Endowment mortgages ... Serps ... personal pension plans. Your everyday financial queries answered

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I have a pounds 35,000 endowment mortgage. I will soon be in a position to repay the pounds 35,000 to the building society without having to use the 25-year policy. It has only been on the go for four years. Do I cancel or sell it or keep it going as a savings policy?

GB, Lincolnshire

You don't say who your policy is with, but the chances are that if you cancel now you won't get much money back. Standard Life is a company with some of the better early surrender values. On a policy that has been going for four years you would get back about 60 to 70 per cent of your premiums. Early surrender values were improved two years ago and policy holders who have taken out a policy since January, 1995 could expect to get a refund of about 90 per cent. Other companies' early surrender values may not be as favourable, however.

You could certainly keep the policy going for its full term and use it simply as a way of saving. But you would have to be committed to paying premiums for the full term in order to get maximum value. Some companies will allow you to lower the amount of life insurance.

An alternative would be to cut your losses now and invest the same money through a unit trust regular savings scheme in a personal equity plan. This has the advantage that your investment returns will be wholly tax- free.

By comparison, although there is no tax to pay on the proceeds of an endowment policy that is held to maturity, the life insurance company has already paid tax on the investment returns on your behalf.

Selling your policy is probably not an option. As a general rule, it should have been going for at least five years and a least one quarter of its full term for it to have a resale value. Your policy has not been going long enough.

I am a female in my mid-40s and feel that I cannot afford to pay into a personal pension plan because my low salary is barely enough to pay bills and day-to-day living expenses. But should I be contracted in or out of Serps, the earnings-related element of the state pension? Where can I get advice on this?

LD, Bristol

It seems quite conceivable that your earnings are too low for you to find the money to pay into a personal pension plan. But bear in mind that the state pension alone is unlikely to be sufficient for most people to live a reasonable life in retirement.

Do consider the possibility of starting a personal plan, or join your employer's scheme if there is one.

You may find that you can cope with a regular pension contribution and after a while may cease to notice it reducing your monthly income. Try to think of paying into a pension scheme as no more optional than paying your gas bill.

The question of whether or not to contract out of the state-run Serps pension is more complicated. Serps is an addition to the basic state pension that is related to your earnings. If you stay in the Serps scheme you build up a guaranteed state pension. If you contract out, a rebate of your national insurance is paid by the government into a personal pension plan of your choice. The reason for doing this is that the money invested in your plan may buy a bigger pension than the one you give up by staying contracted in.

However, it is a gamble. You could end up worse off. Expert opinion is divided on the merits of contracting out. One school of thought says you should return to Serps when you get to the age of 30 to 35. But advisers who are more optimistic about investment returns believe you could stay contracted out until between 45 and 50.

The level of your earnings affects the decision. People on a low income may be better off staying in Serps regardless of their age because flat- rate personal pension plan charges have a greater impact on the lower national insurance rebates paid in.

Getting individual advice tailored to earn own circumstances is sensible. Ring 0117 971 1177 for a list of advisers in your area and compare the recommendations of several.

Can you clarify the situation regarding income from the proceeds of a personal pension plan? You recently carried an article suggesting that the pension must be no more than two-thirds of your final salary, but my broker says there is no limit.

DN, Cambridge

Your broker is right as far as personal pension plans go. There is no limit on the size of the income paid out by an annuity bought with the proceeds of a personal pension plan. But you are limited in what you can pay in: 17.5 per cent of your earnings up to the age of 35 rising in stages to 40 per cent for those who are 61 and over.

With an employer's scheme there is a cap on the pension you can take - broadly two-thirds of your pre-retirement earnings. This limit applies both to pensions linked directly to your pay and to "money-purchase" schemes, where the pension depends on how big your pension fund is and the level of annuity rates when you retire.

q Write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a telephone number.

Do not enclose SAEs or any documents that you wish to be returned. We cannot give personal replies and cannot guarantee to answer every letter we receive. We accept no legal responsibility for advice.

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