THIS TRANSCRIPT IS ISSUED ON THE UNDERSTANDING THAT IT IS TAKEN FROM A LIVE PROGRAMME AS IT WAS BROADCAST. THE NATURE OF LIVE BROADCASTING MEANS THAT NEITHER THE BBC NOR THE PARTICIPANTS IN THE PROGRAMME CAN GUARANTEE THE ACCURACY OF THE INFORMATION PRINTED HERE.

MONEY BOX

Presenter: Paul Lewis

TRANSMISSION 27th OCTOBER 2001 1200-1230 BBC RADIO 4

Independent Insurance

Equitable Life

Overseas Pensioners

Pensions Mortgages

Tax After Death

LEWIS: Hello. In today's programme, emergency payments to people with claims against a failed insurance company are delayed so the organisation which pays them can move offices.

New hope this week for compensation for at least forty thousand customers of Equitable Life

The Government faces Court action over its policy of paying lower pensions to people living abroad

Martin Lewis is with me today, Martin

M LEWIS: Yes Paul with a warning to people who hope their pension will pay off their mortgage

LEWIS: And does the long arm of the taxman reach beyond the grave?

WOMAN: Why do I have to pay what in effect is somebody else's tax bill?

LEWIS: Emergency payments to forty customers of the failed insurance company, Independent, have been delayed further today. Independent Insurance collapsed in June leaving half a million people without cover for their homes and cars. More than twenty thousand people who had claims before the collapse are still waiting for them to be settled. Individual policy-holders should get ninety per cent of their claim met by an industry scheme called the Policy Holders Protection Board but four months on only around four hundred who have pleaded hardship have actually got any money and this week even those payments were postponed so that the Board could move to smart new offices. One of those affected is Jason from South London, shortly after buying a new car in May he was involved in an accident, which wrote it off.

JASON: It was a two-seater sports car and the valuation from the claims assessor was twenty-three and a half thousand pounds. I still owe thirteen thousand to a finance company and that's five hundred and fifty pounds a month that I can ill afford to spend. I can't afford to finance another car with that hanging over my head, I couldn't rent a car because rental costs, which would normally be covered by comprehensive insurance, they may or may not be covered I don't know nobody's said go out and rent a car. I'm in an unpleasant situation.

LEWIS: So still paying for a car he no longer has Jason applied for compensation only to be told it would take months.

JASON: I've recently lost my job and I explained this and I was told there was a hardship process.

LEWIS: And so you're in that process. When did they say you'd get paid?

JASON: I was told that if I'd sent in the necessary forms by last Wednesday I would have been paid by Friday.

LEWIS: And were you?

JASON: No.

LEWIS: The Policy Holders Protection Board told Money Box that Jason's payment and up to forty others, which should have been made on Friday, had been delayed by their move to their new offices, the payments should now be made on Tuesday. Well with me is the man who's now in charge of Independent Insurance, the liquidator from PriceWaterhouseCoopers, Dan Schwarzmann. Dan, as the liquidator you now run Independent Insurance, there are more than twenty thousand claims outstanding, how are they being dealt with?

SCHWARZMANN: Just giving some background Paul, obviously the insolvency has caused this great disruption but we've been trying very hard to ensure that claims are agreed officially and effectively and for customers who've got protected claims we're actually working very closely with the Policy Holders Protection Board who just don't have the infrastructure to cope with the agreement and payment of claims and as you say severe hardship cases are being dealt with immediately and they can be turned around in a week and sometimes they can be turned around in hours if they are severe hardship cases.

LEWIS: Except when the Policy Holders Protection Board is moving offices, leaving that aside, the ones who aren't in hardship, or at least as defined, even if Jason hadn't lost his job, waiting for something like fifteen thousand pounds is hardship to most people isn't it?

SCHWARZMANN: Absolutely, and just recognising that my duties are to all creditors, what we do must be efficient and effective. What we're doing, we simply cannot process all these claims manually, what we've actually done, we've completed IT systems to cope with the identification and payment of these claims to help the Policy Holders Protection Board, the actual system will be ready by November and if it was ready today we'd be ready to pay something like three hundred thousand claims but with average value of about one thousand pounds.

LEWIS: But given that these claims would have been met anyway if Independent had still been around, Independent wouldn't have been setting up new systems and making people wait for months would it?

