Q I have received a lump sum which I want to invest. At the moment I pay higher rate tax although I am due to retire in four years' time when my income is likely to drop to the basic rate. I already have PEPs which are worth about £60,000 and am looking at something less risky. Have you any suggestions?

A If you look at deposit accounts, Gilts, or unit trusts, then you would be faced with an annual additional tax bill until you retire, so a bit of tax planning is required. You should use a 'non-income' producing asset such as an insurance bond where any growth on the money will not attract immediate additional income tax.

You could look at a 'With Profit' bond which should combine the benefits of longer term capital growth while smoothing out any short term fluctuations associated with pure equity linked investments. A typical annual bonus rate would be about 6.5 per cent net of tax, but with scope for terminal bonus this could increase to around 9 per cent a year. It also means that if you become a basic rate tax payer when you retire, all the gains would be effectively tax free. Another attraction is that they would not carry any liability to Capital Gains Tax. Income could also be taken if needed.

For more information on With Profits Bonds call 01484 860123.

Q I am 25 years old and work as a chef in a small hotel. My friend has joined a life insurance company and has suggested I take out a 'critical illness' policy that would give me a lump sum of £50,000 in case I can't work. As I am saving up for a house and to get married money is tight and I want to know whether it is worthwhile or not for the £22 a month I have been quoted.

A If you work for a small employer then it is unlikely that they would pay you for very long if you couldn't work through illness or injury, and the state benefits are very meagre indeed. A lump sum of £50,000 may seem attractive, but you should think how long this would last. If you took an income of 5 percent this would only give you £2,500 a year and your capital would start to go down in real terms with inflation. Should the worst happen you could stand to lose 480 wage packets until retirement, nearly half a million pounds based on a salary of £12,000!

You would be better advised taking out a policy that would pay you a regular income until you either returned to work or until retirement, but remember that the benefits ought to be index linked as there is so long to go. You could provide a future income of £5,000 a year for up to forty years for as little as £17 a month (Source: The Exchange) if you chose a plan that started paying out after a three month waiting period. Securing your future earnings is very important especially if you are planning on getting married and buying a house.

For a free factsheet on Income Protection call 01484 860123

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