Q. With all the recent announcements regarding proposed changes to the NHS Pension Scheme, I have heard that the actuarial reduction percentages have changed for members that are looking to take benefits prior to normal retirement date.

Can you please clarify the position?

A. The good news is that the percentage reductions have reduced slightly. As you are a 1995 section member, let’s look at how you would be affected.

Prior to the change, if you were to take benefits at age 55 your pension would be reduced by 24%, with the lump sum being reduced by 16%. Now the figures are 22/15%, which may not appear to be a big difference, however if you have accrued a pension of £40,000 pa by age 55 and decide to take the benefits you would now receive an additional £800 pa.

You are able to take pension benefits from age 50 or 55, depending upon various factors. Any pension paid to you will increase with inflation each April, although this only applies from age 55.

You can read full details at the NHS’s website.   

Q. Having inherited a sizeable sum of money, I was considering investing some of it into the stockmarket.

My Bank offered a free meeting with one of their advisers, who showed me various graphs showing that this was a good idea over, say, 5 years or more, and recommended their Bond.   

I was quite comfortable with this, but then asked about the charges. The adviser told me that his advice was free, and “don’t worry about it”.

Needless to say I found this strange. How on earth can they run a business without charging?   

A. As you say, it would be very strange if this were true.

An undercover investigation by consumer organisation Which? has found that “Bank and Building Society advisers are persisting in peddling the myth that commission-based advice is ‘free’, and providing inappropriate advice in the vast majority of cases”.

The investigation covered 37 advisers, and Which? said only five of the advisers it investigated gave appropriate advice, while the ”majority demonstrated a poor understanding of investment risk and made misleading statement about the features and costs”.

We think this says it all, and would simply suggest you speak to an Independent Adviser rather than policy salespeople.

Many Independent Advisers also offer an option to pay for their services via a fee, rather than commission. Remember, commission in an investment product simply makes it more expensive via higher charges – in effect you buy the product at ’retail’.

When the commission is removed you’d be buying it at a ‘wholesale’ price, but of course you have to factor in the fee paid to your adviser. 

Q. You recently covered the impact of investment charges that all investors face when they put their money into funds within personal pensions and investment based Individual Savings Accounts.

What are these costs and where can I find out more about them for the funds that I invest in?

A. Investment costs/charges is certainly a ‘hot topic’! In fact, this very topic was discussed in detail during a recent episode of the BBC’s MoneyBox.

The first thing to say of course, is that the costs apply regardless of how you hold the funds that you invest in, i.e. you pay costs that are held in an ISA as well as in a Unit Trust held outside of an ISA.

On a typical fund, the costs are:

• Annual Management Charge, paid to the fund management company, can range between 0.1% to 2% pa
• Total Expenses Ratio, includes legal fees, auditor fees and other operational expenses of the fund, can typically range between 0.1 to 0.4% pa
• Portfolio Turnover Rate, which is a measure of how frequently assets within a fund are bought and sold by the managers, the range can vary – the average costs added to a fund is 1.3% pa (Source: Financial Services Authority Occasional Paper 6).

The first two should be relatively easy to find. You will usually find the information on a fund fact sheet or you can ask the fund manager directly.

The Portfolio Turnover Rate can be a little harder to track down (and they are not published for pension funds). You can ask the fund manager where you can find it – it will usually be available in what is known as the ‘Simplified Prospectus’.

Unfortunately, the Simplified Prospectus is in the process of being phased out and with it’s successor, the Key Investor Information Document (will be introduced by July 2012 for all funds), fund management companies will NOT be required to disclose the Portfolio Turnover Rate.

We believe this is a step backwards as it will allow fund management companies to be less transparent about the true running costs of their funds.

Of course, it could be argued that charges are less important if the fund managers concerned are providing their investors with the sort of returns that make the charges an afterthought.

Unfortunately, many funds do not even beat the benchmark (which could be the market index) that they are compared against on a consistent basis.

