Andrew Warwick-Thompson answers your questions. Q: I have about Pounds 10,000 in a building society and wonder if it would be wise at my age - I am 55 - to enhance my pension by buying two to three added years or whether the money, invested long-term (say a building society five-year bond) would give me a better return. I have a Pounds 20,000 repayment mortgage which will end in 2002.
A: It is unlkely that an alternative form of investment would produce a better return than buying added years. You must bear the following in mind.
The current tax regime confers an enormous advantage on pension contributions over most non-pensions investments. To start with, you receive tax relief on your contributions provided they do not exceed 15 per cent of your salary each year - remember that the 6 per cent ordinary member contribution counts as part of the 15 per cent.
Pension funds are not currently subject to UK taxes, so the trustees of a pension scheme can calculate the cost of added years on the basis of gross investment returns - this means that it will be cheaper to secure added benefits in a pension scheme than to buy equivalent benefits via an investment that is subject to tax.
There are, of course, some non-pensions investments which do not suffer tax, eg National Savings Certificates, PEPs and TESSAs, but you do not get tax relief on the amounts you invest in them.
The added years that you buy will be used to calculate both your retirement pension and your lump sum. This works as follows: Each year you buy will count as 180th of your “average salary”, so it has the same value as actual pensionable service - “average salary” is the highest amount you earn for any continuous period of 365 days during the last three years of your pensionable employment.
For your lump sum payment, each year you buy will, subject to Inland Revenue limits, count as 380ths of your “average salary” - the Inland Revenue limits will restrict the number of added years which can count towards your lump sum if you are in emloyment for fewer than 20 years.
You should not overlook that added years also secure the other “extras” available under the Teachers’ Superannuation Scheme in respect of your actual pensionable employment: * Your extra pension will be index-linked, that is, inflation-proofed.
* They count towards the number of years’ service you need to qualify for widows’ and children’s pensions.
* The amount of widows’ and children’s pensions.
* The death grant payable when you die.
For more information about added years, the Teachers’ Pension Agency produces a very useful booklet (leaflet 374) and you can make personal enquiries to: TPA, ServiceElections, Mowden Hall, Darlington DL3 9EE.
Andrew Warwick-Thompson is a lawyer who works for Bacon and Woodrow, the international firm of actuaries and consultants. Readers who wish to put questions to him (no names will be published) should write to the Personal Finance Desk, The TES, Admiral House, 66-68 East Smithfield, London E1 9XY. No personal correspondence will be entered into and no legal liability will be accepted for the advice offered.
