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The pot thickens

I am aged 40 and have accrued 17 years in a final-salary pension scheme. I am still in the same employment and my salary is now £150,000. I am currently making AVC contributions of £600 a month. How do I assess if this is the most sensible form of retirement saving, bearing in mind the new lifetime allowance?

The first thing to do is value your current pension benefits in terms of the lifetime allowance, which is basically a limit to the amount of pension provision you can accrue before being subject to extra tax charges.

For these purposes, I will assume that your salary is no longer capped in pension terms although this should be checked as some schemes have brought in an artificial cap to limit their pension liability.

For a 1/60th final-salary scheme, your accrued pension to date is 17/60 x £150,000 = £42,500 a year. When multiplied by 20 to measure against the lifetime allowance, we get a figure of £850,000. As you have been paying AVCs, there is also that fund value to add to get the full picture.

The current lifetime allowance is £1.65m, which you are well below. However, your future pension accrual also needs to be considered. If you remain in your current pension scheme for another 15 to 20 years, during which time it is assumed that your salary will increase to some extent, your pension could well reach or exceed the lifetime allowance.

The value of the lifetime allowance has been set until 2010/11 when it will reach £1.8m. The limit is due to be reviewed every five years but we cannot predict with any certainty what it may be after 2010/11, so even with knowledge of your aims for the future in terms of employment and pensions, assessing the benefits against the lifetime allowance after this date cannot be accurate.

The lifetime allowance is applied on the date you take the benefits of your pension and does not vary with age. It is based on the actual value of the pension paid at that time, so if you are likely to take your benefits before the scheme pension age and reductions will apply for doing this, you will have scope to build up higher benefits in the meantime.

There is no definitive answer to your question, as your future pension membership cannot be predicted with any certainty. The most flexible option would be to cease your AVC contributions and save elsewhere. With the more generous rules surrounding the size of pension contributions that can be made in any year, you can always save your money elsewhere, then make bigger pension contributions in the future if you wish.

It is also worth bearing in mind that AVC contributions are linked to your main final-salary pension benefits. They generally have to be taken at the same time as the main scheme benefits, giving no flexibility for gradual retirement in the future, particularly as it is unlikely that the scheme offers any kind of phased retirement or unsecured pension.

On the other hand, having an AVC fund can be very beneficial in terms of taking tax-free cash from your pension at retirement. This needs to be assessed with the assistance of the pension scheme and may have an impact on your chosen savings route.

Saving elsewhere, such as maximising Isa investments each year, will not receive the tax relief that pension contributions offer but Isas will provide much more flexibility for the future in terms of when and how you can take your money and any money withdrawn will be tax-free.

Isa funds can be withdrawn in the future to make pension contributions if your situation deems it suitable at the time. If used for future pension contributions, tax relief will be obtained at that time, so you will not have lost out in that respect, assuming that your tax situation and pension rules do not change to affect this.

Your pension situation should be assessed on a regular basis because your future movements in terms of employment and pension membership could alter your situation drastically. When the lifetime allowance has been reviewed and more is known about any future increases, planning may become a little easier for you.

The main message here is that there is not a simple answer and your personal circumstances and aims are paramount in deciding what action to take.

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