Ask the Experts

Mortgage lenders will only accept a gifted deposit if it comes from a direct family member.  It is also important there is extra legal work involved in this transaction and your parents will need to take independent legal advice before considering the above.

I suggest you seek independent mortgage advice to discuss the whole situation in much more detail and obtain a full understanding of what is available and any implications to yourself.   

Q. I live in Devon but work Mon - Fri in London.  I own my own home in Devon which I have a mortgage on and when I am in London I stay in a flat which I currently rent out.  My landlord for the London property has offered to sell the flat to me and I am keen to buy it.  My question is, would it be possible to get a residential mortgage on a property in London even though it would not be my main home and given the fact I also have a residential mortgage back in Devon. 

It is possible for you to obtain a second residential mortgage and most high street lenders will facilitate this if your scenario is explained to them correctly.  The only reasons this would prove difficult would be if you were to sub let the London property or if your income is not sufficient to support both mortgage payments.

Assuming you will be the only person using the flat a new lender will assess your mortgage application in exactly the same way as you buying your original home.  The only difference will be they will class your existing mortgage as a commitment as will take this into account when underwriting your case.

I suggest you seek independent mortgage advice to look at your overall scenario and discuss your options to ensure all your angles are covered. 

Pensions

Q. I am thinking about buying a holiday apartment in the west country and don’t want to mortgage it as I don’t think I can get a mortgage but I have been told by the sales agent that I could use my pension funds to help purchase the property within a self invested personal pension (Sipp)?  

There has been a lot of media coverage of this idea over the last couple of years but contrary to popular belief, it is highly unlikely that you can follow the course of action suggested by the sales agent. For a property to qualify as a potential SIPP asset it needs to meet some very tight criteria laid down by HMRC and not be "residential" property.  An immediate test to consider is if the property has kitchen facilities they can be deemed 'suitable for use as a dwelling', and therefore classed as being residential (taxable) property.  For further detail on this take a look at RPSM07109060 (http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM07109060.htm) which outlines property that would not be classed as residential. 

It may however be possible for your holiday unit to be wrapped up in some sort of collective investment vehicle  or GDCV (Genuine Diverse Commercial Vehicle) investment which invests in the development into which you as a SIPP client could invest in order to utilise a pension investment strategy. 

This could be by way of an unlisted company where a SIPP buys shares, or through a Limited Partnership or Unit Trust style arrangement where the SIPP invests in the fund. 

Please note that there are significant costs involved here and specialist legal and investment advice would be essential. Some SIPP providers can and  do accept "hotel rooms" within certain criteria, but not separate buildings/apartments even if they are marketed as part of a hotel complex ,especially if they could be considered as stand alone properties with a normal kitchen rather than just tea making facilities etc. The key criteria to consider are:

• No Kitchen and minimal cooking facilities i.e. kettle / microwave
• A block rather than separate buildings
• A management company in place
• Rooms rather than villas
• Multi storey buildings even better.

Q. I am mid-50s and I recently completed my annual financial review. I realise I need to make some further contributions to my pension funds and my financial adviser has suggested that I consider moving my share portfolio--value around £50k--into my personal pension arrangements. He has mentioned using a SIPP (Self Invested Personal Pension) and that I can transfer the share portfolio as an "in specie" contribution--is he correct and how does this work?  

With capital losses on the equity markets over the last couple of years, the value of many share portfolios are well down. You may be in a similar position and your adviser's idea is well worth considering. You are entitled under current tax and pension rules to make a one-off contribution of your share portfolio into your SIPP. I surmise that you do not have a SIPP in place. You need to seek specialist Sipp investment advice with your independent financial adviser to ensure you choose a flexible and cost effective SIPP (ideally online via a WRAP account) to receive the contribution. 

You do need to have sufficient earnings to allow you to make the contribution. Remember under current rules you can contribute 100% of earnings subject to the annual pension contribution limit of £245,000. Assuming that you satisfy these tests, then any "in-specie" payment you make will attract tax-relief at 20% immediately with a further 20% claimable if you are a higher-rate taxpayer.

Of course, as the transfer of ownership of the asset would change from you to the new SIPP then a Capital gains Tax charge may arise, but only if the value of the shares has grown sufficiently to create a chargeable gain? There may also be a stamp duty liability on the pension scheme where the contribution involves equities but the tax relief uplift is a very attractive counter-balance to the charges and costs and allows for CGT free growth in the future.

