Page last updated at 12:00 GMT, Wednesday, 18 February 2009

Ask A Savings Expert

Christine Ross

As part of the Money Matters Roadshow Christine Ross of SG Hambros has been answering your questions on savings and investments.

She took time out from offering advice in the Trafford Centre to tackle a selection of your queries in a webchat.

YOUR QUESTIONS

ANSWERS

My wife and I have about £20,000 coming out in June from ISAs. We are going to by a car, and have about £14,000 left. Should we get another five year ISA with the left over money? Anthony Bacon, Bristol

Please only withdraw the amount you need from the ISAs and not all of it. If you do, you will lose your tax benefits on the remaining sum. If you do not want to reinvest the £14,000 with the same bank then select a new ISA and arrange for the funds to be transferred to your new ISA account. Your intended ISA provider will tell you how to arrange an ISA transfer.

For someone taking early retirement in the next few months, offered the choice of either taking a pension plus a lump sum, or of taking an increased pension and no lump sum, what would the panel advise? Sandra Woods

If your pension is from an employer, and you are happy that the pension scheme will remain solvent and able to pay pensions, then the next consideration will be whether the scheme offers minimum annual pay rises. You also need to consider your state of health and therefore your likely lifespan. If pay rises do feature and you feel relatively optimistic about your longevity, then you may wish to forego the lump sum and take a higher pension.

Conversely, if your pension is a 'money purchase' company scheme or a personal pension plan, then you will almost certainly want to take the lump sum. It is not an all or nothing decision and you can take some of the lump sum, generally up to a limit of 25% of the pension fund.

Would it be advisable to stop paying into a personal pension at the moment, and to pay off debts with the money saved? Peter Hornby, Blackburn

This may be a good idea, depending on the level of your debts and the interest rate you are paying. However, if you are a higher rate taxpayer, you will be receiving generous tax relief on your pension contributions and may simply wish to reduce your pension payments whilst increasing your debt repayments. Before stopping or reducing your pension contributions, please do check if there are any penalties that would be levied by your pension provider.

I am looking at putting £400,000 in a Discretionary Discounted Gift Trust to ease my Inheritance Tax Liability. To do this I have a choice of various bonds which I understand to be high risk investments. Is the bond itself or the company that sells them covered by any FSA protection scheme? Alexander Szczerbiuk, Wimbledon

Your question leads me to ask some further questions. If you are investing the sum of £400,000 in a discounted gift trust, please ensure you are aware of the consequences of investing in a discretionary trust (DGT), and in particular, the fact that your investment exceeds the current inheritance tax threshold of £312,000 (if this is a joint investment this issue may not arise).

DGT's are a popular way of transferring assets outside of your estate for inheritance tax purposes whilst retaining a flow of income payments throughout your lifetime. They often use offshore insurance bonds within which the investments are held and this is an effective way of managing the tax position of the trust's investments.

You do not need to invest solely in the investments offered by the insurance company. It is possible to buy the insurance bond 'wrapper' and have the investments tailored to your needs. The investment bond can buy funds from the various asset managers in the market place. You will be taking on two types of risk: investment risk (the performance of the assets in your trust) and the risk that the insurance company defaults.

If the insurance company were to default, in the case of a UK insurer you would be covered by the Financial Services Compensation Scheme for up to 90% of the value of the assets in the bond. If the insurer is based in the Isle of Man they have a mirror compensation scheme. Dublin based insurers are not covered by a compensation scheme but if you are UK resident when you enter into the arrangement then you may be covered by the UK scheme (ask your financial adviser to confirm this to you in writing before you proceed).

Finally, please ensure that the insurance company carries out medical underwriting before your DGT is set up. HMRC (the tax man) has been known to challenge some cases where they were not underwritten.

With savings rates as they are, would you recommend paying off as much of my mortgage as possible or to keep hold of my savings?Karen Osborne, Birmingham

This is always a difficult one as it depends on a number of factors: if you work is your job secure or could you be forced to rely on your savings to meet income needs if you were made redundant? Do you have an attractive mortgage deal such as a base rate tracker and if so, could you do better keeping your savings invested? Are you likely to need a lump sum from your savings in the near future - for example to buy a car (because car loans generally cost more than mortgage finance). If you do not need to access your savings, and if you are a taxpayer (meaning you would be paying tax on your savings interest), then on balance it would be better to pay off your mortgage.

If you have an account with a bank that is not covered by the FSA regarding compensation, and the government of that country is unable to compensate you, are there any insurance policies you can purchase to reimburse you for the monies lost? Peter Goulding, Solihull

When you save with a bank it is important to know how it is regulated, and which if any compensation schemes apply. Even banks operating in the UK that are subsidiaries of European banks may not be covered by the UK compensation scheme. Savers may first have to claim under the European scheme and then make a further claim to the UK scheme to top up any shortfall.

It is not currently possible for individuals to buy insurance against the risk of default by an institution or government. However, at an institutional level, such insurance does exist. I would suggest instead that you divide your savings amongst a number of different banks, and as far as possible stay within the limits that are fully covered by the applicable compensation schemes.

I have £30,000 to do what I want with, what do you suggest I do in the short term and long term with no risks? Cheryl, Plympton, Devon

Difficult to give you a precise answer without knowing more about your situation - but in the current circumstances there is no such thing as no risk. The lowest risk you are likely to encounter is investing your savings in a cash deposit in a bank or building society. The Financial Services Compensation scheme provides a maximum £50,000 per person per bank, in the event that the bank were to become insolvent, and therefore unable to meet its liability.

So for the shorter term look around for the best savings rate and do take advantage of special introductory offers and the generally higher rates offered by internet-based accounts.

For the longer term, bearing in mind that you don't wish to take any risk, you could look at National Savings, which are guaranteed by the UK government. If you have the view that inflation is going to increase then National Savings index-linked accounts will give you 1% plus the rate of inflation if you pay higher rate tax - or 1.25% plus inflation if you are a 20% tax payer.

Since being made redundant in November last year, and with very little prospect of finding a job in the near future, I would like some advice on whether or not to pay off most of my debts with my savings, or to carry on with what I am doing at the moment, paying the minimum allowed every month. Chris Eddon

First course of action, if you haven't done this already, is to contact all the organisations that you owe money to, and advise them of your current situation. Most lenders will want to agree a payment plan with you that reduces your outgoings but ensures that they are still receiving a regular payment from you.

Secondly, check that you are receiving all the benefits that you are entitled to - it's important to check that you wouldn't lose benefits by paying off your debts (this is unlikely).

Also compare which benefits you might receive if you have no savings, having paid off your debts, against your current position. Although it's always beneficial to have some savings to call on in the event of an emergency, in the long run I do think it would be better to pay off your debts, keeping a small amount of money to tide you over.

Finally - and importantly - having researched your benefits position, you really do need to work out how much income you need to live on. This really will make things clearer.

Do you have any advice for childen's savings? Both our children have stakeholder accounts with a leading Child Trust Fund provider, which we pay a small amount into every month. With the current financial climate as it is, is this the best way to save for them? Mrs Robyn Greenslade, Emsworth, England

Child trust funds are an excellent way to save for when children reach 18. Contributions of up to £1000 a year are tax free. Whilst children are not generally tax payers themselves, money gifted to them from parents can result in interest being taxed if it exceeds £100 a year.

Therefore the Child Trust Fund is a solution to this problem, but if you are considering increasing your contribution do remember that children received the Fund in full on their 18th birthday.

Remember you can change your child trust fund provider too - one of the useful comparison websites to check the best rates is moneyfacts.co.uk.


The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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