Ask the experts - your questions answered - October 2006

Also if a card's outstanding balance is made up from a combination of transfers and purchases, interest is usually charged at differing rates and in the case of a repayment that will not completely clear the balance care should be taken to check which balance will be reduced first (and therefore what rate will continue to be charged).

Finally it is worth considering the differences between secured and unsecured borrowings. Credit cards and unsecured loans are not secured against your home and this means that your lender can only sue for payment if you default on the loan.

However with a secured loan the lender uses your property as an extra guarantee of repayment and if the amount is not paid in full, the lender may repossess and sell the property.

In addition secured loans and mortgages are typically repaid over a longer term (between 10 and 30 years) and while the interest rate charged is typically lower than an unsecured loan or credit card, the cumulative effect of interest over a longer period can make the total interest payable over the term of the loan far higher, and therefore it may be more sensible to repay the longer term debts first.

For further free information try contacting the Citizens Advice Bureau at www.adviceguide.org.uk or The National Debtline at www.nationaldebtline.co.uk.

Contact Details: Dan Clayden APFS, Director - Clayden Associates, www.claydenassociates.co.uk Tel: (01364) 643004 Fax: (01364) 644297 Email: info@claydenassociates.co.uk

Q2. David West in Leicestershire asks: Could you please clarify the current position regarding SERPS. Both for people in their thirty's and for those approaching retirement. Could you also please advise the contact information for the Government Dept with respect to this?

Answer: As from 6th April 2002 the State Earnings Related Pension Scheme (SERPS) was replaced by the State Second Pension. Prior to this point entitlement to SERPS was based on a combination of an individual's level of employee earnings and National Insurance contributions record, however the State Second Pension reformed SERPS to provide a more generous additional State Pension for low and moderate earners while extending access to certain carers and people with long-term illness or disability.

Previous SERPS entitlement is protected for both those currently in receipt of State Pension and those yet to reach State Pension age.

The State Second Pension gives employees earning up to Upper Earnings Threshold (currently £31,100 in 2008/09) a better pension than SERPS, whether or not they are contracted out into a private pension, with the most benefit being received to those earning up to the Lower Earnings Threshold (£13,500 in 2008/09). The level of additional pension payable will be calculated when you claim your State Pension.

If you have 'contracted out' it is possible to take these benefits earlier than State Pension age (currently at 50, however this will rise to age 55 post 05/04/2010) and there is also the option to take 25% of the fund as a Pension Commencement Lump Sum with the remainder used to provide a pension.

However, following the Pensions Act 2007 it will no longer be possible to continue to 'contract out' of the State Second Pension on a money-purchase basis (ie via a personal or stakeholder pension or a defined contribution occupation pension scheme) after 5th April 2012. Previously built up 'contracted out' benefits will be unaffected.

For further information contact the Pensions Service which is part of the Department for Work and Pensions at www.thepensionservice.gov.uk.

Contact Details: Dan Clayden APFS, Director - Clayden Associates, www.claydenassociates.co.uk Tel: (01364) 643004 Fax: (01364) 644297 Email: info@claydenassociates.co.uk

Q3. M Williams in Cornwall asks: I contracted out of SERPS in the 80's when the government were pushing the scheme. I became disabled and unable to work in 1993 and cannot afford independent financial advice so I am still contracted out.

There was a scheme running some years ago whereby some people were entitled to compensation if it was deemed that they were wrongly advised. I missed out on that scheme because poor health and other difficult circumstances prevented me from completing the process. Considering I will almost certainly never be able to work again, what action, if any, should I take regarding my Scottish Widows pension scheme?

Answer - I would suggest that you visit the consumer section of the FSA's (Financial Services Authority) website www.moneymadeclear.fsa.gov.uk which has a selection of useful factsheets that you can download. In particular there is a factsheet that provides guidance in relation to your options if you feel that you were wrongly advised to contract out from the State Second Pension (Formerly SERPS).

In addition it is also worth noting that when the State Second Pension replaced SERPS, provision was made for the payment of an additional State Pension to those with a long-term illness or disability and as this change occurred in April 2002 it is entirely possible that you are now in fact contracted back in (this would be indicated by the fact that no further 'rebate' contributions have been made into your pension since 1993).

If you're not working at all, or you're earning less than £4,680 a year (in 2008/09) and you're entitled to long-term Incapacity Benefit - even if you're not getting it because you get another benefit that pays you more, or you get protected Severe Disablement Allowance or Income Support you would be entitled to the State Second Pension (unless you reach State Pension age before 6 April 2010 - then you also need to pass the Labour Market Attachment Test).

For further information about the State Second Pension I would suggest that you visit the Pensions Service website at www.thepensionservice.gov.uk.

Contact Details: Dan Clayden APFS, Director - Clayden Associates, www.claydenassociates.co.uk Tel: (01364) 643004 Fax: (01364) 644297 Email: info@claydenassociates.co.uk

4. Ken Ayre, cumbria: Is this a good time to buy into L&G's Portfolio bond (distribution bond)? I've read it might be a good time for bond funds. what's the best yield i can get currently? My age next birthday 64.

Answer: The L&G Distribution has an equity exposure of 46%, with fixed interest, cash and property making up the remainder. The fund is down 4.8% over the last 6 months. As this type of fund relies on equities to provide the return, I would suggest that it is a good time to invest, however the current annual yield on this fund is only around 4% and assuming that income is the main priority, higher yielding funds are available.

