Savings and investments Q&A

Bill Cook says "I and my wife have separate savings accounts at a high street bank and have taken steps to reduce these below the �35,000 guarantee level. But we also have shareholdings and uninvested cash in PEPs/ISAs which exceed this amount with the same banks. Are these and mini-ISAs subject to separate additional levels of protection? And what, if anything, happened to Mr. Darling's proposed initiative to further increase the level of deposit protection?

Mini cash ISAs come under the same �35,000 limit for deposits under the Financial Services Compensation Scheme (FSCS), therefore if your cash ISAs are held with the same bank (or banks with same registration) as your other deposits your compensation would be limited to a maximum of �35,000.

PEPs and equity ISAs are treated separately and subject to protection under the FSCS covering investments. The limit is 100% of the first �30,000 and 90% of the next �20,000, i.e. a maximum of �48,000 per person.

Pensions and life assurance have even higher levels of protection, paying 100% of the first �2,000 plus 90% of the remainder.

Regarding further increasing the level of compensation, the banks were not too happy about this and lobbied hard against it.

Paul Cooban says he's interested in investing his stocks and shares ISA in an emerging market, particularly Russia. He's heard mixed reviews about whether this is wise and wants to know your thoughts.

Russia, as with any emerging economy, is a high risk investment. On the pro side, economic and political stability has improved, there is a growing middle class and it is less exposed to any economic downturn in the US than some other emerging markets. Russia also has vast reserves of natural resources, the demand for which will only continue to grow over the longer term.

However, if there is a global economic slowdown Russia, like the rest of the world, will not be immune and so may not perform as well over the shorter term. The long term story for Russia however still looks compelling. As such, I wouldn't recommend investing more than say 5% of your portfolio, unless of course you are a highly speculative investor and prepared to accept the possibility of very high losses.

John Biggs says he's sure we've mentioned in a previous show that it's possible to buy single shares which represent the performance of a particular overseas stock market. He wants to know more about how you'd do this

The investments in question are known as Exchange Traded Funds (ETFs). They are available via stockbrokers and are attractive because of the low total expense ratios and diverse markets you can access. Their popularity has increased since the then Chancellor, Gordon Brown, scrapped stamp duty on non resident ETFs.

Although they are inexpensive, if you are trading frequently or invest regularly, the dealing costs can mount up and the cost advantage over OEICS and unit trusts lost. In addition, their inherent flexibility may encourage you to overtrade; which could be damaging to long term returns. Another issue to be aware of is the currency risk. Many ETFs traded on the LSE are denominated in Euros or US Dollars, with those tracking other regions to EU denominated in Dollars meaning yet another layer of risk where the portfolio is in another currency to the USD.

One final note, whilst China still looks a good long term bet, the short term outlook may not be so attractive.

Joy Haffernan from Blackburn wants to know if she can transfer her cash ISA to her children or grandchildren. She hates the idea of her children having to pay tax on them.

In a word, no. She can however put money into ISAs or child trust funds in their names. She should be aware though that any gifts may have inheritance tax implications

Val Harvey says if you're comparing two savings accounts with the same AER but one pays interest monthly and one annually, would you end up with the same amount of interest/money at the end of the year or would one that pays interest monthly accumulate more interest as you get interest on interest.

AER stands for Annual Equivalent Rate and allows you to compare quoted interest rates on different savings accounts, e.g. where interest is paid annually or monthly. Savings accounts with the same AER will pay the same amount of interest over the year if the interest isn't paid out.

Bernard from Pontefract says he used to have a Tessa which then turned into a TOISA. And now it's becoming an ISA. He already has a mini-cash ISA with another bank. He wants to know whether he will have to cash in his TOISA ISA or whether it can be left earning tax free interest?

All that is changing is the name so keep your savings in your TOISA(ISA) and let the interest roll up tax free. And remember, should you decide to move it elsewhere for better rates be sure to TRANSFER it rather than cashing it in and trying to reinvest the proceeds. Your provider can assist with the transfer.

Tony Jaques says "With a volatile stock market the timing of deciding when to cash in on investments or when to take an annuity could have a significant effect on your retirement income. Can you discuss how to drawdown stock market linked investments to provide income for retirement?

If your investments are in a pension it is possible to drawdown some of the fund as and when required. Changes to pension rules in April 2006 also mean pension drawdown is more flexible than before.

However, drawdown isn't for everyone as it is expensive and there is the risk that investment returns are poor and annuity rates fall further, making future purchase more expensive.

Having the right asset allocation for your needs is very important and when drawing an income, take it from those assets that have performed well leaving others to recover. In addition to drawing an income from pensions you can also drawdown income from other investments such as ISAs, unit trusts or a share portfolio.

