Pension extras that don't add up
In 1989, when university lecturer Paul Durden was looking for a way of topping up his pension, additional voluntary contributions (AVCs) looked attractive. He considered buying added years in the main Teachers' Superannuation Scheme (TSS), but with annuity rates rising, decided that if he contributed to the teachers' in-house AVC scheme instead he would end up with a higher retirement income.
Eight years later things look different. Annuity rates are near a 10-year low, and Mr Durden, who is approaching retirement, estimates that the Pounds 25,000 in his AVC fund would buy him an inflation-proofed annuity of around Pounds 1,500. If, on the other hand, he used this money to buy four added years and put up another Pounds 6,100 to buy a further added year, which would bring the total up to 40 years, he would be able to boost his basic annual pension by around Pounds 1,680.
"But the big attraction of buying added years is that the inflation proofing is solid," he says. "It's much more reliable than inflation proofing with an annuity, and I would also get a lump sum of about Pounds 5,000. So on balance, at the moment, buying added years is simply a better deal, if I could get it."
The Prudential Corporation, which runs the teachers' in-house AVC scheme, told Mr Durden he would not be able to use the money in his AVC fund to buy added years. It had to be used to buy an annuity. The Prudential employee he spoke to could not explain the reasoning behind this rule and referred him to Teachers' Pensions, the government agency responsible for the TSS.
Mr Durden set about trying to find out why he could not make what he saw as the best possible use of his own retirement savings. He contacted Teachers' Pensions. He also wrote to his union, NATFHE, the university and college lecturers' union, all the other teacher unions and anyone else he thought might have an answer to this question, including Education and Employment Secretary Gillian Shephard and the Inland Revenue.
Mrs Shephard and the Revenue have yet to reply, but judging by some of the letters Mr Durden has received, it seems his question is one that teachers have rarely, if ever, asked before.
According to Bill Birmingham, manager of benefits services at the National Association of Pension Funds, the answer to Mr Durden's question lies in a technical oddity that sets unfunded public-sector pension schemes apart from other schemes. Members of most schemes can choose to take part of their pension in the form of a tax-free lump sum, he explains.
But teachers and members of other unfunded public-sector schemes do not have this choice because part of their pension is automatically paid as a lump sum. Because the Inland Revenue says AVC funds cannot be used to buy retirement benefits consisting wholly or partly of a lump sum, teachers and many other public sector employees cannot use these funds to buy added years in their main pension schemes.
"Whereas most private schemes will give 160th of final salary for each year of service, the teachers' scheme gives 180th of final salary for each year of service," says Mr Birmingham. "But the difference between 160th and 180th is made up of a lump sum, which is paid automatically, so if you purchased any added years, you would get a proportion of your added years paid as a pension and a proportion paid as a lump sum, and the Inland Revenue has imposed a requirement that nothing anybody pays by way of AVCs may be taken as a lump sum."
Mr Durden argues that these rules are unfair. He is not suggesting that money paid into an AVC fund should be used to buy anything other than a pension, but that individuals should be able to choose what type of pension this is. Members of some pension schemes have this choice and can use their AVC funds to buy added years, although the Inland Revenue's rules still mean they cannot take the AVC element of their pension in the form of a lump sum.
A recent survey by the National Association of Pensions found that in the private sector, 6 per cent of AVC schemes provided added years, while in the public sector 88 per cent of respondents - mostly local authorities - provided this facility.
So in a school or college, a caretaker or administrator belonging to the local government pension scheme, which is funded, may be able to use money that has accumulated in his or her AVC fund to buy added years. But a teacher or lecturer working in the same institution will not have this option.
Calling for a change in the rules, Mr Durden says: "The regulations governing the teachers' AVC scheme are not written by the Finger of God. They can and should be changed in favour of teachers approaching retirement."
MAKE THE MOST OF YOUR MONEY
Annuity rates offered by life assurance companies vary much more than other interest rates. According to the Annuity Bureau, a firm of independent financial advisers specialising in such investment, the difference between top and bottom rates is on average around 9 per cent, but can be as much as 25 per cent.
So teachers who have been paying AVCs into a free-standing AVC policy or the in-house scheme operated by the Prudential need to select an annuity with care - or end up with a reduced pension for the rest of their lives.
Annuity rates are also volatile. When share prices are high, they tend to drift downwards, which is what has been happening over the past three months.
But two of the biggest life assurance companies have recently put their rates up, and Ronnie Lymburn, business dev-elopment director at the Annuity Bureau, says there is a chance that annuity rates may now start to drift upwards.