THE GREAT ESCAPE

Trapped in a poor investment? Afraid of exit penalties? Here’s how to stage...

FINANCIAL choices are not for life. Indeed, loyalty rarely pays. Even when you believe your mortgage provider or your insurer has made it nigh impossible for you to escape, there is usually a route out.

Like Steve McQueen’s character in the movie The Great Escape, there are ways to jump free. Often, the benefits of breaking out will outweigh the penalties, enhancing your finances in the process.

SHARE AND FUND INVESTMENTS

PURCHASES of funds or shares made years ago without the protection of a tax efficient wrapper such as an Isa carry a potential financial sting in the tail.

Recent buoyant stock markets have brought a cheer to many an investor. But lurking in the background is the taxman ready to take a slice of your profits when you decide to cash in.

Tax is charged on capital gains at 10 per cent for a basic rate taxpayer and 20 per cent for a higher rate payer. This tax dilemma can affect someone who inherited shares long ago and those who received shares over many years through their workplace share option schemes. REGULAR spring cleaning can limit unwanted tax bills down the line.

Stephen Womack, director of financial planning firm David Williams IFA in Northampton, says: ‘Everyone has an £11,100-a-year capital gains allowance so it is worth selling enough investments each tax year to soak up the exemption.

‘If you want to stay invested in the same sector, you can rebuy similar investments, such as selling one UK equity fund and using the proceeds to buy a rival one. This sets the clock to zero again in terms of capital gains sums.’

If the original purchase date is uncertain, play it safe by selling shares or funds equivalent to the value of the annual exemption. Or track down the purchase value of the shares through the company’s share registrar or fund manager and work out the sums.

Womack adds: ‘Even if you bought shares a couple of years ago it can be worth selling to take the gains and make use of the annual exemption. You can then switch them to a tax-free Isa and you will not have to worry about gains again.’

Be careful how you sell any investments. If you have owned shares for a while, you are likely to hold them in paper form. This will add to the cost of selling. In some cases, you could pay three times as much to sell paper shares as those held electronically.

For example, broker The Share Centre charges one per cent or a minimum £25 for the sale of paper shares. This compares to a minimum £7.50 for electronic sales.

Best value brokers for share certificate based transactions include Halifax and Barclays Stockbrokers. Among the low cost options for electronic dealing are AJ Bell Youinvest and The Share Centre.

WITH-PROFITS FUNDS

PENSIONS and bonds invested in with-profits funds were bought heavily in decades past. They appealed to investors because providers promised to smooth returns by holding back some profits in years when markets performed well to enhance returns in poorer years.

But many of these investments have failed to deliver and returns on a majority of plans have been stubbornly poor, made worse by high charges. Investors can feel trapped because a ‘terminal’ bonus is applied to plans on maturity and will be lost if cashed in early.

Plus an early exit penalty called a ‘market value adjustment’ may also apply, especially if stock markets are in freefall when you sell.

Another drawback is many withprofits funds are now closed to new business, reducing the incentive for fund managers to manage the underlying investments well. MANY experts argue investors can replicate a with-profits strategy on their own, more cheaply and tax-efficiently. They can do this by putting a range of diversified investments in an Isa or Self Invested Personal Pension.

For those considering an exit strategy, there is an argument for moving soon.

The stock market is currently high, meaning exit penalties are less likely to be applied.

But savers should hold off if they believe their insurer is about to add value to their with-profits plan through the addition of an annual bonus.

Investors should check what guarantees they might give up if they exit. Also, higher rate taxpayers need to factor in possible tax charges on any gains.

If unsure of the next step, seek independent financial advice. Find a qualified adviser at websites unbiased, vouchedfor or financialplanning.org.uk.

PENSIONS

MILLIONS of retirement savers have old pension plans that carry exit charges as high as 10 per cent.

The good news for those wishing to move elsewhere or exercise their rights under new pension freedoms, is that such excessive charges will be banned from April.

Under the new regime, the maximum that a pension provider can charge to get out of an old pension is one per cent. Some providers, including Scottish Widows, have already scrapped such penalties. TO BE sure of avoiding exit penalties, delay any move until April. But before making a switch, check closely what you might be giving up.

Many older plans carry attractive promises, including guaranteed growth rates or annuity rates of up to 12 per cent – as much as three times standard rates available now on the open market.

Find out more at pensionsadvisoryservice.org.uk or seek the help of a professional adviser.

FIXED-RATE MORTGAGES

BORROWERS who took out a longterm fixed-rate mortgage a few years ago to ensure predictable repayments might not feel so happy now, with rates tumbling to record lows.

Fixed-rate deals tie in borrowers with hefty early exit charges, sometimes as high as five per cent of the value of the loan. This charge often applies throughout the fixed period. NOT all exit penalties are onerous and some reduce

as each year passes. David Hollingworth, of mortgage broker London & Country, says that a borrower who took out a popular fiveyear fix with Nat West three years ago at a rate of 4.89 per cent would see their monthly payments fall from £929 to £691 by moving to a fee-free, two-year fixed rate with Barclays at 1.84 per cent.

This assumes their property value has grown, allowing them access to the cheaper deal.

If the remaining loan is £150,000, that is a monthly saving of £238, which would total almost £5,700 over two years.

The three per cent early repayment charge on the old loan would cost £4,500, meaning a net saving of about £1,200.

Leave the switch until July and the exit charge falls to 2 per cent – though who knows what mortgage rates will be then.

To work out if a switch makes sense, ask a mortgage broker or as a first step try London & Country’s calculator at landc.co.uk/calculators/compare-two-rates/

LIFE INSURANCE

POLICYHOLDERS with life insurance often feel trapped. This is because they believe that if they cancel a policy in favour of a new one, the premiums will be higher because they are older. But this is not necessarily the case. IT IS possible to cut premiums by rearranging cover through a discount broker. Also, those who were smokers when they took out a policy but have since given up can also shave premiums by taking out a new policy.

Ian Williams is managing director of discount broker Cavendish Online. He says: ‘Even if someone has had a policy for a few years they may be able to save money by taking out a new one.

‘The cost of life insurance has decreased over the last decade so even someone whose circumstances have not changed may still be able to cut their premiums.’

Williams warns: ‘Do not cancel an old policy until the new one is in place.’

Compare deals using a discount broker or comparison website such as MoneySupermarket or payingtoomuch.

Using a financial adviser will usually cost more but they can help you choose the right policy.