Pamela Powell says "We have sold our house and are moving to rented accommodation in Spain with a view to purchasing there in six to 12 months time. Where would be the best place to put the proceeds of the sale which is several �100,000"

In addition to a good interest rate, Pamela should also be aware of the impact of exchange rates on their house sale proceeds and should compare rates offered by the foreign exchange companies. They may also want to consider using a specialist IFA, who can get beneficial rates for clients.

They can also help with finding the best savings accounts. Other issues to consider are the potential for Sterling to weaken further against the euro; which is a possibility although by exchanging now they would have certainty and can take comfort in the fact that property values in Spain have been falling.

They may also be concerned about the levels of protection available for savings in Spain, which 90% of your deposit up to a maximum of 20,000 euros compensation

Pauline Brown says - could you possibly advise on the most cost-effective method of saving �550 per month - I have recently repaid my mortgage and would like to continue utilising this sum for saving. I am a 56 year old female without dependents (although he lives with me my son is 32) and I already have a cash ISA account.

The first thing Pauline needs to identify is what the savings are for, what savings she already has and her tax position. In addition to a short term cash reserve, of between three and six months normal expenditure, she may require other shorter term savings.

If this is the case then she should consider deposit based savings first - maxing her cash ISA for 2008/2009 first and then looking at other high interest bearing accounts. National Savings Index Linked Certificates may be attractive if she is a taxpayer as they are tax free and a good hedge against inflation, although interest rates have just gone down.

Pauline may also want to consider the longer term. Has she build up sufficient pension? Even if she is a non taxpayer she can contribute up to �3,600 per year gross and will receive tax relief (20% for 2008/2009 tax year). The contribution is paid net of basic rate tax, i.e. �2,880. Equity ISAs may also be attractive; however, the most appropriate vehicle and assets will depend on her financial goals, tax position and attitude to risk.

James Monk says when the new rules governing CGT come in, will it mean that it would be better to invest in Growth Funds rather than the customary Income Funds? Perhaps you could explain the different tax regimes for these two kinds of investment.

Don't let tax considerations dictate investment decisions. In some circumstances growth funds may be more appropriate and in others income may be, often a mix of both is required. And remember if you invest via pensions and ISAs, tax is not an issue.

Susan Avis says: "From the 6th April 2008 I understand that there is a commitment to keep the 10% rate of income tax for savings up to �2,230 on top of my personal allowance. As a housewife the only income I receive is generated through savings.

Until now this income has been well within my personal allowance but during the latter part of the current tax year 2007-2008 I received an inheritance which may well take me over the personal allowance this next tax year. I have used up my full ISA allowance this year with the intention of doing so again after the 6th of April after which it is my intention to add to the small share portfolio I already hold.

Would I be able to benefit from this new savings tax as does it apply to share dividends as well as interest on savings in building society and bank accounts?"

Tax on dividends is 10% if you are a basic rate taxpayer so it isn't affected by the changes. The 10% rate will be for savings income up to �2,320 provided your taxable non savings income is not greater than this amount.

Gilly Donoghue from the Dordogne wants to know about what protection is in place for money held in offshore accounts such as on the Isle of Man or Guernsey. She says she pays tax in the UK and on her pension, but has a very small French income which she pays very little tax on. She says it makes sense for her to have money offshore but she wants to know how protected it is.

I checked with my colleagues at Siddalls, a sister IFA company that advises people moving and living in France, Spain and Australia.

Siddalls said It sounds as if Gilly is a French resident, and as such, she would be liable to French taxation on her worldwide income and assets, even if "offshore". The good news is that there are tax-free bank accounts available to French residents if she wishes to avoid French tax, in addition French investor protection is �70,000 per investment.

This is a far higher level of protection than offered in 'offshore' accounts such as those in the Isle of Man or the Channel Islands. Currently the Isle of Man depositors compensation scheme pays 75% of the first �20,000 per depositor, i.e. a maximum of �15,000. Jersey and Guernsey have no formal scheme, although Guernsey has passed enabling legislation but have yet to introduce a scheme.

Gilly should also be aware that if she leaves her money offshore French social taxes also apply at 11% on any investment income such as bank interest, as there is no 'nil' band for social taxes for French residents. Incidentally, she may also be liable for French income tax, as it is only public sector pensions, such as civil service type schemes, and not UK state pensions, that remain taxed initially in the UK and she would normally be required to complete a French tax return showing all her income. She may find it advantageous to take advice.

The opinions expressed are Donna's, not the programme's. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.

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