Money: It could be you: from Lottery winners to long-haul tourists

READERS' LIVES: When syndicates win jackpots ... guaranteed income bonds ... student loans ... travel insurance. Your queries answered
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The Independent Online
WE HAVE an office whip-round every week for the National Lottery. Twelve of us put in pounds 1 a week each. We have had the odd pounds 10 win, but Lady Luck has yet to bestow upon us her broadest smile. When the jackpot does finally come our way, the winnings will obviously be shared out in equal amounts. Can we be sure that there will be no tax implications? JS, Newcastle

Strictly speaking, only one ticket holder can win a National Lottery prize. That one winner can then make gifts of money to others. But a potential problem is the death of the ticket holder within seven years of the gifts being made. (There is no problem after seven years.) The gifts could become subject to inheritance tax at the time of the ticket-holder's death.

You can, however, avoid this potential tax pitfall if you draw up a proper syndicate agreement. In addition to avoiding tax, a well-drafted agreement should protect your interests in the event of any dispute over who has a right to the winnings.

You don't need a solicitor to write out a load of legalistic mumbo-jumbo: a do-it-yourself agreement should suffice. In the absence of a written agreement, you could still claim you had a verbal agreement. But this could entail all the hassle of trying to prove the existence of a verbal agreement to a court of law.

The written agreement should include the names of all the syndicate members and specify an identifiable lead person who would be the official ticket holder, plus details of how the numbers will be chosen, how much everyone pays in and how much everyone wins. Every member of the syndicate should sign the agreement and it should be witnessed by a non-member and dated.

The most straightforward syndicates would have everyone paying in the same amount and getting an equal share of prize money. But you could draw up an agreement allowing different stakes and different pay-outs. You should include some words on what happens when someone fails to pay. You would probably want to ensure that no one misses out because they are on holiday, off sick or simply don't have the change to put in the kitty. But you may want to exclude someone who runs up arrears for a set number of weeks.

Syndicate agreements do have some inflexibility. Each time the players change, you need a new agreement. That may be no bad thing: if you have an informal whip-round each week among whoever is present, you risk having a dispute about who exactly has paid in when you have a big win.

Incidentally, all groups of National Lottery players should set up a syndicate agreement, including family groups. The inheritance tax rules apply to transfers (gifts) of money or assets between family members, too. An exception is transfers between husband and wife, but not transfers between unmarried partners.

To obtain a National Lottery leaflet on syndicates, telephone 0645 100000.

Your "Best savings rates" table (on page 14 this week) includes "guaranteed income bonds". What are these bonds? Their rates rarely seem to compare well with other accounts in your guide. AT, London

Guaranteed income bonds, sometimes called GIBs, are lump-sum investments offered by some life insurance companies. You invest a lump sum, receive a fixed income for a fixed term of usually one to 10 years, and then receive your initial lump sum investment back at the end of the term. A variation, the guaranteed growth bond, rolls up all the income and pays out a guaranteed fixed return at the end of the bond's life.

These bonds should not be confused with guaranteed equity bonds, whose returns are unpredictable and depend on stock market performance. Guaranteed income bonds are generally considered to be safe investments. They can reasonably be compared with fixed-rate, fixed-term deposit accounts from building societies. Some of these accounts also contain the word "bond" in their names.

The only risk with guaranteed income bonds is that the insurance company could default on its promise. If that were to happen, the company would be in severe difficulties. In the event of the company collapsing, the bondholder would be protected by the Policyholders' Protection Act, which ensures a pay-out of at least 90 per cent of the money owed.

From an investor's point of view, one key difference between a guaranteed income bond and a building society fixed-term deposit is taxation. A guaranteed income bond is a life company investment. Basic-rate tax is deducted at source from the interest. This means that, as with building society accounts taxed at source, only higher-rate taxpayers will have more tax to pay. But as with other life company investments, non-taxpayers cannot reclaim the tax deducted at source. So rates are always quoted net of basic-rate tax.

For this reason, at first sight the rates may not appear to compare well with the other rates in our savings guide which are quoted gross - that is, before deduction of tax. For direct comparison of the net rates, multiply the gross rates by 0.8.

Guaranteed income bonds are inflexible investments which carry heavy penalties if you want to cash in early. In this respect they are similar to fixed-rate accounts from building societies.

If you want a fixed-rate, fixed-term, safe investment you can compare guaranteed income bonds with building society bonds. Also, compare both with the returns on government gilts that have a suitable maturity date to coincide with when you want your money back.

