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Tips on top-ups

As a member of a company pension scheme, I understand that I will have some new options in April after the introduction of stakeholder pensions. I am particularly interested in topping up my benefits because, while the company scheme is a good one, I will not have been a member long enough at retirement to get the maximum benefits. The current AVC scheme is with Equitable Life. What should I do?

You have raised, directly or indirectly, a number of good questions. For some pension scheme members, it will be possible after April 6, 2001 to both be a contributing member of a company pension scheme and pay into a personal or stakeholder pension plan.

This will be possible only if you are not earning in excess of £30,000 a year. Also, you must not be a controlling director of the company.

Contributions to a personal or stakeholder plan will be paid net of basic-rate tax relief. As you know, if you contribute to an AVC plan, you get both basicand higher-rate tax relief immediately by virtue of your contributions being deducted from your gross pay.

Higher-rate tax relief on personal or stakeholder pensions has to be claimed from the Inland Revenue and this can take some time. That said, if you are earning less than £30,000, it is unlikely that higher-rate tax relief will be available against your contributions in any event.

If you choose to top up your contributions via a personal or stakeholder pension, you will need to arrange the plan and probably organise the payment of contributions via your bank account unless your employer is willing to facilitate such an arrangement.

The benefits of a personal or stakeholder plan include tax-free cash of 25 per cent of the accumulated fund value. An AVC started after May 1987 cannot directly produce any tax-free cash although the value of the pension it produces can be taken into account in calculating the amount of total tax-free cash available.

The benefits produced by the personal or stakeholder plan will not form part of the total benefits for the purpose of calculating Inland Revenue maximum benefits although, from what you say, that should not be a problem for you.

The main reason for allowing occupational scheme members to take out a personal or stakeholder plan while remaining a member of an occupational pension scheme was primarily to remove the need for an employee to have to choose between the different types of scheme. It has, however, meant that existing members who have or are considering AVCs have to make a choice. A significant benefit of personal or stakeholder plans is, of course, the ability to take benefits from age 50 and continue to work and build up benefits in the occupational pension scheme.

You mention that your existing AVC scheme is with Equitable Life. While I do not wish to go into a long description of the troubles suffered by that organisation, it may be that a personal or stakeholder plan will provide you with a greater degree of investment choice from a company in which you have more confidence.

AVCs historically have been low-cost products (although free-standing AVC plans have tended to be more expensive) mostly because of employer subsidy. Personal or stakeholder plans are also likely to be relatively inexpensive, many operating with no more than a maximum annual management charge of 1 per cent.

If you leave your employer in the future having taken out a personal or stakeholder plan, you will not have to stop contributing to the plan even if you take on further employment and join your new employer&#39s scheme. You will, however, have to undertake to advise the scheme and administrator if your remuneration exceeds £30,000.

The maximum contribution to a personal or stakeholder plan of £3,600 a year includes any contribution that your employer might make to support your endeavours to improve your retirement benefits.

Given the choice, I suspect many occupational pension scheme members will be best advised to top up their scheme with a personal or stakeholder. For many, this may mean ceasing to contribute to their scheme AVC or FSAVC plan.

In the case of FSAVCs, check to see if there are any penalties that might be applied before making the plan paid up or transferring it. If you have yet to make any provision, you might wish to wait until April to start topping up your contributions.

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