Maximising your pension

PAST ADDED YEARS AND AVCs

You can increase your pension through purchasing past added years or paying additional voluntary contributions (AVCs) or free-standing additional voluntary contributions (FSAVCs), through a personal or stakeholder pension scheme if you are earning less than £30,000 per year, or through other various forms of savings, including those with tax advantages.

If you take out these options you will receive tax relief at a teacher's highest rate of tax (though any pension paid at retirement from an AVC or past added years is taxed as earned income). As you can claim tax relief on 15% of salary contributed to an occupational pension scheme - and 6% of your salary goes into the Teachers' Pension Scheme - you can put 9% of your earnings into AVCs or into past added years. You can make payments for past added years or into AVCs by deduction from your salary so that you receive the tax relief immediately in your monthly salary.

But there are limits on the value of the pension, including the pension equivalent of the lump sum, you get at retirement: it must not be more than two-thirds of the final salary (as defined by the Inland Revenue and the AVC regulations).

You can contribute to past added years if you will have less than 40 years' teaching service by the time you are 60. You can purchase them by regular deductions from salary or through a lump sum on retirement or redundancy - but you must apply while you are still in pensionable employment. The cost of past added years is estimated as a percentage of salary and that depends on age. The cost of one added year is around 21% at age 21, just over 17% at 35, and it then rises to 24% at 59. If you purchase additional years you will get a lump sum and an index-linked pension on retirement, with additional benefits in cases of ill-health retirement, or family benefits in case of death before retirement. Past added years are particularly advantageous if you are confident that your salary will rise before you retire (you can find information on this on the Teachers' Pensions website).

The teachers' in-house AVC scheme is provided through the Prudential and has lower administrative charges than most FSAVC plans. Contributions can be deducted by your employer before tax. Under the scheme, you use your AVC fund to purchase an annuity (a pension) on or after retirement. There is currently no lump sum, but the government is considering a change in this. You can 'shop around' for the best deal on an annuity and should do so - look at the financial pages of the weekend newspapers and seek independent financial advice.

Your pension from an AVC or stakeholder fund depends on the value of the accumulated fund and annuity rates at the time the fund is converted to a pension, so it is difficult to make a simple comparison between the benefits from past added years and AVCs as much will depend on the long term future of interest rates and an individual's age.

Changes to the AVC scheme in 2000 mean that you can now defer taking your AVC fund as a pension at any age up to 75. You can now also eschew fixed interest annuities in favour of investment-linked annuities. These are most likely to be of interest if you have alternative forms of income which are adequate to meet your main costs.

The Prudential offers a choice of funds, including a with profits fund and a 'lifestyle fund', which allows you to transfer your AVC fund into fixed interest securities gradually as you approach retirement. This can help to offset some of the issues associated with low interest rates at the time of retirement. The Prudential provides an annual benefit statement and you are advised to check your payslips to ensure that the correct deductions have been made from your salary, and check that your benefit statement accurately reflects the contributions you have made.

STAKEHOLDER SCHEMES

As an alternative to past added years or AVCs you can now top up your pension through contributing to a stakeholder scheme, if you earn less than £30,000; like AVCs, you obtain a pension by using a fund to purchase an annuity.

The advantages of the stakeholder scheme over AVCs include:
• 25% of the fund can be taken as a tax-free lump sum at retirement
• the limits on contributions are higher
• there is greater flexibility for you to combine earnings from different sources and to transfer pension fund investments
• charges are capped at 1%.

The TUC has developed its own stakeholder scheme, with the Prudential and Standard Life as fund managers. The particular advantages of the TUC scheme include the governance arrangements and the charges which, at 0.85% of your investments, are below the 1% cap set by the government. NATFHE supports the TUC scheme and is represented on the sub-scheme for teachers - the Teachers' National Stakeholder Pension Scheme.

If you want to find out if a stakeholder pension is suitable for you, you can check the 'decision trees' produced by the Financial Services Authority (telephone 0845 606 1234).

YOUR PENSION WHEN YOU ARE OUT OF SERVICE

You can contribute 'current added years' to a pension scheme for up to three years while you are out of service, or six years if you are teaching overseas link to continuing to pay combined contributions pdf. You would have to pay the employer's contribution as well as your own, and the total cost would therefore be approaching 19.5% of your pensionable salary before you left teaching, index-linked for inflation. Contact Teachers' Pensions for details. Alternatively, you may contribute to a stakeholder scheme during a period of absence.

The choice of AVC, FSAVC, past added years or other investments has to remain one of individual preference, taking account of a wide range of different circumstances. NATFHE's role is to monitor the main agencies providing services and to assist with problems; under the financial services regulations we are not allowed to provide financial advice. You may wish to seek independent financial advice, for example, Frizzell on 0800 748748