Questions of cash

Right age to get out of Equitable
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The Independent Online

Q My husband and I have Equitable pensions, are in our late thirties and have held the policies for three years. Can you help us decide what to do with them? We have approached three IFAs, who have given us different advice. Should we transfer the policies, leave the funds and start again or stay with them? KS, Brentwood

Q My husband and I have Equitable pensions, are in our late thirties and have held the policies for three years. Can you help us decide what to do with them? We have approached three IFAs, who have given us different advice. Should we transfer the policies, leave the funds and start again or stay with them? KS, Brentwood

A Equitable said at its annual meeting this week that it was solvent, had always been so and intended to stay that way. The leading analyst of the society, Ned Cazalet, said Equitable's own return showed it now had almost no cushion against further liabilities, putting its future in the hands of the bond and stock markets.

Tom McPhail, the pensions research manager at Hargreaves Lansdown, believes Equitable was "extremely unlikely to become insolvent". He adds: "It is fair to say the ship has stopped sinking, but only because it is now resting on the bottom."

He said his firm was receiving increasing requests from Equitable members to transfer out of the with-profits funds. "Returns are likely to significantly underperform the market average, so the ongoing message to long-term policyholders is to think carefully about whether it is worth leaving their investments in the with-profits fund."

The decision for an individual is difficult: generally, older people with larger savings stand to lose more by transferring out. Investors often stay in poorly performing funds to protect bonuses, but Equitable's situation means there is little prospect of bonuses. Clive Scott-Hopkins, of the IFA Towry Law, said your action must in part depend on which of Equitable's funds you are invested in. The Halifax/Equitable managed fund is fine, but the with-profits fund is under-reserved, has a low exposure to equities, with an ongoing net outflow. Mr Scott-Hopkins says you should not have been advised to put all your money into a with-profits fund, and should split your pension arrangements 50/50 between with-profits and managed funds.

You should stop contributing to Equitable's with-profits fund and, on balance, given your age, you should accept the 14 per cent penalty and transfer existing funds out. You will need to take detailed financial advice. Perhaps you should re-examine the advice of those three IFAs and decide who you trust most.

Q Peter Miller's reply to ID's complaint about low annuity rates (Questions of Cash, 18 May) claims an annuity is better than a deposit as the interest on the latter may fall to zero. But how about PIBS, safe as houses and yielding more than 7 per cent in perpetuity? Yes, if interest rates soar the underlying investment is eroded, but at least there will be some value left, unlike an annuity, and if interest rates fall to zero, you hit the jackpot. DS, Wantage

A PIBS are permanent interest-bearing shares, issued by major building societies to pay for capital investment. Almost half of the total outstanding PIBS have been issued by the Nationwide. It is misleading to talk about them as being as "safe as houses", because in the unlikely event of one of the societies collapsing, you may not get anything back.

The high rate of interest recognises that holders have the last call in the event of a business collapse and are not subject to a depositors' protection scheme. It seems unwise to use them for large investments for retirement, though they are good products in a balanced portfolio.

Sohan Jheeta, of Personal Investment Planning Services, an IFA, says: "PIBS pay a fixed rate of interest, unlike the ordinary rate shares of a company. But, since PIBS are listed on the stock market and as such are types of undated 'building society stocks', though PIBS pay fixed interest, their stock price alters daily. This makes them a potentially high risk investment.

"PIBS are more susceptible to variation in price than average stock market shares. I have not recommended these to clients. They are like gilts in that interest is taxable and paid twice yearly net of 20 per cent income tax. There is no CGT payable on the profit upon redemption."

Q I need advice on IHT planning. My elder brother and sister look after my frail mother. They all live under the same roof but we are not certain whether we should be reducing our potential IHT liability. My mother's house is estimated to be worth between £300,000 and £400,000. She owns it outright. The house is also the main residence of my brother and sister, but is it likely we will need to sell the property to meet this potential liability? Is there a way of avoiding this? I would like my brother and sister to continue living in the property. BA, Bucks

A Stephen Pallister, tax partner at Pinsent Curtis Biddle, says that if we assume the total value of your mother's estate is worth £400,000, then the IHT liability on her death will be £60,000, which is 40 per cent of her assets above the new £250,000 IHT threshold. To avoid IHT your mother would need to give away some of her estate and survive seven years. The Revenue does not allow you to give something away and still benefit from it. This means that if your mother gave the three of you the house now she must pay you rent while living there.

That rent must be declared on your tax returns and you must pay tax on it. She might instead give one-third each to your brother and sister, keeping one-third and meet all the outgoings. But if your brother or sister moved out, your mother would have to pay rent for their share. She would also need to ensure you get the remaining share of the house under her will. Paying the IHT is probably the least stressful option.

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