John HusbandQ: I am about to buy an annuity with my personal pension plan, but smaller providers offer the best rates. What would happen to my pension if they went bust?
A: The recent financial crisis has shown that size alone is no guarantee against failure, but if a provider collapsed the Financial Services Compensation Scheme would ensure you get at least 90% of your pension. So, if a smaller provider offers you 10% more than a larger firm you’d still be no worse off by going to them.
Q: I understand that any gifts made at least seven years before I die are exempt from Inheritance Tax. Is there any way to avoid the tax if I die sooner?
A: No, but you could buy a relatively cheap seven-year reducing-term life insurance policy to cover any potential tax liability, which should be written in trust for the receiver of your gift. If you paid the premiums they could count as an extra gift, but you can get round that if they come within your yearly £3,000 tax-free gift allowance. Or, they can be counted as normal expenditure if they’re paid out of your income. Alternatively, the recipient could pay the premiums.
Q: About 20 years ago I was talked into opting out of the State Second Pension, then called SERPs, and using the National Insurance rebates to buy a personal pension. Now I’m nearing retirement, how can I find out what has happened to it?
A: Your pension provider should send you a yearly statement. If you have lost touch and cannot remember their name, the Pension Tracing Service (0845 6002 537), should be able to help you.
Q: I need to make out a new will and can no longer trust my son to be my executor. Who can I appoint instead?
A: Anyone you like. Most people choose the main beneficiary because the work involved can be quite demanding. It is usual to ask a close relative or friend but, if you do, it is a good idea to appoint two in case one dies before you. If your will is at all complicated, consider a professional, such as your solicitor, or make them joint executor to help the person you have chosen. If you intend to use a solicitor to draw up your will, ask for an estimate that includes the likely cost of any work done as your executor.
Q: The price of gold keeps rising. Would you recommend investing in gold either directly or buying shares in gold mining companies?
A: Gold is a popular refuge in times of international uncertainty such as we’ve seen recently. It has reached a record $1,260 (£850) an ounce this year. Some investors have made a lot of money buying gold but many more have lost. It previously peaked at $800 an ounce in 1980 when relations between East and West reached a low point after Russia invaded Afghanistan. Allowing for inflation, that’s equivalent to nearly £1,600 today. That triggered a stampede to buy gold bars and coins such as sovereigns, but the metal halved in value in the more stable years that followed. The price may go higher still, but I see buying gold as a pure speculation, not a sound long-term investment.
Q: I have an opportunity to go into some excellent sheltered accommodation offered by a local charity but I would have to sell my home to pay the rent and other charges. With savings rates so low it will be difficult to earn enough interest to meet those charges. Can you suggest a solution?
A: One possibility might be to use part of the money from your house sale to buy a “Purchased Life Annuity”. Unlike an ordinary annuity funded from a maturing pension plan, the income you would receive is partially (not largely, as depending on age the tax-free portion will vary) tax-free. That’s because the Government treats it partly as a refund of the capital you used to pay for it. To find out more, talk to an independent financial adviser.
Q: What happens to my pension if I die before I collect it?
A: Death benefits from private pension schemes vary, so you should find out exactly what yours provides. Occupational schemes may offer lump sum payments to a spouse and dependent children plus a reduced pension. If you are unmarried, payments to any other dependants may be at the scheme trustee’s discretion. Most schemes offer a form you can complete to express your wishes. Money purchase schemes may pay out a lump sum equal to your fund’s current value or simply a return of contributions, plus some interest. Personal pension plans may include dependants’ benefits or offer them as optional extras for which you have to pay.
Written by John Husband, this article was first published in the August 2010 issue of Saga Magazine. John's opinions are his own and for general information only. Always seek independent, professional, financial advice.