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.

We also have a maturing bond worth £100,000 with a local building society. Its financial adviser 
recommends a life insurance-linked investment bond and says this would be an excellent time to invest.

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 
investing it?

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.

Your Comments

Excellent webpage. Could you help me please?

My daughter Tina is 32 years old, married with a 3 month old baby boy.

3 years ago, while she was single, she bought a small house, which she is selling now.

After deducting all expences, she will be left with around £125,000 to invest for a long term for the future of her baby boy.

She does not need this money now and wishes to invest for growth in diversified assets and classes with security to pay for baby's future education.

Could you please suggest some ideas on where to invest for a long term - say 15 to 20 years ?

Best regards.
Barry Gohil