Q. I keep hearing about SIPPs and how great they are. Can you please explain in simple terms what they are and how they differ from my other personal pension plans I have held for the last fifteen years? Personally pensions bore me and it just seems like throwing good money after bad.

SIPPs, or Self Invested Personal Pensions are a cost-effective and flexible vehicle for building a retirement fund. SIPPs are ideally suited to the self-employed and those employed people who have no employer-sponsored arrangements. Historically SIPPs were used by higher earning individuals who were prepared to pay the set up and running costs of the arrangements in return for flexibility and investment choice, but in 2010 and beyond, the charges should be a side-issue. 

A well run online SIPP, accessible via a WRAP platform will offer you the investment choice and flexibility without heavy front-end or ongoing costs. 

It is really important that you get fee-based investment advice on the setting up of a SIPP to make sure that you make the right choice from the many offerings available.

The over-riding key benefit of using a SIPP is that you gain access to a wide choice of assets to hold within your pension fund, from cash deposit and  equities (stocks and shares) to collectives and the most notable one - property, as immediate examples.

SIPPS also offer the option to hold your accumulated Protected Rights funds (used to be called contracting out of serps) and you can consider transferring your existing old-style pension funds into a SIPP (subject to review of costs and loss of any benefits) thus aggregating your personal pension arrangements in one place. 

Q. My daughter and I run our own private family business. I am in my late fifties and want to plan to pass on as much as I can to her and avoid Inheritance Tax where possible? Although we own the business together, there are business premises (valued at £400k) that I own completely in my sole name. My accountant has heard about use of self invested personal pensions (SIPPs) as a means of helping with this. Is he correct and what do I need to consider doing? I have around £300k in my existing personal pension funds and my daughter has just over £40k in her personal pension funds 

Your accountant has very wisely alerted you to the potential benefits of using what is referred to as a Group SIPP. Careful consideration is needed on your individual circumstances but in principle you can set up a Group SIPP, and then transfer your existing pension fund into it. With the 300K in the Group SIPP, a loan of £100k may be raised by the pension fund to purchase your business premises from you. The upshot of this is that the SIPP now has a property worth £400k and a debt/mortgage of £100k but you have £400k capital from the sale of the property!

You will need to bear in mind the potential Capital Gains Tax bill that arises from your sale of your premises to the SIPP and other costs incurred so seek investment advice from a fee based independent financial adviser before taking any action.

Once the SIPP is in place, your daughter can transfer her existing pension fund into the new Group SIPP and you can also make a gift to her of capital you have realised from the sale of your premises. She could use this to make a new contribution into the SIPP.

 Some of this could be used to pay down the mortgage borrowing of the SIPP and this exercise may be repeated in future years (subject to regulations) to shift the balance of ownership of the SIPP but bear in mind the need for sufficient income to support her contribution and that you must keep careful record of any gifts you make.

This last point is crucial. Any gift made is disregarded from the value of your estate after a full seven years assuming you survive and this strategy should potentially reduce the value of your estate for Inheritance Tax purposes.

Investing

Q. I have just received £17,000 and want no risk and am considering my options. Are index linked savings a good investment as I hear they are from some of the papers that returns are likely to increase if inflation soars? 

It’s a small question with lots of potential answers but the main answer relates to inflation but be sure to seek investment advice from a fee based independent financial adviser before taking any action.

The key question is - Will we get soaring inflation? The answer relates to the impact of quantitative easing, so lets explain that. The central bank simply gives itself more money by typing that simple fact into its computer, which creates new money in its own account – what a joy. They can now choose to buy what they want with it. If as in this instance of quantitative easing they buy corporate bonds and gilts, the price of these will rise and the yield will fall.

Lets pretend you are ‘x’ company. If a willing central bank is happy to buy x’s bond, they will be able to offer a lower yield for their bonds. A bond is the equivalent of company ‘x’ borrowing money. So now companies are borrowing cheaper. Cheaper borrowing should equal greater spending and in turn greater demand which pulls us out of a recession. As the money eventually ends up in bank’s deposits they can now lend more, which has a multiplying effect on the economy.

The key to its success is whether or not it eases money supply i.e. banks begin to lend again. There are numerous risks to this strategy. If the bank of England purchases the wrong assets it could lose money (that’s not good). If too much money is created and spending goes too far you can create inflation if not hyper inflation, destroying the value of the currency and in turn creating a whole host of other problems.

