Andrew Warwick-Thompson answers your questions. Q: I am a 45-year-old female head of department on a D allowance. I have been divorced since 1976 and have no real savings.
After staying at home with children I began teaching in September 1978. I should like to retire when I reach 57. Last year I took out a Prudential AVC (additional voluntary contribution), bringing my contributions up to the maximum of 9 per cent.
I have since been advised to reduce that to 2 per cent and take out another freestanding AVC (FSAVC). I have also been advised that I can "buy back" a few years from the LEA, and that I must not go over 40 years in total or I will have to pay money back. What should I do to maximise my pensionlump sum at retirement?
A: The straightforward answer is that you should pay AVCs andor buy "added years". Regarding added years you can pay a lump sum to secure guaranteed additional pension at retirement. For example, at retirement an individual might have completed 31 years as a teacher entitling them to a pension of 3160ths of their final salary as pension. By purchasing added years they could increase their pension up to a maximum of 4060ths.
By paying regular AVCs there is no guarantee of how much extra pension you will secure at age 60. The AVC contract will have a value at retirement and this will be converted to pension at the then prevailing rate in the open market, again subject to the overall limit of 4060ths of your final salary. The main differences between AVCs and added years are, therefore: * Added years produce guaranteed pension while AVCs produce a pension on what is usually called a "money purchase" basis.
* Added years are secured by a one-off, lump sum payment while AVCs tend to be paid on a regular, monthly basis.
The tough question is which is the best value? To answer this you need to find out the cost of buying one added year and how much you need to pay by way of AVCs to produce the same benefit; so you need to get a quotation for both.
Turning to your Prudential AVC, I don't understand the advice you have been given to reduce your payments to the Prudential and take out a FSAVC . Having incurred the costs of setting up the AVC in 1994, I see no reason for incurring further costs by taking out the FSAVC in 1995. You should approach this with caution and ask your adviser for a clear "reason why" letter.
Andrew Warwick-Thompson is a lawyer who works for Bacon and Woodrow, the international firm of actuaries and consultants. Readers wishing to put questions to him (no names will be published) should write to the Personal Finance desk, The ES, Admiral House, 66-68 East Smithfield, London E1 9YX (fax 071-782 3200). No personal correspond-ence will be entered into and no legal liability will be accepted for the advice offered.