Personal finance: Ways to keep the taxman from the door

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Indy Lifestyle Online
Name: Harriet Craven

Age: 52

Occupation: University lecturer

The problem: She recently took early retirement, receiving a lump sum of about pounds 30,000, which is in Britannia Building Society.

Harriet receives a small monthly pension, enough to meet bills on her home, on which she has a small mortgage, and she works part time. She owns 450 shares from Woolwich Building Society's stock market flotation, which are invested in a Fidelity PEP. She has a very small endowment with Sun Life. Harriet would like to invest in a tax-efficient way. The investment should be for growth initially, but with the option to provide an income in the future when fully retired.

She is also considering taking in a lodger or letting the entire property to augment her income. Her son lives at home with her.

The adviser: Fiona Price, managing director, Fiona Price & Partners, independent financial advisers, 33 Great Queen Street, London WC2B 5AA, phone 0171-430 0366.

The advice: You have a current account with NatWest with around pounds 1,000 in it but if it starts to build up any higher, it should be transferred to your savings account where it will earn a higher rate of interest. You also have a savings account with Britannia Building Society with around pounds 27,000 deposited. We recommend you maintain a minimum of three months' net income for emergencies.

We would recommend you move to Britannia's Capital Trust 30-day notice account. This is a postal account paying a reasonably competitive 6 per cent gross on deposits over pounds 5,000. Alternatively, you may wish to move your funds to Abbey National's Bonus Postal account, which pays 7.2 per cent gross on balances from pounds 2,000 to pounds 9,999.

You should also consider starting a Tessa (tax exempt special savings account). Tessas are bank or building society accounts where deposits held within them for a five-year term are not subject to income tax. You can only have one Tessa at any one time and the amount that may be invested is limited to pounds 9,000 over the five-year term.

Royal Bank of Scotland is offering a gross annual rate of 7.65 per cent and we recommend investing pounds 3,000 in it.

National Savings are risk-free government products which can be purchased through the Post Office. This investment is designed to provide tax-free capital growth over a five-year period. The return will match inflation, enhanced by an additional 2.75 per cent per annum. We recommend you invest pounds 3,000, but first read our advice below on a single-company PEP.

On the investment side, you transferred your Woolwich shares into a PEP with Fidelity, which offers one of the best plans for windfall shares and makes no charge until 1999. As you have already invested with Fidelity for the current tax year, you may not use any other provider for your general PEP. We recommend a pounds 6,000 investment in a Fidelity PEP. We suggest Fidelity's WealthBuilder fund.

In addition to your allowance of pounds 6,000 for a general PEP, you may contribute pounds 3,000 into a single-company PEP. We suggest you consider investing pounds 3,000 in a secure single-company PEP as an alternative to the National Savings index-linked certificate.

We recommend the HSBC International PEP Plus. This is a 5.5-year fixed- term contract and pays your money back at the end. In addition, you will achieve the average growth of a range of stock markets over the period. If you remain invested for the full term, you receive a loyalty bonus of 20 per cent of the growth achieved.

We also recommend you invest pounds 8,000 in a with-profits fund. The value increases each year through bonuses which, once added, cannot be taken away. Furthermore, a terminal bonus may also be payable.

Other than the small Sun Life endowment, you do not have any life assurance, nor is it necessary. Your son would benefit from your estate in the event of your death and hence would have sufficient assets for his needs.

You have no disability insurance but your employer will continue to pay your salary for six to 12 months if you are unable to work. You may want to consider Permanent Health Insurance. Premiums for a policy paying about pounds 700 a month would cost about pounds 40 a month.

Your house is valued at around pounds 220,000. You are concerned that you might have to sell your house to fund nursing home fees if you required long- term care. There are a number of insurance policies that can provide an annual income to cover the cost of the fees and these can be funded by means of a regular premium or lump sum. We would be happy to provide a recommendation for this kind of cover but if your primary concern is the loss of your home we would suggest you consult your solicitor.

Taking in a lodger can prove tax-efficient. You are permitted to receive up to pounds 4,250 annually in rent from a lodger without paying tax. If you rent your home, you will be subject to tax at your marginal rate.

Your total estate is worth more than the threshold of pounds 215,000 and hence inheritance tax at the rate of 40 per cent would be payable. It could be covered by assets such as bank and building society accounts and investments.

The verdict: Fiona's advice was very comprehensive. The fact that I had options to choose between was useful.

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