but you will lose out if you don’t live long enough to recoup the money you’ve deferred. In many cases, it’s more sensible to have some extra years’ worth of income upfront, rather than an increased income for life in the future.
If this income is going to be surplus
until you retire, why not consider
Q: Help me find the best return for the lower risk
I have £80,000 to invest. But although I have quite a simple request – I need a product that will give me the highest monthly income with the lowest possible risk to my capital – my head is spinning with all the information I’m getting.
I’m not prepared to take chances with my capital, because in the past, whenever there has been a ‘Black Monday’ or ‘Black Wednesday’, I have suffered from it. The last blow was after 9/11, when I lost £10,000 in one day.
Since the 1980s I have probably lost around £25,000 by choosing the wrong investments or listening to the wrong advice. I wish now I had spent it on myself and had a good time instead.
A: Matt Pitcher, a wealth adviser at Towry Law, says:
You sound as though you’ve been unfortunate in the past, but the reality is that high income and low risk do not go together. One fundamental rule of investing is: the more you get from an investment, the riskier it is. It simply can’t be any other way.
Your choice, therefore, is a simple one. Firstly, you could go for no risk and spread the money between two savings accounts, with two different organisations, offering the highest interest rates.
Make sure the banks or building societies in question are not part of the same group to ensure up to £50,000 of your savings is covered under the Financial Services Compensation Scheme.
Many of the smaller building societies offer a good rate of interest. However, you are probably looking at an income of 2.5-3.5% unless you tie the money up, which wouldn’t be wise if inflation is around the corner.
Alternatively, you could invest this money in a broad spread of asset classes to give yourself the least volatility, while exposing your investment to some risk and the potential for better returns.
Decide what your tolerance to loss is, and look for a good, independent, fee-only adviser. They should be able to construct the sort of portfolio that doesn’t keep you awake at night but does give you a good income.
Q: How can I compare OEICs?
I want to compare performance of open-ended investment companies with different management and fund charges – some operate with 1.2% annual total expense ratio (TER) and others with 1.75%. Firstly, is it correct that all annual charges are deducted from the fund, impacting the net asset value (and hence the unit price)?
Secondly, if I look at total return based on bid-to-bid pricing (with income reinvested) does this allow funds with different charges to be compared on an equal footing? So for example, if fund B has a higher TER but may produce a higher total return, the extra charges were in a sense worth it?
A: Caroline Hawkesley, a certified financial planner and director at Evolve Financial Planning, says:
You are right to compare TERs rather than annual management charges (AMCs) as the TER provides investors with a clearer picture of the total annual costs involved in running a fund. In addition to the manager’s annual charge, the TER also includes the costs for other services paid for by the fund, such as the fees paid to the trustee (or depositary), custodian, auditors and registrar.
You would therefore expect large funds to have lower TERs than small funds, overseas funds to have higher TERs than UK funds, and that a new fund would have higher costs than an old fund.
The best way of comparing ‘like-for-like’ is to make sure all of the fund factsheets you look at come from the same independent source, such as Financial Express. Have a look at the small print at the bottom of the factsheet to see on what basis it has been prepared. All annual costs should be reflected in the unit price of a fund and should show in the performance history.
Remember the old adage that past performance is not guaranteed for future performance, so I wouldn’t read too much into that.
But if a tracker fund charges, for example, 0.5% a year and an active fund that invests in the same market charges 1.5% per year, you have to ask yourself whether it is worth paying the extra 1% given that by definition, at least 50% of funds won’t beat the market. Keeping charges low is an extremely important aspect of building a portfolio for all weathers.
Q: Is it possible to turn a quick profit?
How could I make a safe/ certain, legitimate profit on £2,500 within a year? What return could I be assured of?
A: Francis Klonowski, principal of Klonowski & Co in Leeds, says:
I suspect you are looking for something more than cash. In which case, the answer is simple – I don’t believe you can.
The words ‘safe’, ‘certain’ and ‘assured’ suggest you’re looking for some sort of guarantee, while the word ‘profit’ suggests you’re also looking for some sort of real return.
Dealing with the ‘safe/certain’ part first, the only way you can guarantee this is through cash deposits. But your return will then be subject to interest-rate fluctuations. To get a decent fixed rate you normally have to hold it for a longer period, or invest a larger minimum than you suggest.
Many experts would argue that now is a good opportunity to make money from stocks and shares, as prices are still relatively low – a good global investment trust may provide a substantial profit over the next 12 months (or earlier). You can always withdraw if you reach what you feel is a sufficient return. The risk, of course, is that you may not get your initial £2,500 back – and there is nothing ‘certain’ or ‘assured’ about the potential returns.
Q: Help - my bond has bombed
Last year, I decided to invest a considerable lump sum in a five-year investment bond with
Britannia. However, over the past 12 months, the investment has lost almost £5,000 in value. Before I invested the money, I had been quite happy to leave it deposited in a one-year fixed-rate bond, as it paid a good amount of interest.
Although I’ve been advised by my financial adviser at Britannia to stick with the bond, I’m now wondering whether I should just write off the loss and move the money into a fixed-rate savings account. I don’t want to risk further losses over the next three years.
A: Philip Pearson, a partner at P&P Invest, says:
Although you accepted the advice of the financial adviser at Britannia to switch your savings from a cash deposit account, which offered a high rate of interest for the first year, into a stockmarket-linked investment, your money is in fact managed on behalf of Britannia by AXA.
The AXA distribution bond is a portfolio that invests in loans and shares in UK companies, and therefore has a much higher level of risk than a deposit account. Your investment’s loss in value reflects 2008's stockmarket slump.
I believe that the fund will eventually recover in value, but this may take some time. If you don’t want to experience any further loss in value, your only alternative is to surrender the policy and place your remaining capital in a cash-based deposit account.
If, however, you’re prepared to invest for the next three years, then surrendering now will provide poor value in the short term as interest rates currently offer savers little in the way of growth.
The right decision for you will depend on your current financial position, the value of your savings and your investment goals, so seek the advice of an IFA and give your finances a thorough review.
Often used by stockbrokers to ease the administration of buying and selling holdings on behalf of their clients, a nominee (the broker) holds securities on behalf of investors (the “beneficial owners” of the securities). Holding securities through a nominee is cheaper, but the disadvantage is that beneficial owners of shares forego certain rights enjoyed by shareholders on the register, such as the right to vote at an annual general meeting (AGM) or extraordinary general meeting (EGM) and the right to propose AGM or EGM resolutions. Holding securities through a nominee still entitles the shareholders to dividends, rights issues etc.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Issued by life companies and designed to produce medium- to long-term capital growth, but can also be used to pay income. The minimum investment is typically £5,000 or £10,000 and your money is invested in the life company’s investment funds, so the bond can either be unit-linked or with-profits. They offer a number of tax advantages, such as the ability to withdraw up to 5% of the original investment amount each year without any immediate income tax liability. Also, a number of charges and fees apply, such as allocation rates, initial charges, annual charges and cash-in charges. As investment bonds are technically single-premium life insurance policies, they also include a small amount of life assurance and, on death, will pay out slightly more than the value of the fund.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.