Instruments out of tune

QUESTION -- My wife and I have maximum Tessas and each have #6000 in

Personal Equity Plans in Global Advantage Trust accumulation units,

purchased in November, 1992. I have 7000 ScottishPower and pay #30

monthly to a share scheme in ScottishPower. My wife has 3000 Blue

Circle, and we both have 400 British Gas shares. We have #12,000 in a

joint Halifax 90-day account and about #1000 each in current accounts.

My wife, who has been made redundant, has a #4000 annual pension from

her previous employer. She owes #380 under-paid tax for 1991/92. Should

she pay this off or have her code number adjusted? Also should our

holdings be changed, i.e., do we have too many ScottishPower?

ANSWER -- Your savings and investments are heavily concentrated in a

few instruments. In all you have assets of around #70,000. Just under

one-third of this is accounted for by your large holding in

ScottishPower. In the normal course of events this would be considered

far too high a proportion to allocate to one asset, especially as you

are continuing to add to it through monthly subscription. We also think

that your wife's holding in Blue Circle is on the large side.

It is not clear from your letter whether your wife's redundancy has

affected your need for income since she also has a modest pension from a

former employer. In any event she might be as well to pay off the

under-paid tax from her current account so long as there is no

over-payment of tax in 1992/93.

Between your Halifax 90-day account and your Tessas you have even more

of your assets in deposit form than in ScottishPower shares, and with

interest rates at much lower levels than two years ago this is not

entirely satisfactory unless you depend on the income from these

sources.

It is also unfortunate that your recent subscriptions to PEPs are both

invested in the same asset as you have lost an opportunity to spread

your interests more widely.

We would suggest the following. Reduce your holding in ScottishPower

to around #5000, making sure that you do not incur liability to capital

gains tax (maximum annual exemption limit #5800) in the process. Sell at

least half of your wife's Blue Circle shares.

If you are not dependent on your income from the Halifax 90-day

account and the Tessas you could consider reducing the total in these to

about #15,000.

The proceeds released by the share sales and, if thought appropriate,

the reduction in your deposits, should be used to broaden the spread of

your equity interests to give you a portfolio of, say, about eight

shares in all.

A good stockbroker would handle the disposals for you and recommend

shares to add to your ScottishPower, Blue Circle, and British Gas. You

should also ask his advice on whether you should continue with the

#12,000 in your Global PEPs or seek a suitable opportunity to switch at

least part of this elsewhere.

QUESTION -- Some time ago I purchased for three great-grandchildren

Children's Bonus Bonds of #1000 each. A further great-grandchild is

expected and in the light of the recent fall in interest rates I now

wonder if a better bond, accumulating over at least 16 years, could be

available.

ANSWER -- In the current environment of lower interest rates and given

the timescale of at least 16 years you would be much better investing

the #1000 in the shares of a leading investment trust with an

internationally diversified portfolio dedicated to long-term capital

growth. Such shares could be bought through the management company's

savings and investment scheme, which would keep transaction costs to a

minimum.

You could safely choose from Alliance Trust in Dundee, Foreign and

Colonial Investment Trust in London, and Scottish Mortgage, managed by

Baillie Gifford in Edinburgh, or any of the other large international

investment trusts with a good record of increasing asset values.

QUESTION -- Some three years ago I chose to opt out of SERPS, enticed

by Government incentives. Since then I have had some time of

unemployment. Does this affect my private pension? Also I am unsure if I

made a wise decision in opting out; if so, do you advise if possible to

opt back in? I do not fully understand how opting out affects my state

retirement pension. Do I receive less than I normally would?

After reading your recent review about SERPS saying opting out is only

advisable for people earning more than #9500 per annum, which I do not

earn, have I made the correct decision?

ANSWER -- The pension you obtain from your private pension plan

depends on the contributions you make into it so if you miss payments

then the pension will be lower than it otherwise would have been. Some

plans, however, have an insurance element which ensures contributions

are met through a period of unemployment up to a certain duration.

You will clearly not receive any SERPS pension from the date of opting

out but the basic state pension will still be payable, the amount

depending on the National Insurance contribution record. A period of

unemployment of up to a year does not adversely affect this record. As

regards your original decision on opting out, everything depends on your

age. It is generally recognised that men over 40 should not opt out.