SCHWARZMANN: No those systems are to allow protected policy holders to be paid, I should actually say that of the twenty thousand claims that you're talking about, most of those cannot be agreed immediately. For example if you've got a subsidence claim which would be protected the property has to be monitored for quite a while before we know the exact level of the claim.

LEWIS: And people who, for example, if their car is written off, like Jason. He was concerned, afraid, to rent a car because he wasn't sure if he'd get the money back. Should people go ahead and incur expenses like that in anticipation of a reasonably swift payment from you?

SCHWARZMANN: Well we can certainly try and help people there, ultimately I should stress it's for the Policy Holders Protection Board to decide what is protected and what isn't. In cases like that we can pass them straight through to them and there is a help line number if people would like to call it.

LEWIS: Right, and that will be on our website. Do you think though that we need a better system, insurance companies don't go bust very often do they, but this was a big one and a lot of people are going to be affected for many months. Do we need a better system to make sure these payments are made?

SCHWARZMANN: Thankfully insurance companies don't go insolvent that often. In fact the Policy Holders Protection Board is moving to a new compensation scheme called the Financial Services Compensation scheme at the end of November and I'm pleased to report that actually we had a meeting with them yesterday and we're looking at putting in place, structures, that payments can be made immediately upon an insurance company's failure.

LEWIS: And literally, in a word, people who are waiting, when can they expect a payment, if everything is straightforward?

SCHWARZMANN: If their claim is agreed we will be making payments at the end of November and be processing hundreds of claims every week.

LEWIS: Dan Schwarzmann thanks, and I should point out that the change to the Financial Services Compensation Scheme is of course why the Policy Holders Protection Board is moving, it's not just that they want smarter premises, they all have to get together with all the other compensation schemes, and if you have any questions about insurance then our phone-in Money Box Live on Monday afternoon will interest you. My panel will be discussing all sorts of insurance and what you can do when things go wrong. E-mail now [email protected] or call Money Box Live on Monday.

There's new hope this week that forty thousand Equitable Life customers who joined the troubled company in 1999 and 2000 may be able to get compensation for their losses. As we said on Money Box last week, the Financial Services Authority was heavily criticised in a recent report over how it handled the Equitable crisis in those two years. The FSA Chairman, Sir Howard Davies, told this programme he and two other directors had had their pay docked by a total of thirty two thousand pounds because of those failings. Now MPs are asking the Parliamentary Ombudsman, Michael Buckley, to investigate and consider the case for compensation but he's indicated he may wait until the full government inquiry into Equitable Life by Lord Penrose is published next year. I asked Sir Gordon Downey, former City regulator, if in the light of these facts, he thought such a delay was acceptable?

DOWNEY: Well I don't think it's acceptable and I don't think it would have been acceptable even without this new evidence because I think the role of the Parliamentary Ombudsman is to inquire into any allegations of misadministration by government departments and other agencies and that is precisely the charge here. In my view there was misadministration by the regulators, the DTI, the Treasury and the FSA in several respects and it seems to me that there's a degree of urgency about investigating all these allegations.

LEWIS: Money Box has learned that following the report the Ombudsman has reconsidered his position and is writing to Members of Parliament this week. Well live now to Southampton to talk to the Conservative MP for Christchurch, Christopher Chope, who's waiting for that letter. Mr Chope what do you hope the Ombudsman will say when you get this letter?

CHOPE: I hope he will say that he is going to inquire straightaway into the facts found in the Baird report and apply those facts to the cases of policyholders, particularly those who joined during that period from about August 1998 up till the close of business in 2000.

LEWIS: The Baird report of course being the recent one that we reported last week and that just looked at the Financial Services Authority, as you say, those two years 99 and 2000. You think there's a case for people who were encouraged to join Equitable at that time, that the FSA was guilty of maladministration?

CHOPE: Yes I think there's a clear prima facie case established in the Baird report and I've got constituents who were investing heavily in Equitable Life for the first time during that period. I've got one constituent who's invested over one hundred thousand pounds of savings in Equitable Life at a time when as we now know the FSA and the Treasury knew that Equitable Life was in trouble but didn't tell anybody.

LEWIS: And indeed during the time when the Board of the Financial Services Authority in effect fined three of its directors for the mishandling of the affair

CHOPE: Yes I think that's healthy, that there is a performance related assessment of the performance of the Board of the FSA. It's a pity that up to now the Treasury has been taking the line, well all we must do is learn lessons for the future and we're not interested in redressing anybody who's suffered financial loss as a result of past mistakes. I hope that's going to be changed as a result of the pressure that's being put on.