This has been covered many times by various journalists, such as Paul Farrow who is personal finance editor at the Telegraph Media Group and discussed this in 2010.

Q. I have heard that HMRC are going to be targeting owners of holiday homes abroad.

I know several colleagues who have invested in property this way. Is this something that should unduly concern them?

A. With the Office for National Statistics revealing that one in seven people in their fifties or sixties have a second home; this is a tempting target for the tax man.

Apparently a 200-strong team of investigators are to tackle tax evasion on holiday homes and in particular they are targeting the wealthy that earn more than £150,000 a year.

The internet makes it easier for investigators to check on people, and tax exchange agreements with other countries mean it is far easier for the taxman to access information.

So it’s clear that this is now going to be looked at more closely with British tax returns checked to identify “those who do not appear to be declaring the correct income and gains from the property” say HMRC.

This will include owners who rent out their property to friends for relatively small sums.

Therefore any owner of a holiday home who rents it out should have nothing to worry about – as long as they ensure all rental income is declared properly!

Q. With future uncertainty about the economic outlook, what would you say is one key factor when investing disposable income and any capital I have available?

A. As you might expect, there are a number of factors that you should consider.

If I had to pick one, it’s investment charges.

We’ve written about this topic many times during the last few years (see below) and the message remains the same.

Reduce costs to a minimum so that your invested capital does not have to work as hard.

It’s a logical approach if you think about it.

All other factors being equal, for every 1% pa of charges/costs applied to your invested ‘pot’, your returns must cover this 1% to stand still.

A number of funds have high charges, which can be avoided if you do your homework.

Our recommendation is to invest in funds that aim to provide you with the return of the stock market, rather than trying to beat the returns of the market.

These funds tend to have lower charges than those that employ an ‘active management’ approach.  

Of course, there are funds that will promise this (and some do beat the market), however the difficulty is predicting which funds will beat the market in future years (crystal ball time!).

A recent article appeared on the Daily Telegraph’s website on this very subject which makes interesting reading.

Some past articles that we’ve written are:

Investment Costs – What Is The Real Deal?

Investment Costs – Are They Important When I Invest?

Q. I am a 58 year old Consultant who had a family quite late.  As a result we have 3 children either doing A levels or at University.

We plan to pay all their course and living expenses and were wondering about taking out a life policy on my life for, say, the next 7 years ‘just in case’. I ask in particular as I plan to take my NHS Pension at age 60, and therefore lose my Death In Service protection of around £250,000.

We also have plans for the lump sum from the pension, as we want to buy a property in Spain.

I would imagine that at my age such cover would not be cheap, but would feel a bit more secure if we had some insurance.

Is this a sensible approach to take?

A. This is an interesting question. the first thing to say is that we would recommend that you consider an overall financial strategy that includes this issue.

However, just looking at this question on its own, there is something vital that you will need to include to enable you to come to a conclusion on whether your family would ‘have enough’ in the event of your death.

This is because that although you point out that your Death In Service protection will end, there is a little known rule that will still give you life cover based on the size of your pension.

You tell us that your pension is around £45,000 per annum at age 60. On drawing this, the rule is that you will have 5 times your annual pension in life cover, which is a £225,000 lump sum from day one.

This then reduces every day by the amount of pension paid to you.

So for example this would mean after one year, the cover would be £225,000 minus £45,000 = £180,000. This would continue until there is no cover left at your age 65.

This could well be ideal for you in your situation, and you can now do your sums with this protection now built in.

Q. In light of the recent falls in Stock markets around the world, should I consider selling my equity (share) holdings and buying safer assets?

A. This is a great question and we totally understand why you are asking it at this volatile time for world stock markets.

As you’ll know, there’s a great deal of psychology involved with investing.

When values fall, sometimes the feeling can be to sell to avoid any future potential losses.