There is the other worry that a bank in creating quantitative easing could actually create panic rather than confidence and as such we are all in for a very sorry ten years.

One of the biggest issues with quantitative easing is that no-one really knows how much is good and how much is bad. And so we have a ‘suck it and see’ approach. First we had £75bn injected into the system and we hope that it works. If it didn’t work quickly, it will probably not work further billions have been injected.

The truth is quantitative easing eventually has to work as it did in Japan, as the bank can just keep giving itself money until it does, but when that tyre thread eventually bites, they better have the steering wheel firm and every handbrake and parachute available to avoid the prospect of the economy running away, so lets hope it works sooner rather than later.

If inflation does happen, index linked savings will be a welcome option as your savings will surge as inflation does.

Q. I have made some good returns from my Gilts and wondered if now is the time to invest into them or should I get rid of them.

Gilts have performed strongly over the last six months. No surprise really given Quantitative easing. The strength of the market will undoubtedly relate to the surprise in the Bank Of England's increase in its buying programme. The upward bounce happened even though we are seeing signs of economic improvement. Couple this with inflation falling less than perspective, its no shock that we have had such a surge in prices. 

In August, Gilts sharply outperformed international bonds and I notice HSBC, perhaps the best performing manager with a gilt and fixed interest fund decided to adopt a more defensive position and sold both long dated bonds and gilts futures.

It is therefore difficult to say what potential upside there is with Gilts at this stage, particularly if quantitative easing impacts positively which it appears to be doing. It is well worth a review with your independent financial adviser to seek investment advice before you proceed with any actions.

Q. Is property on a buy to let basis a good investment now?

It very much depends on what you want to do with it. Clearly it is a much better option than it was two years ago but there is still the potential for further falls.

It was only a matter of time before house prices eventually would be supported by quantitative easing and lower interest rates. The Bank of England have not made the same mistake as last time and were aggressive in their monetary policy which has clearly had an impact on the confidence levels of the homeowner.

The news that across the UK house prices have found a support level will be welcomed. This will allow lenders to begin increasing the level at which they lend and to relax the extortionate rates they are charging for homeowners with higher loan to values. 

Despite what most people might think, the prices are not being supported at the higher end. In fact it's quite the reverse. Detached and semi detached properties reported a fall in the most recent figures and it was the properties most attractive to first time buyers that proved the winners. At the peak of the market I said house prices would fall, and fall to the first point I stated house prices were expensive, and that was 2003. Quantitative easing and amazingly low interest rates look to have halted the house price just before then with prices now turning at April 2004 levels. 

Will it be sustained? There are two key factors: First time buyers in rented accommodation and investors.

The fact is many first time buyers and investors will be looking at today's interest rates and realising they are potentially missing an opportunity. The cost of rent is considerably more than the cost of a mortgage and many first time buyers will seek this opportunity to dive into the market at 2004 levels. This is just as evident in the record mortgage enquiry levels reported for June. 

In the meantime we would encourage readers to seek mortgage advice to consider the benefits of fixing their mortgage considering the considerable hike in the cost of fixed money and the drive in mortgage enquiries. Whilst that may not be an instant decision your should prepare for surprises in inflation figures driving rates up over the next year.A support for house prices will support confidence, which in turn will make its way through to increased spending and good old inflation. It might be a strong decision to fix now when you are on a low standard variable but if quantitative easing has its true effect; higher interest rates will be on their way. 

Q. Is it a good idea for a 40 year old to continue to invest in a pension scheme in a money, property, equity or managed fund?

There is a general view that the closer someone gets to retirement the more they should put into lower risk investments but what is the meaning of low risk? With the surge in quantitative easing any of the asset classes could easily turn positive or sour in a blink of an eyelid. Many pensions change their asset allocation the closer you move to retirement but do it automatically and this is called lifestyling.

Irrespective of your attitude to risk, need for capital or income and the timing of it, or indeed your surrounding financial situation, lifestyling is a one size fits all approach:

Any reasonable backtesting of lifestyling will see it does not work, nor does it treat the customer fairly. I am not talking about picking the key dates that show it does work or vice versa. The simple structure by definition, is a complete laughing stock and I can only assume financial advisers have queues of people with lots of money who do not care about managing their money effectively.

It follows that fixed interest rates and cash as well as property are more secure investments you move into when you are getting close to retirement. How can that be the case at either the beginning of an interest rate rise cycle, beginning of a prolonged recession or the end of a property bubble?

Does not make sense does it?