LEWIS: And of course the Treasury was in charge for some time and that's being looked at by another inquiry, the Penrose inquiry, do you think that when that's published you anticipate the Ombudsman going back even further looking at misadministration then and ordering compensation to more people?

CHOPE: Maybe, and I hope that that will happen but it's still rather vague as to whether Lord Penrose is going to look into the issue of misadministration and possible rights of redress at all and that's why I hope very much that this week the Ombudsman will say that he will be starting his independent inquiry, I hope that he will announce that before the adjournment debate that I've got on this subject on Wednesday so that I can then talk about the particular terms of that inquiry.

LEWIS: We'll be hearing more about this on Wednesday, Christopher Chope, the Conservative MP for Christchurch, thanks very much for talking to us.

Now a British woman living in South Africa won the right this week to take the government to Court over her retirement pension. More than thirty six thousand people draw a UK pension in South Africa but those pensions are frozen at the rate when they were first paid and they are never increased in line with inflation. The result is that some older people are receiving a pension of just a few pounds a week, the rate they got when they first claimed it twenty years or more ago. But this week the High Court in London gave Annette Carson the right to challenge that policy. I rang Annette in Johannesburg and asked why this was so important to her?

CARSON: People like me depend very much on a welfare system that we were brought up to believe would look after us in old age. People like that, and I fall into that category, make sure they jolly well contribute throughout their working life so they'll be eligible for it and in fact the department encourages people. When I came to South Africa I contacted the department and said tell me how I can continue contributing until I reach retirement age so that I won't lose any of it and the department was quite happy to help me contribute and I was hoping I was going to receive a full pension and it was quite a surprise when I realised I wasn't going to.

LEWIS: When Annette's case is heard it'll be the first time the government has had to defend itself in recent years in court over freezing pensions. Worldwide four hundred and ninety thousand UK pensioners don't get their pension increased with inflation and the government claims that doing so, all around the world, would cost three hundred million pounds a year. Well live now to Cape Town to talk to Annette's lawyer, Graham Chrystie - a partner is the City law firm Vizards, Staples and Bannisters. Graham, remind us how these rules work..

CHRYSTIE: Paul, annually all UK pensions are up rated if you're resident in the UK, however there's also a disqualification order which disqualifies British pensioners resident overseas from getting any increase. But there's also a further arrangement whereby if the UK government and overseas governments have an agreement you can get your increase. It therefore happens that approximately fifty three per cent of these residents overseas are deprived and forty seven percent obtain their full increases.

LEWIS: So these are people who get the increases, people living in the European Union, for example, and in America I understand but people in other countries, particularly Commonwealth - South Africa, Australia, Canada, they don't get increases.

CHRYSTIE: Correct, we're talking about hundreds of thousands of people not getting these increases.

LEWIS: Now although that may sound unfair, and this is a subject we've covered on Money Box before, what is the legal case that makes it wrong?

CHRYSTIE: The Human Rights Act of 1998 brings UK law into line with Community law and basically there is a right now, in terms of the European Convention of Human Rights, embodied into UK law, for a right in possession and we are making the case that pensioners are right in possession and that the people resident in South Africa are being discriminated against as far as they're not getting any increases whereas others are.

LEWIS: So this goes right back to Annette's point that she paid into her pension like everyone else but she gets less than other people so in a sense that extra is being taken away from her?

CHRYSTIE: It is being taken away. If she comes back to the UK, even for a short holiday, she can apply for the increase and get an increase and UK rate of pension.

LEWIS: And if she wins the case, if you win the case on her behalf, will it just affect her or all the half million UK pensioners affected?

CHRYSTIE: We're basically applying to strike out the disqualification for increases so it should open the door to all these disqualified pensioners and enable them to get their increases.

LEWIS: Now the government says to us it wants to concentrate what additional resources it has on pensioners living in the UK. That seems fair comment.

CHRYSTIE: A fair comment if you haven't paid in and have been induced to continue to pay in, then very often two weeks before you're due to retire, you find to your horror that in fact you're not going to get increases and in many cases you'd have been much better to invest the money locally.

LEWIS: And in a word Graham, when do you expect this to come to trial?

CHRYSTIE: We're hopeful between May and June next year.

