Questions of cash: Income protection and a £1m pension problem

In the present economic climate, has the price of income protection gone up over the past year? Does it fluctuate in good/bad times? BD, Newport, IoW.

In the present economic climate, has the price of income protection gone up over the past year? Does it fluctuate in good/bad times? BD, Newport, IoW.

David Hanratty of Nelson Money Managers says: Premiums on income protection policies, giving the policyholder an income if he or she is sufficiently ill or injured to be unable to work, are unaffected by the economic environment. But there are also accident, sickness and unemployment (ASU) policies, in which the unemployment element has moved premiums up slightly so far this year. The main provid-ers are Axa and Norwich Union. This week, Scottish Equitable launched an income and unemployment policy.

My partner and I are a few years off retirement and find ourselves woefully under-provided for pensions, but I have recently discovered to my amazement that the house we are living in is worth more than £1m. Is it possible to use this as our pension fund? FW, London W1.

Not if you want to qualify for the tax relief normally available on pension fund contributions, as your main residence cannot be put into a self-invested personal pension. But if you are willing to ignore that – and I suggest you put as much as possible into either an occupational or personal pension – you have two options.

The first and simplest is to trade down, selling your house and moving to something smaller in a less expensive area. You could easily set aside £700,000 or more, and still have enough for a decent home elsewhere, depending on the size of your mortgage. The rest can then be invested conservatively in gilt-edged stock to yield perhaps £30,000 a year tax-free, in addition to your state or any other pension entitlements.

But if selling your home is too much of a wrench, then several mortgage lenders offer equity release schemes, either as home reversion or roll-up.

Home reversion schemes allow homeowners to sell all or part of their property in return for tax-free cash, a regular income, or a combination of the two and you have the right to stay there for life. There is no loan to repay, but, when you die, or the property is sold, the scheme provider then takes its share of the proceeds.

With roll-ups, you mortgage your property for part of its capital value but do not have to make any repayments of capital or interest until the property is sold. The interest is added to the original loan on a compound basis. It is repaid by your estate on your death. So the longer you live, the bigger the debt.

Ensure that the provider is a member of the Ship (Save Home Income Plans) code of conduct which guarantees that you will not lose your home.

The Inland Revenue are trying to fine me for a late tax return which was sent back on time, but they lost it, twice. Is it true they can?t impose a fine which is greater than the amount of tax I owe? LC, Cardiff.

The Inland Revenue says: Penalties are charged for late tax returns. Surcharges are charged for certain late payments. In addition, if we think you have not paid enough tax on time we may issue you with a "determination of tax due". This tells you our estimate of your tax bill for the year. You cannot appeal against this estimate. There is a £100 fixed penalty if we do not receive your tax return by the deadline, usually 31 January.

If the correct amount of tax payable is less than the fixed penalties, they will be reduced to the amount of that tax. We cannot surcharge you more than the amount of tax due.

You can appeal if you think you have a good reason why you did not send your tax return back in time.

If you have any questions about personal finance topics or problems, please write to Questions of Cash, ?The Independent?, 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk. We regret that we can reply only to letters published here