I've read that it is worth taking out a student loan even if you don't need it. You can invest the money for more than the cost of borrowing and make a profit.

I'm thinking of getting a loan and putting the money in a tax- free Tessa. Is this wise?

NB, Somerset

Whether it's worth going to all the rigmarole of taking out a student loan to invest the money would depend in part on your attitude to debt. Many people do not want unnecessary debts.

It also depends on the likely profit. The interest on a student loan is the same as the inflation rate. This makes student loans about as cheap as borrowing can be apart from interest-free credit. The difference between current Tessa and inflation rates means you could make a net profit of pounds 40 to pounds 50 a year for each pounds 1,000 borrowed. But a Tessa must be kept going for five years to give tax-free returns. After graduating, depending on income, you may have to fund loan repayments from earnings before the Tessa matures.

I am going away backpacking for six months. I have an annual travel policy which, despite its name, only covers me for trips of up to 30 days. Where should I go for insurance to cover me for six months and for the range of activities I might do, including whitewater rafting, mountaineering and scuba diving?

MC, Hendon

Yes, unfortunately most travel insurance policies described as "annual", while covering you for any number of trips in a year, have limits on the length of each trip. Some will cover individual trips for up to 90 days, which will suit some travellers, others a month or less - which will only be of use to routine holidaymakers.

The annual multi-trip insurance market is extremely competitive - one "best buy" from Bradford & Bingley building society (0800 435642) costs just pounds 70. Unusually, there is no requirement to pay the first x pounds of a claim (that is, there is no excess; most policies have excesses of pounds 35-plus), although for the standard policy individual trips are limited to 31 days.

It is probably not worth the risk of using an annual multi-trip policy for longer trips. If you are genuinely delayed abroad during a shorter trip, some insurers are flexible enough to offer you additional cover if you contact them. But if you try to fiddle the system, don't be surprised if when you make a claim from an exotic country under a multi-trip policy, the insurer asks you for proof of when you left the UK.

Competition for longer-haul backpacker-style policies has been more muted. Some policies cost a few hundred pounds for six months, and even those where cover has been pared down might still cost at least pounds 100.

The importance of having at least medical cover cannot be overstated: too many backpackers put their lives at risk by not seeking medical assistance for financial reasons. A good policy should give the peace of mind of knowing that your medical bills should not be an issue.

Lower-cost policies offering adequate medical cover (and not a lot else) include Columbus Insurance's Globetrotter (0171 375 0011) and Inter Assurance's Options (Silver level of cover, 01252 747747). Both give pounds 1m of insurance for medical costs (which should cover virtually anything, particularly for claims outside the US) and personal liability cover (basically, if you get sued). Columbus includes a few other benefits, such as pounds 150 if you lose your passport. But neither covers other property against theft, loss or damage. Both are covered by the Insurance Ombudsman's arbitration scheme, under which policyholders can refer disputed and unpaid claims to the ombudsman for a free and independent review. For six months for someone going anywhere in the world, Inter Assurance charges pounds 95, Columbus pounds 109.

Insurers have widely differing policies on what "adventurous" sports they cover as standard, and what they cover for an extra premium. Give insurers an idea of what you will be doing upfront; there is no point in taking out a policy that does not cover you when you most need it.

Columbus says it will cover most supervised adventurous activities, although there may be an extra premium. Inter Assurance, by contrast, covers whitewater rafting, mountain biking and scuba diving as standard, but won't cover mountaineering that involves the use of ropes even for an extra premium.

Worldwide Travel Insurance (01892 833338), whose long-stay standard policy at pounds 93 for six months' travel anywhere in the world bar the US looks even cheaper, is not covered by the Insurance Ombudsman's scheme.

These three appear to be among the cheapest policies available, but they don't provide any real cover for baggage or property. Each insurer offers more comprehensive policies including baggage cover, but that costs pounds 10 or more for each month you travel, pushing total costs to pounds 150 or more. Again Inter Assurance looks cheap at pounds 145 for six months, but total baggage cover is just pounds 500 with a claim limit on individual items of pounds 150.

Another option for travellers wanting cover for property, particularly valuables, is to see if an existing home insurer will cover items like cameras abroad, under an "all risks" extension to your contents policy. That said, most such extensions restrict cover to the UK or to "developed" parts of the world such as Western Europe and the US.

For students and young people used to arranging travel through companies such as Campus Travel, STA or Trailfinders, these insurance options do not look particularly competitive.

q Write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number, or fax 0171-293 2096, or e-mail s.lodge@independent.co.uk. Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.

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