HIRE CAR customers have been warned not to put down cash deposits after a Leicester couple

HIRE CAR customers have been warned not to put down cash deposits after a Leicester couple were told they would have to wait several days before their deposit would be returned. However, the purchase of an annuity cannot be put off beyond the investor’s 75th birthday.If the investor dies before buying an annuity, his or her dependents can continue making income withdrawals until the investor would have been – or the dependent is – 75, at which point the latter can buy an immediate annuity or take the remaining value of the fund in cash, less tax at 35 per cent.. Nevertheless, it is possible that the maximum income that can be taken could be reduced after three years – if investment returns are low and interest rates fall over the three-year period.The investor has the opportunity of buying an annuity at any time with the balance of the value of the contract. This review is repeated every three years until an annuity is finally bought.The intention of these reviews is ensure that the investor monitors the amounts being taken out of the personal pension contract and to provide a warning if the funds are being depleted too rapidly. But every three years, the maximum / minimum income is reviewed, based on the value remaining in the contract and the hypothetical rates applicable to the age of the investor and long-term gilt yields at the time. The applicable yield, based on the yield on gilt-edged stocks, is 8.23 per cent, and the total inocme available is 11.4 per cent for men and 10.3 per cent for women.The minimum income, which the investor must take each year, is 35 per cent of the maximum income.The investor has complete freedom to decide how the remaining funds in the personal pension are invested.

Naturally, there are separate rates for men and women.These hypothetical rates approximately reflect current annuity rates at the time the ben- efits are taken.For example, a man born on 1 May, 1930, decides to take the benefits from a personal pension on 10 July, 1995, at age 65. But it is by no means as simple as it sounds.If the investor elects to take income from the fund, that income is also subject to limits.These are determined by the value of the contract at the time the benefits are taken, and the hypothetical rates produced by the Government Actuary, which depend on the age of the investor and the yields on long-term gilts at the time the benefits are taken. Instead, he or she can take income direct from the personal pension contract in the meantime.So if annuity rates are low, the investor can take income from the pension fund and wait until annuity rates are more favour- able. But as the Government brought down interest rates, actuaries at life companies lowered annuity rates.Indeed, annuity rates have fallen by more than a quarter over the past few years, and investors have consequently been receiving lower incomes from personal pensions.Now the Government cannot repeal the laws of economics and have high interest rates for savers and low interest rates for borrowers, much as it might like to do so.However, to meet the demands of investors holding personal pensions, it has introduced a facility whereby an investor can choose to retire and take the tax-free lump sum but defer buying an annuity. INVESTORS wishing to take the benefits from their personal pensions will no longer be forced to buy an annuity that fixes income for life as soon as they retire.

Under previous rules, the investor taking benefits from an ordinary personal pension could take up to one-quarter of the value of the contract as a tax-free cash sum, but had to use the balance to buy a fixed annuity from a life company at the going rate, which might not be favourable.
Annuity rates quoted by life companies depend on four factors – current interest rates, mortality rates, the sex of the investor, and expenses. The dominant factor is the prevailing level of interest rates, plus an allowance that represents the capital surrendered by the investor.During the years of high interest rates, annuity rates were accordingly high, and investors taking benefits from personal pensions received high levels of income. Richard Branson, the standard- bearer of unconventional investment houses, claims that the average investor who has signed up to make regular contributions to his PEP rather than a lump sum is putting in more than pounds 125 a month, despite the initial charge of pounds 2 per month.That is more than the commonly accepted industry-wide average monthly contribution invested in unit trusts and investment trusts.The average age of the typical investor in a savings plan is also just over 30, whereas the 40-55 age group has accounted for 75 per cent of the lump sums invested to date.. Savings schemes take so long to build up into a worthwhile sum, which makes them reluctant to advertise heavily to attract them, and independent financial advisers rarely recommend these schemes because the up-front commission they earn from a successful sale is not attractive enough.Regular savings schemes, however, allow millions of investors who are unlikely ever to have more than the price of a holiday or the down payment on a car to make a start on saving for as little as pounds 30 a month.Better still, regular savings allow investors to buy more assets, shares or bonds when prices are depressed, ready to profit from the upturns when prices start to recover.This is in stark contrast to lump sum investments, which peak close to the time when assets are expensive; prices of shares, for example, have peaked and are poised for a fall.There is good reason to believe, however, that there is a potential stream of savings waiting for anyone ready to tap it.

Only 58 per cent admitted to saving spare cash.One problem, by common agreement, is the low rate of interest currently available on deposits in banks or building societies. Even the added attractions of a tax-free Tessa leave investors with little more than 6 per cent return on their money.This year at least, National Savings seems to have taken a back seat in the battle for savings, perhaps on the dangerous assumption that the public sector borrowing requirement is shrinking fast and National Savings are a relatively expensive method of collecting the cash the Government needs.Most of the investment managers who rely on attracting investment from the general public also make no secret of the fact that they much prefer lump sum investments. The survey also reveals that 32 per cent of adults have had to rifle through their pockets of spare clothes to find enough cash to tide themselves over to the next trip to the bank or building society, 16 per cent have had to rummage through their drawers, 15 per cent went looking in the glove compartment, parcel shelf or door pockets in the car, and 6 per cent have been on their hands and knees looking under the sofa for it.
Asked what they did with their windfall cash, two out of three said they spent it on treats for family or friends, 55 per cent chose to spend it on a holiday, but one in three admitted to drinking it, 9 per cent gambled it and 47 per cent confessed to spending it on that ultimate fantasy, the National Lottery, where the chances of winning a million are 20 million to one against.Even allowing for multiple choices, all this builds up a picture of a public with a haphazard attitude to money. JUST OVER half the adults questioned in a recent Harris poll for Virgin Direct go out and spend any spare cash they have, 6 per cent put it in a piggy bank and 13 per cent drop it in a bottle (in the days when there were sixpences it used to be Dimple Haig, nowadays it is usually an old Maxwell House or Nescafe jar wide enough to take that seven-sided colossus, the 50p coin). By definition all these stocks generate capital gains through inflation, and would also have suffered heavily if capital gain became taxable as income..

These investors would have been most affected if the Inland Revenue had effectively been allowed to change the rules.Gilts, like all fixed-income stocks, have no defence against inflation, and in the 1970s and 1980s the Treasury resorted to issuing a number of index-linked stocks whose capital value and coupon is adjusted in line with rises in the retail price index, after a time-lag of eight months or so. It still acts as agent for the Treasury and has frequently issued stock with an artificially low coupon at a substantial discount, knowing that investors liable to top rates of income tax were more interested in capital gain when a stock bought at a discount matures than in income. There are still a handful of stocks trading at a discount, and top-rate taxpayers have clearly still been buying them for the tax- free capital gain rather than the income. But at pounds 105, the yield would be 100/105 x 8 =7.62 per cent. This is known as the “flat”, “interest” or “running” yield.”Undated” stocks such as 3.5 per cent War Loan, originally sold to finance the First World War, have no set redemption date, and it looks increasingly likely that they will never be repaid, so investors are simply buying income.