The danger of course is that you can end up selling when asset prices have fallen, therefore crystallising losses – in effect the opposite of rebalancing, which aims to sell when prices have risen and purchase more of the assets that have fallen in value.

It’s also important to view your portfolio as a whole over the longer term. We know that the bond funds you hold are doing exactly what we’d expect in times of volatile equity markets. They are the insurance policy to fall back on.

For every c4% fall in equity values, the bond funds only have to provide c+1% return to compensate (as they are a near 4:1 ratio). When it comes to the UK equity markets, we’re back at the same level as 12 months ago.

When investors do sell and sit on the sidelines, they are likely to re enter equity markets when prices have risen again and they have missed some of the best days.

This is why our investment philosophy and discipline is for clients to remain invested throughout the periods of volatility.

Lastly, you should not view your investments as separate from your overall financial goals. After all, you are expecting to utilise some of your invested capital to help fund your retirement so you should ensure that you are only taking risks that you are comfortable with as you approach retirement.

Q. Over the years I have used various financial advisers. A lot of the time they call me with a new idea on investing that involves putting money into an ’exciting new product’.

I have had my fingers burned on this sort of thing before, but still find the ideas interesting as they sound so good when an adviser presents them.

You seem to believe in avoiding the exotic, but do you ever look at these types of new products?

A. ‘Pushing the new thing’ has recently been discussed in one of the financial publications we read called Money Marketing.

Here, a fellow planner was quoted as saying:

“Recently, we have relished our boring approach to investment advice. By keeping things simple, we have been able to avoid the exciting funds which have failed so spectacularly. It seems that the desire to impress clients is the root cause of bad investment advice.”

We couldn’t put it better than that!

Keeping it simple with proven risk assessed passive portfolios at a low cost has been our approach for many years, and has stood up well in good and bad times.

Yes we do look at all types of investments, and are ourselves approached by fund managers with new ideas.

But why take more risk than you need to? It simply does not make sense to us, and we aim to get our clients from where they are to where they want to be with the minimum risk.

Q. It seems that NHS / Private dentists can easily fall foul of the new annual pension allowance. It is interesting to know that if the £50,000 annual limit is breached we can use up unused allowance from the previous 3 years.

In the light of this, can you please advise if we can use up any of our unused allowance from the £255,000 pots from the last three years?

A. Unfortunately, the new rules for carrying forward unused allowances initially use a “notional” annual allowance for the years 2008/09, 2009/10 and 2010/11 of £50,000.

That is they assume that the new, reduced annual allowance has been in place for those years.

From these notional allowances are deducted the actual contributions in those years. In the case of defined benefit schemes, such as the NHS Pension Scheme, these are calculated using the new basis applying a factor of 16 to pension accrual over increases in CPI for the September prior to the year in question.

The relevant figures for each year are:

• 2008/09 1.9%
• 2009/10 5.2%
• 2010/11 1.1% 
• 2011/12 3.1%

You must use the current year first.

I hope this helps with your query.

Q. I hope it’s a long way off yet but my parents, who are now in their seventies, have become increasingly worried about Inheritance Tax.

They had successful careers, and live in a very large house worth a lot of money. It occurred to me that what with property values having taken a hit, how does the Revenue know that the value quoted for Inheritance tax as part of their estate is correct?

Surely this can be manipulated to reduce tax?

A. As a house is usually the highest value asset when people die, the beneficiaries could well be tempted to undervalue a property.

This route is, as you’d expect, well known by HMRC! In fact the valuation of properties is becoming increasingly challenged by them. Statistics for 2010/11 show that 16,000 estates paid inheritance tax, around 3% of all estates.

Of these 16,000, 3,441 had the valuation of the property increased, with a further 800 having it reduced. Needless to say there are penalties if HMRC feel that a low valuation was deliberate.

Typically, this penalty would be an extra 30% of the tax deemed to have been lost to the Exchequer, and in the current climate of the taxman raking in all he can, this clampdown is likely to continue.