The best yield available at the time of writing is from the City Financial Strategic Global Bond Income fund, with a yield of 14.28%. This fund is in the UK Fixed Interest sector (Global Bond) and I feel it offers a good alternative to the L&G fund.

Paul Monk, Partner, Balmoral Associates

5. Andrew cunningham, Birmingham: I'm a first time buyer trying to get a mortgage... however, although i'm earning £40,000 a year and would only like to borrow £160,000, i'm finding it hard to get one for that amount. Any advice on where i should go?

Answer: In the jargon, what you need is a Lender offering an income multiple of four times or more. Assuming that you have a 5% deposit, you could consider Abbey's 7.34% 2 year fix or their 5 year fix at 6.99%. The Bristol & West do a 5 year fix at 6.79% at 95% Loan To Value. If you have any credit which will not be cleared upon Completion, Bristol & West will do 4.5 times earnings, subject to a good credit score. Abbey would potentially offer even more.

If you have had credit problems in the past, you should consult a mortgage broker to find the best deal for you.

Paul White, Consultant, Belgravia Insurance Consultants

6. Pauline fisher, cheshire: Could you explain the new ISA rules which have come into effect?

Answer: From 6th April 2008 the annual ISA investment increased to £7,200 (previously £7,000), £3,600 of which can be invested in cash (previously £3,000).

The definitions, mini and maxi ISAs no longer exist and have been replaced by cash ISAs and stocks and shares ISAs, you can invest in one of each per tax year.

For example, you can invest £3,600 in a cash ISA and the remaining 7pound;3,600 in a stocks and shares ISA, or you could invest less than £3,600 in cash and the balance of the annual £7,200 limit, in a stocks and shares ISA.

Another big change in the rules is that you can transfer any money held in a cash ISA into a stocks and shares ISA, but you cannot then transfer the money back to cash. However, if you took out a cash ISA and then transferred it to a stocks and shares ISA in the same tax year, you could take out another cash ISA provided you hadn't already used up that year's ISA allowance of £7,200.

There are some other minor changes to the rules and Her Majesty's Revenue and Customs (HMRC) have produced a very clear explanation of the changes, which can be accessed at http://www.hmrc.gov.uk/isa/rule-change-april08.htm.

Donna Bradshaw, Financial Planning Strategist, IFG Financial Services

7. Roger bolton in southamptom: I'd like to retire in around 4 years and currently have a personal pension pot of around £120,000. I still, however, have a small mortgage of £25,000. I'm 58 and would like to retire at 62, my current salary is £38,000 a year and i have no other debt outside my mortgage and low outgoings.

I'd like to maximise the amount i can put into my pension over the next four years and also make sure it's quite safe as stockmarkets could plummet in that time. Also, what sort of income can i look forward to in retirement, including the state pension (i'm fully paid up NI wise)?

Answer: Roger, you haven't mentioned whether you are already contributing to a pension or whether you are married so I'm going to make some assumptions here.

On the basis that you're not making any pension contributions then under the rules that came into force on 6th April 2006 it would be possible to make contributions to your pension to the lower of your annual salary or £235,000 (for 2008/09) per year. In your case it means that you could contribute £38,000 this year and get tax relief up to the amount of tax paid.

You can do this for each of the years prior to retirement, with even more generous allowances in the year that you actually retire and take benefits. You are right to be concerned about stock-market volatility between now and retirement, and if you haven't done so already you should be switching from stock-market funds to those that are safer, such as cash and building society funds.

You will be eligible to draw your State pension from age 65 and for a single person the full rate is currently £90.70 per week. You would need to have NI credits for 44 years if retiring now, but from 2010 this reduces to 30 years required credits.

If you were going to purchase an annuity then indicative rates for a single male age 60 who didn't want any increases in pension or any guarantees on death are averaging £725 per year for each £10,000 of pension fund. Smokers tend to get higher rates and healthy people will find the amounts are lower. At these rates £125,000 pension fund would generate a gross income of £9062.50 per year. Of course these rates can change and are purely an indication of what is available today.

Dennis Hall, Managing Director, Yellowtail Financial Planning Ltd

9. Maxine Sinclair in canterbury: I'm 42 and recently inherited £350,000 and am thinking of giving up my job as i'm sick of it and moving abroad as I have friends in spain. I'd live off the income the money I have might make me. I'd make around £100,000 profit if I sold my home and have around £30,000 in savings.

How much income do you think I can derive from a spread of higher yielding shares/funds and safer deposit accounts and bonds with the money I have? I also have £55,000 in a personal pension. if I cashed this in, what penalties would i face? Regards, Maxine.

Answer: Maxine, the generally accepted level of return that would provide you with an income for life that would climb with inflation is around 4% per annum. I know that you can earn more from a deposit account right now, but the effects of inflation over time mean that you cannot take out everything that is earned in a year as you would eventually run out of money because of inflation pressures.

So, 4% of £480,000 is around £19,200 per year before taxes, and assumes that you have somewhere to live - if not then this money needs to pay the rent too. Sure, there are loads of people around promising higher returns, but over the long term research has shown that this 4% level remains constant, as it allows for inflation, and at age 42 inflation has got a long time to do damage. Not only does your income need to grow, so does the capital.

Regarding the pension, the earliest that you can access any of this money is age 55 and at that time you would take 25% as tax free cash with the remainder providing you with an income. If you are sick and tired of the job why not use some of this inheritance to retrain so that you end up doing something you love.