LEWIS: Well we look forward to talking to you again and good luck with the case. Thanks very much for talking to us Graham Chrystie from South Africa.

The scandal of endowment mortgages, where the money saved in the endowment will often not be enough to pay off the mortgage loan, is something we've often covered here on Money Box. But there's another group of people who may also be facing similar problems. A pension mortgage combines our two biggest financial commitments in one deal and it now seems likely that a substantial number of the hundred and fifty thousand such policies may fall short. Our reporter Martin Lewis is with me, Martin how does a pension mortgage work?

M LEWIS: Well Paul in truth they don't actually exist! They're two separate products- a pension and a mortgage, and that's part of the problem. The idea is you take a mortgage where you pay only the interest then when you retire you use the quarter of your pension fund you're allowed to take as cash to pay off your original home loan, leaving the rest to buy you a pension using an annuity. They seemed attractive, as you get tax relief on pension contributions so there's more money going in. Linda, a Money Box listener from Llangoff took out a pension mortgage fourteen years ago but it's looking like it won't repay her mortgage, nor give her an adequate pension.

LINDA: I was told that it would pay off my mortgage of thirty eight thousand and it would give me a substantial pension. However when I got the quote back from them, that was about 1999, I found out that at the age of sixty I'd get a cash sum of ten thousand two hundred and a pension of three thousand four hundred per annum.

M LEWIS: Linda's therefore committed to using this cash sum towards her mortgage, even though it'll only pay a quarter of what's needed, rather than using it to boost her retirement income. She's now considering whether she was missold the policy. Ray Boulger of mortgage broker Charcol says her situation is common for policies set up in the late eighties and early nineties as both inflation and investment returns have fallen since then.

BOULGER: They will probably have set the pension up on the assumption of growth rates of between eight per cent and thirteen per cent and in exactly the same way as projected returns on endowments has fallen there may not be enough in it to pay off the mortgage and because annuity rates have fallen the actual amount of pension will be hit by the double whammy of a smaller fund and lower annuity returns.

M LEWIS: Worse still, as the two policies are completely separate even if your pension isn't projected to pay off your mortgage no one will send you a letter telling you. Pension mortgage holders are on their own. Abbey National has thirty thousand interest only mortgages where the holder also has a pension, but its decided not to sell pension mortgages anymore. Steve Conley, its Group Pensions Manager, explains why it's pulled out of the market.

CONLEY: We decided to withdraw for belief that a pension is appropriate for only a few people, it wasn't worth our while to try and explain to those few people the pro's and con's of the pension.

M LEWIS: And Abbey hasn't withdrawn because it's worried about misselling?

CONLEY: We haven't withdrawn for that reason but that reason does add weight to our decision.

M LEWIS: We asked the Regulator, the Financial Services Authority, if pension mortgage misselling and shortfalls were a concern and what its plans were. It declined to comment, however Paul Cooper of Claims, a business helping people get compensation for missold financial products, says more problems are likely to be uncovered.

COOPER: Pension mortgage misselling is a widespread problem because the salesmen got much bigger commissions from selling someone a pension than from selling someone an endowment. A pension mortgage can only touch twenty five per cent of the money, therefore you have to put much more money into a pension than you do to an endowment. There are large numbers that have been sold and they haven't been properly investigated yet.

LEWIS: Paul Cooper of Claims. Martin, you said pension mortgage holders are on their own, how can they work out if the pension isn't likely to cover the mortgage?

M LEWIS: Pension providers send an annual illustration telling you how much is in your fund and the projection of how big the fund may be at your chosen retirement date, hopefully this will state what the tax free lump sum you can take at retirement is. That's the crucial figure, if not it's usually simply a quarter of the fund. You then need to match this figure up against your original mortgage loan.

LEWIS: And what if it's less, what if you're going to have a shortfall?

M LEWIS: Well it's likely you'll need to start paying more, either by starting to directly pay some of the capital off your mortgage or by setting up another investment like an ISA to meet the shortfall or by increasing your pension contributions. It's worth taking independent financial advice.

LEWIS: And if you think you've been missold the product, how's that defined?

M LEWIS: Well it isn't strictly defined but there's likely to be two issues. First if no one told you your pension mightn't grow quickly enough to pay off the mortgage or if your advisor sold you a pension mortgage when it was completely unsuitable, possibly if it was instead of paying into a company pension.

LEWIS: And who do you complain to if you think you might have been missold?