In any event the sole purpose I suspect of such arrangements is to decommoditise the pension product, or is that being cynical?

Insurance companies know there is little to differentiate between them. Expensive products coupled with investment funds with as much expertise as a politician are hardly attractive.

To decide whether you should be investing into property, equities, cash or property you should seek investment advice from your independent financial adviser as much depends on your risk and outlook. Notwithstanding that most investors will easily be aware that many managed funds are indeed appalling and not in any way managed in comparison to what your expectations are. Your adviser will explain that. 

Long-term care and your assets

Q. I have built up some savings and also I have saved over the years and am worried about what might happen to my money if I have to go into care. How can I protect my assets from the cost of long term care?

There is a rule called deliberate deprivation of capital. This means that your motivation will be called into question as to why you have taken any actions. If you have deliberately tried to 'offload' cash, or assets the local authority will in most circumstances be able to include your assets in any calculations they have.

Make sure you receive advice from a fee based independent financial adviser who by way of being fee based is not motivated by commission.

If you do not believe you are due to go into care and you do hold investments, consider holding them in a life insurance bond. As it is a policy of insurance, it is disregarded from your overall assets. There are a couple of versions of this type of arrangement but ensure you use a life assurance bond as opposed to a capital redemption bond.

Also you could consider changing the ownership of your property from joint tenants to tenants in common. In legal terms, tenants in common doesn’t mean that you own half the house value. A tenancy in common can be a great way to reduce the value of your estate for care costs. When valuing the estate for means testing etc, the market value of the property is taken into account. If a husband and wife each have a tenancy in common, each tenancy is valued separately. What value would you place on a tenancy you were purchasing where another person had the same legal rights as you to live in the property? Zero.

Consider that as one of the first options available before planning any equity release or long term care plans and going to any expense.
 

Q. Is it worth creating trusts and if so, are there drawbacks?

A trust is useful for Inheritance tax planning and the protection of assets from care and is also a very useful way of ensuring your capital goes very quickly to the intended beneficiary.

With most trusts you have now lost complete control of the asset although with many you can set the trust up to return an income on a year by year basis whilst still ensuring the growth and remaining capital is outside your estate.

It is a really highly complicated area and I would suggest that you seek clear advice from an independent financial adviser before proceeding with any plans at all.

Q. Where do you think interest rates will be next year?

I think that quantitative easing will kick in and already has done so and will provide a support to the economy. The current very low rate is only there to really support bank's reserves and is having little real effect as most banks have not passed this saving on.

Interest rates could probably rise by another 2% and it will have little or no impact on the borrower but it will squeeze the margins that banks have although I suspect by next May in time for the election this will not matter. Savers will be happy and in turn will have the extra 2% and borrowers will hardly notice as many of their loans are collared at a higher rate.

All in time for an election. Watch out for inflation which I suspect will surprise on the upside and this will put a higher pressure on interest rates. It’s a difficult call but I suspect inflation will soar next year and interest rates will soar with it. If you are a saver, seek independent investment advice from a fee based investment adviser who will guide you through the best rates.

Q. There has been much in the press that advisers will soon be fee based, what would be the likely fee for someone investing £5000pa?

Yes, there is much in the press that advisers will be fee based and we have been moving more and more towards fee based advice for many years now.  It is really the best way forward in terms of transparency for a client and to ensure integrity of your independent financial adviser.  If you are sure that your adviser will be paid no matter what their advice, then you are sure that you are receiving the best advice that adviser can provide. Perhaps the best investment advice is that you don’t invest at all. A commission-based adviser is hardly likely to give you that advice especially if they will not be paid.

For many years clients have felt that they have received advice for free but in reality it has been wrapped up in commission costed into the contract over several years.  It is quite frightening what this can add to the cost of the plan.  A fee based independent financial adviser's fees would be fully disclosed to a client before carrying out any work. 

It would depend what work would be involved in the investment of the £5000 and advisers offer a range of fees, from £150 per hour to a fixed fee or a percentage of the investment amount, along with an annual fee to review the client's plans (this could be on a six-monthly or annual basis, for example).

In any event all fess are explained well in advance of you taking any action.

Q. I was told to invest money into an investment bond but now with the extra Isa allowances I  think I should move them over there to get a more tax efficient income and growth. Can you point out the snags on the new ISA rules?

