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An endowment insurance will be maturing soon and this will provide me with a sum of #70,000. I propose to use #25,000 to pay off my mortgage and my monthly outgoings should reduce by #172. I have #3000 in a building society account and I have quoted investments currently valued at #14,000, of which #12,000 are in a PEP. What investments in pension plans or other forms of investment do you think I should make to provide for my retirement?

n There are complex issues here and you will have to seek professional advice from an independent financial adviser who has the necessary experience. From age 51 you can contribute up to 20% of your earnings to your retirement annuity plan and it would be worthwhile to do this. At that age you could put up to 30% into a personal pension plan (PPP). So you could set up a PPP and contribute the difference, 10%, if you could afford it. You should also be able to use the carry forward provisions to use tax reliefs available for up to seven previous tax years, but you will need specialist advice on this. The overall limit on contributions is the proportion allowed in PPPs.

Otherwise you could put more into PEPs if you haven't already used this tax year's allowance and possibly put some money into a with-profits bond, eventually taking income from it when you retire. Your adviser can make suggestions on the investment front.

Co-habitation risks

q I and my partner are both divorced after difficult first marriages. We have a young son and we have no desire to marry. I know there are financial disadvantages to not doing so and I would be grateful if you would spell them out and suggest steps we can take to mitigate them. We are both in company pension schemes and have various life assurances and savings.

n There are several things you should do if you haven't already done so. You should check to ensure your wills are as you want them to be. This also applies to ancillary benefits under your pension arrangements, notably death in service benefits. Obviously you would not want these to go to your previous spouses by default and you must ensure the trustees of the pension funds know to whom you want to leave these benefits. The scheme may also have flexibility as regards a widow's pension. However, some are legally restricted to widow or widower.

Apart from these major considerations, the main disadvantages of co-habitation lie in inheritance tax (IHT) and capital gains tax (CGT). Assets bequeathed to a spouse do not attract IHT and assets transferred between spouses are not liable to CGT. These effects cannot be mitigated and have to be borne in mind. For example you may want to have more life assurance to cover any potential IHT liability. Or you may want to transfer assets directly to your partner and son or establish a trust with them as beneficiaries.

Inheritance value

q My mother died in December and I have recently sold shares in her estate in order to pay the inheritance tax bill. There has, however, been a drop in the price of the shares between the value in December and the proceeds realised. Bearing in mind that inheritance tax is calculated on the December values, tax will be paid on more than the amount actually received for the shares. Is there any form of appeal procedure to change the inheritance tax liability.

n Provision has been made in the inheritance tax legislation to deal with the circumstances you describe. When quoted shares are sold within 12 months of death, a claim can be made to have the shares revalued for the purposes of probate at the lower sales proceeds instead of the value at date of death. The claim should be made by the person liable for inheritance tax on the shares. On making a claim the tax is calculated as though the value of the shares to which the claim relates were reduced by the loss on sale (ie restating the shares at their sales value). In calculating the loss you have to take into account all sales investments within the 12-month period and not just the sales that show a loss from date of death values. Care should therefore be taken if other shareholdings were sold within the 12 months from date of death and a profit realised as they will also be restated at the sales

price which will be higher than probate value. Before making a claim you should ensure that the sales proceeds realised from all shares sold within the 12 months from date of death is lower than the value at the date of death.

End of tax credit

q For the past few years I have been preparing a tax repayment claim form for an elderly aunt and I am just about to start preparing the form for 1997/98. I am aware that at some point my aunt will no longer be able to reclaim the tax credits on her dividend income, but I cannot remember the date that this change takes place. Can you please jog my memory?

n Your aunt can continue to reclaim the tax credit on her dividend income for 1997/98 and 1998/99. With effect from April 6, 1999, the tax credit accompanying dividends will reduce from 20% to 10% and your aunt will no longer be able to reclaim the tax credit.

If the withdrawal of the repayment of the tax credit has a significant effect on your aunt's income you should perhaps consider restructuring her investments. However, before undertaking any change in the investment portfolio bear in mind that the shares may have been held for their capital growth potential.

The editor of The Herald accepts 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.