M LEWIS: The person who sold it to you in the first place, if not then to the pension and mortgage companies. If you're not satisfied you may then complain to the Financial Ombudsman.

LEWIS: Thanks for that Martin.

In this world nothing can be said to be certain, except death and taxes. That was Benjamin Franklin in 1789 but what happens if someone dies before they pay their taxes? Do they still have to be paid? That was the question that June e-mailed us this week and she explained to me what had happened.

JUNE: I was married to an American, we worked in Saudi Arabia and then we retired to the UK two years ago. Then he began to receive his American old age pension, he died in December very suddenly from heart failure. Round about July I got a letter in from the Inland Revenue stating that as his personal representative I should pay his taxes for the current tax year and they were taxing his old age pension. Now my question is, when Tom died he had no money, no personal possessions that I could sell, I owned the house, I owned the car, why do I have to pay what in effect is somebody else's tax bill?

LEWIS: Well a fair question and who better to put it to than John Whiting, President of the Chartered Institute of Taxation. John, take me through this, June's husband, when he died, had no will.

WHITING: Right, and that of course means that in this case June acts as his administrator because he died intestate and one of the things the administrator, the executors do, is they get hold of all the assets in the estate, and of course all the liabilities because people will die with a credit card bill, anything like that outstanding, and it seems that her husband died with some income that he had but of course that created a tax bill which he'd yet to pay and there's a bill there that the Revenue are, understandably saying, has to be paid. But it's due out of the estate.

LEWIS: So it isn't actually June who has to pay, what she has to do, as you say she's like an executor in effect, she has to add up all his assets, look at all his debts, pay the debts if she can, but if she's right and he really had very few assets then there's no money to pay this tax bill.

WHITING: That may well be the case and clearly if really all he died was with the clothes he stood up in, as it were, and a few bits and pieces, then she can write to the Revenue and say, well look, he died with fifty pounds and you're saying he owes you a thousand, sorry the estate is insolvent, and that should be that. But needless to say, I'm sure they'll be asking to say well can you prove that that's all that he had.

LEWIS: They'll want to see some sort of accounts, and of course this is income tax not inheritance tax because he didn't have enough.

WHITING: Yes.

LEWIS: John, while you're here, the Revenue lost a case in court this week that could help people with their self-assessment forms?

WHITING: Well yes, many people will hold off putting their forms in until they've got exact figures. It is possible to put in estimates, the Revenue have always said, oh well only in certain cases, exact circumstances. What they're now saying is, ah, because of this hearing it will be looking at that guidance and may well just take a simple estimate so please if you don't know the exact figure put the return in with an estimate.

LEWIS: And this is very helpful because in the past those forms have just been sent back haven't they?

WHITING: They have, the Revenue have tended to send the form back without a fairly exact, very scientific, estimate that says well the reason I haven't filled in the exact figure is because the trust or whatever hasn't given me the exact figure so it's another lesson, please, please don't hold off putting your form in. Remember that famous hundred pound fine for January 31st.

LEWIS: Indeed, we've got a few months to go yet, I'm sure we'll be talking to you before that, John Whiting thanks very much for talking to us.

And, Martin, good news for some members of National Mutual this week?

M LEWIS: Yes roughly a hundred and sixty thousand policy holders with the pensions specialist are like to receive windfalls worth at least five hundred pounds next Spring, if they decide to vote for the takeover of the Society by GE Capital. Voting packs will be sent out this week for a ballot on November 20th, unfortunately there are about a hundred thousand policyholders who won't get windfalls, as they don't have with-profits policies.

LEWIS: And a new scheme for someone worried about the cost of their mortgage.

M LEWIS: Yes, bizarrely City Index, the spread betting firm, is jumping on the housing bandwagon to try and get people to hedge their bets on the future value of their property with a bit of a betting flutter.

LEWIS: Umm, bit of a gamble that. Thanks for that Martin, that's all we have time for today if you'd like more information about any of the items on the programme you can call the BBC actionline 0800 044 044, calls are free on 0800 044 044. You can look at our website www.bbc.co.uk/moneybox . More finance and business stories on Working Lunch, BBC2, 1230 each weekday, the phone in Money Box Live on Monday on insurance, the e-mail address, [email protected]. I'm back here next Saturday, today the reporter was Martin Lewis, the producer was Jessica Dunbar and I'm Paul Lewis.