 The new rules on ISA's are: you can invest up to £5100 into a cash ISA as of 6^th October 2009 as long as you were already 50 by that date.  The balance can go into a Stocks and shares ISA up to £10200, so you could invest the whole £10200 into a stocks and shares ISA.  Everyone under 50 will benefit from the increase from April 2010.  

Some banks and building societies weren't prepared for the increase in the allowance for the over 50's on October 6^th this year and it has resulted in clients having trouble trying to deposit additional funds into existing ISA accounts and having to push their bank or building society on it but the majority now have this under control and savers are now able to top up more easily. 

The same rules apply as before, that you can only hold one type of  ISA with one institution in one tax year so seek independent investment advice with a fee based adviser before taking any action.  Not all banks and building societies have been geared up to allow investors to increase their cash ISA's mid year and so some savers with fixed rate ISA's are being frustrated that they cannot increase their fixed rate cash ISA.  Some savers are finding that they can only top-up at a lower interest rate than they are currently enjoying - if enjoying is the right word with interest rates as they are.

Q. I have just had a call from my bank who have refused to renew my overdraft facility which my business relies on at various times in the year. Is there an alternative way of financing my business as this will have serious impacts on our chances of staying in business.

A. You would need to understand why the bank has refused to renew the overdraft, however there are some alternatives out there. If you have assets, they could be offered as security to raise a loan to inject cash into the business rather than using an overdraft.

Also if your business is owed money from trading you may well be able to raise cash against those debts via some form of factoring. This is where the lender advances you up to say 85% of your book debts at any one time. That way you get an immediate cash injection into your business and continued advances as and when each subsequent invoice is issued. If you have no assets then the latest Government scheme to support business - Enterprise Finance Guarantee (EFG) can be used to raise cashflow.

If you have a pension, that pension could also be used to buy the building you are working from which may free any equity you have which you could use to work with. There are many methods of achieving business finance and an independent financial adviser specialising in commercial finance will be able to guide you efficiently through each one

Q. I have had enough of my job and the threat of redundancy so I am looking at setting up a business and but I am hearing that no one will lend me any money to fund my business as it’s a start up business. Is this true?

A. This is a common complaint. Most banks are not keen to offer business finance to start ups because there is no evidence of track record on which to base a risk decision. However, lenders will help start ups usually where the owner is prepared to share the risk. You would need to show that you have committed a proportion of the funding required - usually 50%.

The lenders will then match that sum if you can provide assets as security such as investments you may have or perhaps another property but be careful before making that decision because if the business goes under your assets could go with it. 

If you have no assets then there are other ways to raise the cash. The Government scheme EFG mentioned earlier will support start ups. There are also vested interest groups such as The Prince of Wales Trust for young people up to the age of 30, the British legion for ex service personnel and in various parts of the country there are public sector sponsored schemes to assist various groups i.e. Women in Business etc. 

Q. I have £50,000 to invest but I have been to a bank and they have asked me what my attitude to risk is and I had no idea. They gave me a choice between 1-5 and I suppose like everyone I chose 3 but that doesn’t help me understand how much money I could lose or gain. Help!!

 Investing for the future can be a complex subject.  Taking into account future income requirements, taxation, fluctuations in the investment marketplace and your changing needs, it is a complicated area and this has to be married with the highly complicated arena of financial products available to the consumer.

The most important part of the process is to discuss your financial situation with the right person.  The right adviser can talk through your current situation, your objectives and your aspirations to identify the right solution for you.  This is the most important part of finding the right solution for you and should be done with an Independent Financial Adviser, preferably one who is fee based and specialises in investment advice. 

The typical questions you need to think about and talk through are: 

Q. What % of your total liquid capital (excluding emergency funds) does this represent?
Q. What are you seeking from your investment: income, growth or both?

Q. How many years do you expect the capital to be invested for?

Q. What's your view on where inflation will go? Do you know why understanding the impact of inflation is important?
Q. What are your expectations of investment returns, as a percentage per annum?

Q. If you require income now, what percentage return is needed on the investment you are making?

Q.  Do you require the income or growth guaranteed?

Q. When your investment term is complete, what do you intend to do with the money?

Q.  Have you used your ISA allowance this tax year?

Q.  Is your tax position likely to change for any reason in the foreseeable future, or when you retire, if you have not yet done so?

Q.  What are your immediate cash requirements?

 Establishing your attitude to risk is essential to ensure the right solution is found for you and not all advisers do this the same way.  Taking the time to research and find a quality IFA to deal with this will be time well spent.

Peter McGahan, independent financial adviser