How to cash in on windfalls.

A lucky 900,000 investors in Scottish Widows will soon be faced with a happy dilemma. What to do with windfall payments averaging almost #7,000. After a lengthy conversion process, members of Scottish Widows next month will finally be able to taste the fruits of the purchase of the insurer by Lloyds TSB. The banking group is paying a total of #7.3bn for Widows, triggering some of the largest individual payouts ever seen from a demutualisation. All 1.6 million qualifying members of the insurer receive a flat #500 to compensate them for loss of membership rights. In addition, the 900,000 members who have with-profits investments share a cool #5bn immediately. The value of their payment depends on how much and how long they have invested. A further #1.5bn will be added to their policies on maturity. Someone who has paid #50 per month into an endowment since 1979, and was 40 when the policy started will receive #14,700. A pensions saver, contributing #100 a month since 1989 is in line for #6,550. So large is the distribution that Lloyds TSB and Scottish Widows have had to come up with a structure to minimise potential tax liabilities. Recipients are being offered the choice of a cash payment or loan notes of equivalent value, minus a 0.5% charge for stamp duty. The loan notes are designed to help investors offset capital gains tax. Rather than triggering a chargeable gain on the date of payment, gains are only triggered when the loan note is redeemed. The notes will attract interest, added every six months from March 2001, and note-holders can choose to redeem some or all of them on any date at which interest is added. This lets someone with a substantial windfall spread it over two, three or more years, soaking up any unused annual CGT allowance. It will also be possible to transfer the notes to another person. For most households, finding a good home for any windfall is rarely a problem. New cars, kitchens and exotic holidays are the three most popular uses for any cash windfall. And why not? It is churlish to suggest that you shouldn’t enjoy at least some of any windfall payout. But for those who want to capitalise on it, there is always the chance to turn a this medium-sized gain into a real whopper. One option is to use all or some of the windfall to top up pensions. This allows you to squeeze a little extra out of the taxman to maximise contributions. Payments in to a pension are, of course, subject to Inland Revenue earnings restrictions, though by waiting until April next year when stakeholder pensions are launched anyone can pay in #3,600 a year and earn basic rate relief, regardless of earnings. Virgin Direct has run some calculations for Accountancy Age, based on a #7,000 Scottish Widows windfall and standard 7% growth assumptions. Take the example of a 45-year-old, hoping to retire at 60. For a basic rate taxpayer, a one-off #7,000 net lump sum payment into a pension is projected to produce a lump sum of #21,666 at 60. A 40% taxpayer’s #7,000 net translates to #11,667 gross, and a projected lump sum of #28,166. Another option is to invest all or some of a windfall into an equity Isa, buying either a unit trust or investment trust. Adrian Shandley, a partner of financial advisers Balmoral Associates, of Southport, Lancashire, says that investors might feel they can afford to take a chance with windfalls out of the blue. He says: ‘If they are willing to put the money away for 10 or 15 years, it makes sense to go for a more risky, more adventurous fund like technology or a Far East fund.’ The right investment could easily turn #5,000 today into #30,000 in a decade, free of tax worries. Scottish Widows is not the only insurance windfall game in town. Despite the 54% to 46% vote by members of Standard Life last week to keep the company mutual, the insurer still looks vulnerable. Dedicated carpetbaggers are already plotting a further challenge to the insurer, possibly calling for a one-off mutuality bonus. And although Standard Life wants to change its rules to make future conversion bids much harder to mount, it may struggle to get the necessary 75% majority for a rule change. Expect a long war of attrition over the next few months, possibly years. Other windfalls are likely more quickly. Friends Provident has already committed to floating on the stock market next year. The board has decided to change and it is unthinkable that members will not back the move when the get to vote on it next year. Scottish Provident, meanwhile, is almost certain to convert and sell itself to another company. The insurer is openly reviewing all options for its future, and has appointed merchant bankers to help it evaluate potential offers. An announcement on its future is likely in early September. However, those who are not already members of either of the Providents are now probably too late to share in payouts. Other mutual insurers still being picked over for windfall potential include Scottish Life, Equitable Life and Liverpool Victoria Friendly Society. INSURANCE WINDFALLS PAST, PRESENT & FUTURE Year – Company: Average distribution* 1997 – Norwich Union: #1,500 1997 – Scottish Amicable: #1,800 2000 – Scottish Widows: #7,000** 2001 – Friends Provident: #3,000** 2001 – Scottish Provident: #1,000-plus *Figure for average distribution includes any bonus added in the future when policies mature ** For with profits member. ?:

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