With most bank and building society current accounts paying little or no interest, it is not a sensible option to leave the money where it is. Teachers who have taken the time to plan their investment strategy in advance of their retirement can ensure there is little or no delay between having the funds paid in to a current account and transferring the money to places where it will earn a greater return.

It is not always possible to find the time to make detailed plans, of course, but it is important not to rush into long-term investment decisions purely because capital is sitting in a current account. If no plan has been drawn up before retirement, funds should be transferred from the current account to a high-interest instant access account. Time can then be set aside to consider the options for investment, in the knowledge that the capital is earning its keep.

Whether the investment planning takes place before or after retirement, it is important to decide on the investment priorities and considerations. If there is a mortgage outstanding should it be paid off? What about short-term debts and credit card liabilities? How much of the lump sum should be set aside for immediate expenditure and how much will be left to invest? How much will the monthly pension be after tax and will it be enough to live on? Extra income may be needed to supplement the retirement pension, although not necessarily if the intention is to continue working either full-time or part-time after retirement.

It is useful to draw up a personal budgeting plan showing total annual expenditure against total net income. This gives an idea of the amount of additional income which will be required. It can be very difficult to estimate annual expenditure in retirement and a second assessment of expenditure a year or so after retirement can produce a more realistic figure.

Teachers are fortunate in having index-linked retirement pension benefits. Inflation, however, will gradually reduce the value of the lump sum and, more importantly, the value of the income it can supply. The retail price index for September 1995 shows year-on-year inflation of 3.9 per cent, the highest since May 1992. To protect the value of investment income, the available capital will have to produce a growing income.

Whatever the amount of capital to be invested, sufficient money should be kept readily available for emergencies and immediate cash needs. Bank and building society deposit accounts are an appropriate home for these funds and it is better to overestimate the amount required initially, rather than disturb long-term investments too soon.

The lump sum is paid free of tax but, once invested, income and growth may be taxable depending on the choice of investment. Tax treatment alone should not dictate the choice of an investment but in order to take full advantage of a tax-free lump sum it makes sense to choose tax-free investments where possible.

Deposit accounts offer security and easy access and pay a rate of interest which is taxed at source. While the present low interest rates are good news for borrowers, savers are suffering, with net interest payments now less than the present rate of inflation on many instant access accounts.

Postal deposit accounts offered by building societies offer better rates than the accounts available through the High Street branches of the same societies. The cost savings produced by centralised administration for postal accounts are passed on to savers, with typical rates exceeding those for branch-based accounts by up to 1.5 per cent a year.

Basic and higher-rate taxpayers should consider opening a TESSA (Tax Exempt Special Savings Account) if they have not already done so. Since the introduction of TESSAs in January 1991, more than 4.2 million accounts have been opened, with more than Pounds 25.5 billion invested. Interest is paid free of tax if capital is left untouched over the five-year term. The maximum initial investment is restricted to Pounds 3,000. Savers are allowed annual top-ups of up to Pounds 1,800 provided the total investment does not exceed Pounds 9,000.

Fixed interest and index-linked certificates are available through National Savings, and both offer a tax-free return over a five-year period.

Secure though they are, deposit accounts, TESSAs and National Savings schemes are unlikely to produce the higher returns which are possible over the longer term with investments which contain real assets such as property and stocks and shares.

Direct investment in stocks and shares is risky even for the most experienced investor. Pooled investments such as investment trusts, unit trusts and investment bonds offer a safer route to the stockmarket as they provide the opportunity to invest in a very wide range of company shares in a single investment. Investment decisions are made by professional fund managers, although there are no guarantees with stockmarket investment.

Income and gains from unit trusts and investment trusts are normally subject to tax, but not when they form the underlying investment in a personal equity plan. Individuals can invest up to Pounds 6,000 in each tax year in a general PEP plus a further Pounds 3,000 in a single company PEP. More than six million PEPs have been taken out since they were introduced in 1988. The tax advantages are most beneficial to higher-rate taxpayers and capital gains taxpayers, but all investors can benefit from the lower charges resulting from the recent competition between PEP providers.

Managed investment bonds, available from insurance companies, can be used to provide income and capital growth over the medium to long term. The initial investment is used to purchase units in a fund which contains UK and international company shares, fixed-interest investments, property and cash. Units can fall in value as well as rise and more cautious investors might consider distribution bonds or with-profits bonds as alternatives for a steadier return.

These, then, are the main options. But it has to be said that no one type of investment gives everything we were looking for at the planning stage. Instead an investment portfolio which uses a mix of different types can meet all the planning objectives and offers the best protection against unforeseen changes in the future economy. There is no ideal investment strategy and the exact proportions of secure and asset-backed investments in the portfolio will vary according to your personal attitude to risk and the amount of capital to be invested.

John Chadwick is a development manager with Frizzell Life and Financial Planning