dear Prudence

An expert answers your queries on money matters
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The Independent Online
I have some shares in Lloyds Bank and have been given the choice of taking the dividend or free shares, but the price of the shares I am offered is based on the five trading days after the shares go ex-dividend. How can I make a sensible choice?

Ms J K, Arbroath

Shares are traded ex-dividend, ie the dividend goes to the seller not the buyer, well before the dividend is actually paid, so there is a window between the ex-dividend price being known and the date you have to make your choice in order to receive the dividend.

The bank will tell you what the dividend on your holding is and the number of shares plus any residual dividend you are being offered. Subtract any residual dividend and divide the balance by the number of shares you are offered to get the value per share. If the ex-dividend price is significantly higher, the share offer is a cheap way of increasing your holding. But you may be taxed as if you took the dividend in full.

I had a full Tessa account containing pounds 9,000 with Barclays which matured this month, and I am putting the proceeds into another account while I decide what to do with it. But Barclays tells me there will be a five- day interval before I start to earn interest on the new account. Is this right? And if so, will they let me off paying interest if my current account is overdrawn?

Mrs E C, London

I am sorry to say that Barclays says the five-day interval is correct because the items are in transit. Most other banks and building societies that are members of the automated clearing system suspend interest payments on items in transit, although some deduct only three days' interest.

I am 51 and have a mortgage with nine years to run totalling pounds 45,000, only pounds 17,000 of which is eligible for tax relief. I have an insurance policy maturing worth pounds 28,000, and a Tessa maturing shortly with pounds 9,000. I have been advised to roll over the Tessa on a fixed rate, put pounds 13,000 into a with-profits bond and pounds 15,000 into a distribution bond. Does this sound reasonable?

Mr F G, Surrey

Interest on a Tessa is tax-free if held for five years, but the rates now available are a shadow of what they were on the first issue. Some of the best fixed rates on offer earlier this month have now been withdrawn.

With-profits bonds and distribution bonds are sound investments. Financial advisers like them because they earn good commission, but they incur up- front charges and internal taxation, and are probably 10-year investments.

A good PEP invested in corporate bonds or in equities will cost you less in charges, earn you immediate tax-free income and gains, can be cashed when you need it, and should be your first priority.

People your age who are still working might also do better to put money into a personal pension or an additional voluntary contribution at work, where the contributions will be tax-free.

You could certainly pay off some or all the mortgage on which you are not getting tax relief. Mortgages are now cheap, but you would have to earn 8 per cent gross to pay off the mortgage interest. But have you considered a remortgage? There are lots of discount, cash-back and fixed rate offers around that could reduce your monthly payments.

I have just been made redundant and have been offered a package including a payment of pounds 30,000 which I understand is the maximum amount I can be given without having to pay tax on the pay-off, plus a contribution to my pension, plus my company car, which is valued at about pounds 7,000. But I have been told that the car will be added to the value of my pay-off and will be liable to tax, which would make it a rather costly luxury if I am unable to find another job.

Mr D I, Bristol

You are right in thinking that the absolute tax-free limit on a redundancy pay-off is pounds 30,000, after which the balance will be subject to income tax, although they can chip in to your pension pot without triggering a tax liability for you, if they feel inclined.

The firm of chartered accountants Moores Rowland also believe that the Inland Revenue, on legal advice, is now willing to allow the value of a business asset such as a car to be included in a package, subject to the pounds 30,000 limit. If so, employers will also be able to give a business asset such as a company car tax-free to employees who are retiring. They will not be eligible for a cash pay-off on retirement. That would be taxable, but they can now have a company car, or a holiday, or even lifetime membership of a golf club free of tax.

Questions from readers are welcome. Write to Prudence, c/o the Features Department, the 'Independent', One Canada Square, Canary Wharf, London E14 5DL. Fax: 0171-293 2182.

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