Ask the experts - your questions answered - October 2006

Answer: The simple answer is yes, probably. But here come the caveats; I'm assuming that the employer scheme is a Group Personal Pension with stakeholder charging, and depending upon when the plan was set up the maximum annual management charge will be either 1% or 1.5%. It's not always the case that older personal pensions are cheaper, so you need to find out about the annual charges on your personal pension before transferring.

Check also whether there is a penalty for moving from one plan to the other, older plans often had a mechanism for providers to charge exit penalties. Additionally, fund choice under the group plan may be restricted, whereas there could be more choice under the personal plan.

In terms of benefits at retirement, it doesn't matter whether you combine your pensions now, or sometime in the future, the amount of tax free cash you can take is the same. Base your decision on charges and appropriate fund choice rather than on convenience of having everything under one roof, if necessary seek independent advice.

Dennis Hall APFS AIFP, Chartered Financial Planner

4. Daniel in Southampton aks: If I dont have a deposit for mortgage would having a guarantor bring the monthly repayments down on my mortgage?

Answer: If you have a close family relative who is able to guarantee your mortgage payments, this should mean that you could borrow more than your standard income multiple would normally allow. By having a guarantor you should therefore be able to access a wider range of mortgage products and as a result of this, get a better deal in terms of mortgage rates and repayments.

I hope this is of interest.

Contact: Jason Witcombe APFS, CFPCM, Chartered Financial Planner, Evolve Financial Planning. Tel: 020 7956 2070, Email: jason.witcombe@evolvefp.com, Web: www.evolvefp.com

5. Robert in Torquay: In view of the volatile market, and interest rates falling, should i still be into HBO Corporate Bond Fund?

Answer: In general terms falling interest rates and equity market volatility should be good for Corporate Bond funds as the relatively stable fixed income becomes more attractive in such markets and the value of the interest becomes proportionately greater as alternative interest bearing investments (such as banks) start to pay less.

When most investors mention fixed interest investments they actually mean fixed term bank deposits. Fixed interest securities are actually loans to Companies (corporate bonds) or Governments (gilts). They provide a fixed rate of interest for a fixed term.

On maturity investors receive the return of their original investment capital. However, the big difference is that these securities can be sold on the open market during their term in much the same way as company shares. Market conditions such as interest rates play a big part in determining how much somebody will pay to buy your holding.

Other factors such as inflation will play a part in determining the value of investments, as will the security of the borrower. Strong financial companies are more likely to be able to pay their interest obligations while weaker or distressed companies are more likely to default not only on the interest payment but also potentially the final return of capital.

Therefore the make up of any corporate bond fund will have a bearing on the future prospects.

It may be helpful to take a quick look at how fixed income securities actually work. (This can be included with the answer if desired).

Imagine you invest £100 in a Corporate Bond with a 10 year term. You have actually lent £100 to the company for 10 years. This loan pays interest of £5 each year. Clearly this equates to an interest rate of 5% in our example. If the bond is left to run until maturity you would have received £50 (£5 x 10 years) in total interest payments plus the return of your original £100.

If interest rates when you invest are 3%pa the 5% being offered by the corporate bond is clearly attractive. If you want to sell your bond during its term and interest rates at the bank are still 3% you would expect to get close to the face value of the bond.

However, if interest rates on the open market have fallen to say 2% the £5 fixed income provided by the bond is now more valuable relative to other investment options. As a result it may be possible to sell your bond on the open market for more than the face value of £100.

If on the other hand interest rates increase to say 10% no one would want to invest £100 in a bond to receive £5 interest when they can simply put the money in the bank and earn £10 so you would be unlikely to be able to sell your bond for the full face value of £100.

I do not believe any investor should be trying to second guess markets by holding a single asset class such as corporate bonds. The only rational investment strategy is to diversify and invest some money in each of the major asset classes (Cash, Fixed Interest, Property and Equity).

Any attempt to try and time when to be in or out of each individual asset class should be avoided as it is a sure way to sabotage your investment portfolio - even the experts get it wrong on a regular basis.

Alan Dick, Partner Forty Two Financial Planning

6. Lynda in Fleetwood asks: I have £27,500 from my late husband's retirement investment plan which I need to purchase an annuity with. Can you advise the best firm to place the money with? Apparently, as it is protected rights, I can't take the lump sum even though my husband was only 50 when he died.

Answer: The basic rules are as follows...

On death, priority is always given to a widow/widower or surviving civil partner (termed a survivor) and a pension must be paid to them.

If the member has protected rights which he has not yet taken and he dies leaving a survivor, then the protected rights fund must be used to provide a pension to the survivor. This pension could be in the form of an annuity, USP or even ASP depending on the age of the survivor.

If buying a survivor's annuity, there is no requirement for escalation on the pension (though it could be included) and the annuity cannot have a guarantee period on it (compared with the 5 year guarantee that the member can opt for when buying their annuity). It is only if there is no survivor on death that the protected rights can be paid out as a lump sum.

This explains why you are not entitled to a lump sum from your huband's policy. You must have a pension and this can be provided by the scheme that your husband belonged to or an alternative provider if they are able to offer you a better rate. This is known as the Open Market Option.

The process which you need to go through is to obtain a quote from the current scheme for the pension which they will provide to you as well as a quote for the Open Market Option Fund. Once you have received the quote you should then take advice from an independent financial adviser specialising in pensions who will be able to review the market for you to see if it is possible to improve on the income.