The #9500 is not a formal limit but below this amount the National

Insurance rebate for opting out is largely cancelled out by the charges

of the personal pension policy. If you stop your pension plan now most

of the contributions you have made so far will be lost. If you are below

the age threshold you should carry on, otherwise you should consider

opting back into SERPS.

QUESTION -- I am a member of a non-contributory company pension

scheme. If I remain until my normal retirement date of age 60 I will

have 39 years service and would receive 39/60ths of final salary as

pension. I also contribute into the firm's AVC scheme.

I am considering making more AVCs, and wondering whether I should

increase my payments into the firm's scheme or set up a freestanding

AVC. While I am sure my employers are very trustworthy the Maxwell

scandal has concerned me regarding control of my own pension rights.

I still have 30 years' service left and there must be some possibility

I may change jobs, even if I have no present plans to do so. However, I

presume I will pay less charges by continuing with the firm's AVC. What

do you think would be best for me -- to increase the existing AVC or

take a free-standing AVC?

I also realise there may be little scope for further AVCs anyway,

unless I moved to a poorer pension scheme or I retired early. Can you

also confirm whether the lump sum derived from commutation of pension is

excluded from the normal maximum of two-thirds of final earnings?

ANSWER -- As you will be only one year short of a full pension

entitlement there is little if any room to continue even your existing

AVCs let alone make further contributions without over-funding your

pension.

There would be some point in AVCs if you really intended to retire

early or change jobs but as this appears far from certain you should

consider having a savings plan rather than making AVCs. You will not get

tax relief but will end up with a more flexible lump sum. Why not take

out an investment trust savings plan, in PEP form if your payments are

of a size to make this worthwhile bearing in mind the higher charges?

The normal lump sum is derived from commuting part of the pension

entitlement and so you either have a full pension or a lump sum plus a

reduced pension.

QUESTION -- Halfway through the tax year 1990/91 I became

self-employed and for various reasons chose to make up my accounts to

April 5 each year. During the three years 90/91, 91/92, and 92/93 my

profits in round figures were #6000, #12,000, and #10,000 respectively.

I made an election to be assessed on a current-year basis for the first

three years of business.

As I understand the Revenue leaflets on the matter, my tax for each

succeeding year will be based on the previous year's profit, meaning

that my tax for 93/94 wil be based on the profit of #10,000 earned in

92/93.

Such work as I have obtained for the past three years was not easy to

come by and the situation is becoming worse. What is the tax position if

I cannot get any work during 93/94 or indeed any future year? I would

like clarification on the position that could arise for a series of lean

years followed by a cessation of business. It seems to me that tax could

be payable on income not received.

ANSWER -- You made the correct decision to elect for the actual basis

of assessment for the first three years, as under the normal basis your

second and third-year assessments would have been based on the first 12

months and previous-year profits respectively and the amount assessed

would have been #2000 higher in aggregate.

Under current legislation profits are then assessed on a previous-year

basis and this normally has a cash-flow benefit where there is a rising

trend in profits. This applies until the final year of business which is

always assessed on an actual basis and the Revenue have the option to

assess the second and third-last years on an actual basis if in

aggregate the profits so assessed are higher.

The rules for the opening and closing years can also apply where there

is a change in the persons carrying on the business, and if therefore

you were to introduce for example your wife as a partner then unless you

elect for the previous-year basis to continue the cessation and

commencement rules would apply.

These are the rules at present but there is a proposal in this year's

Budget to introduce the actual basis of assessment to apply to profits

from the year 1996/97.

QUESTION -- I have taken early retirement from employment and am

considering moving abroad on a permanent basis. I receive a pension from

my former employer but realise I must wait until age 65 for the state

pension. If I leave the UK what will be my tax position and will I still

qualify for state pension if living abroad?

ANSWER -- If you have been paying National Insurance contributions

regularly throughout your working life you will be entitled to state

pension even though you are living abroad. You should, however, check

with your local DSS office that the contributions you have already paid

are sufficient to qualify for full pension, otherwise you might consider

voluntary contributions to make up any deficiency.

Income arising in the UK is liable to UK tax even if you live abroad

(except for certain Government Stocks which are exempt) but you would

still be entitled to personal tax allowances to set against this income.

You will be required to notify the Revenue that you are going abroad and

at that time they will ask you the appropriate questions.

George Outram and Co. and the editor of The Herald accept no legal

responsibility for the answers given in these columns. Readers are

invited to submit concise questions for answer in the paper. No

correspondence can be entered into.