Christopher Wicks ACII ASFA Certified Financial Planner, Director N-Trust Limited. Telephone: 0870 420 1281, Web: www.n-trustgroup.co.uk

7. Tommy in Mid Glamorgan asks: My wife and I now own two properties. How can we avoid paying CGT on both properties? ie Can we elect to move into either property for a short time making this our main residence and if so how long will you have to stay in the property and what way should we own the properties ie jointly or other. Thanks, Tommy

Answer: There is a wide range tax planning strategies available which could help to reduce any potential tax liability in relation to property ownership.

When an individual disposes of their main or only residence, the gain for capital gains tax (CGT) purposes may be exempt. If an individual has two or more properties they can then chose to elect which is to be their exempt residence for CGT purposes, however this property must be an actual residence (even if it is not their main residence) and not an investment property.

If an election is not made to the Inland Revenue within two years of the date that the last property was acquired, HMRC may decide which property is deemed to be the individual's main residence. It is worth noting that married couples living together only get one main residence between them, and therefore main residence election is made jointly.

Also there are periods of absence during ownership that will be treated as occupation (whether living there or not) and therefore exempt from CGT - of which the 2 main ones are the last 3 years if the property has been the main residence at some point during ownership and the first year before taking up residence. So by combining a selective election of residence carefully with allowable periods of absence it is possible to successfully mitigate a potential CGT liability.

For married couples there are also potential benefits of joint ownership of a property that should be considered. Rental profits from a jointly owned let property can be divided equally in order to utilise two sets of personal allowances and basic rate tax bands, which may potentially reduce any overall income tax liability.

And when the property is eventually sold both spouses would also be able to deduct the annual CGT exemption from any gain on disposal (assuming it has not already been used elsewhere) which could have the effect of potentially reducing any overall capital gains tax liability.

Before deciding on a course of action, it is always advisable to seek professional guidance specific to your particular circumstances.

8. E.M. Lambert in Warwickshire asks: How do I work out capital gains tax liability as a retired person? When financial institutions pay us interest they always deduct tax... how do they know we are liable, and, how do WE know whether we are liable? Do we have to work something out from our tax coding ? Thanks

Answer: Whether you are retired or not, a capital gains tax (CGT) liability is based on total gains made in a tax year less any capital losses. Taper Relief is then applied to this, which has the effect of reducing the net gain - for non-business assets (i.e. an investment property) it is applied after two complete years of ownership and can reduce the gain by up to a maximum of 40% (after 10 years) - however Taper Relief is due to be withdrawn after 05/04/2008.

Finally the annual CGT exemption (currently £9,200 for an individual) is deducted to give an overall liability which is then taxed as the top slice of personal income. Capital gains are taxed at a rate of 10%, 20% or 40% (40% for trustees). It's worth noting that in the Pre-Budget Report the Chancellor announced that post 05/04/2008 CGT will be charged at a single flat rate of 18%.

In relation to income tax, while it is true that most deposit based accounts pay interest after basic rate savings tax (currently 20%) has been deducted, there are accounts available (for example National Savings & Investments Income Bonds, Investment Account and Easy Access Savings Account) where interest is paid gross. However this does mean that income tax is still liable on these accounts and any interest paid should be declared on your tax return.,/p>

If too much tax has been paid it can be reclaimed however if you've not paid enough there will be a further tax liability (i.e. for higher rate tax payers who will be liable to an additional 20% tax on interest paid net or for anyone if interest is paid gross). It is possible to avoid having tax taken from interest unnecessarily by completing a R85 form which tells your bank or building society to pay interest without deducting tax.

If you want to be able to work out how much tax you should be paying the starting point should be your personal allowance. For an individual between 65 & 74 after 05/04/2008 it will be £9030 and broadly speaking income exceeding this will be liable to tax (subject to other limits & allowances). You can find details of tax rates, limits and allowances on www.hmrc.gov.uk.

9. Derek asks: I currently hold an ISA bond. Is it possible to surrender it before its term expires? if so what is the penalty?

Answer: I'm afraid that 'ISA Bond' is too generic a term to give a precise answer, as a 'bond' can mean 3 different things.

It can be used to describe a deposit based account with restricted access over a fixed period, normally offering a fixed rate over its term. A 'bond' can relate to fixed interest securities which are issued as debt and provide a fixed interest determined at outset and are repayable at some point in the future, such as gilts or corporate bonds.

And finally the term 'bond' can also be used in reference to an investment bond which is a type of investment wrapper in which different types of investment can be held, so you could have a bond invested in bonds!

Bearing this in mind my initial recommendation would be for you to call your ISA provider and ask for details specific to your account or to try looking at the plan's Terms & Conditions (that should have been issued to you in writing at the time you took out your plan).

ISAs are tax-free and so there are no income or capital gains tax implications on encashment, however it is entirely possible that your plan provider may impose some type of penalty or charge applied on early surrender. If your plan is a 'Cash ISA' it will be a deposit based plan and the most likely type of penalty would be a loss of interest, so for example early withdrawal might lead to a loss of 30 days interest.

If your 'ISA Bond' is a 'Stocks & Shares ISA' then it will almost certainly be invested in fixed interest securities and this would mean that the most likely penalty would be in the form of a fixed rate (sometimes reducing) charged on any capital withdrawn before a specified date. If this is the case it would normally only apply over the first five years of the plan - with no penalty for withdrawal thereafter.

Contact Details: Dan Clayden APFS, Director - Clayden Associates, www.claydenassociates.co.uk Tel: (01364) 643004 Fax: (01364) 644297 Email: info@claydenassociates.co.uk