Topping up your pension

By THIS IS MONEY
Updated:

 

I've been in my company pension scheme since I was 17 and hope to stay in it until retirement. Is there any point in topping up and what are the best options? RH, Irvine.

Jon Minchin, independent financial adviser with Pensionline, says: Generally, how old you are determines whether it is worth topping up, but if you have been in the scheme since the age of 17 it is almost certainly inappropriate to do so. With a final salary scheme the maximum pension you can receive is two-thirds of your final pay.

In these schemes you usually get benefits of 1/60th of your salary per year, so after 40 years at work you will get 40/60ths and thus reach your 2/3 maximum. In principle, if you save extra into an AVC you can retire early if you have 40/60ths in under 40 years.

But in practice saving extra into an AVC in your situation may not be worthwhile because firstly, many companies encourage over-50s to take early retirement by offering to make up your pension to the equivalent of 40 years service as a sweetener, so you will get the maximum pension you can get. In this case any AVC contributions will have been wasted.

Also, if you earn less than £30,000 a year you will be better off from a flexibility point of view with a stakeholder pension (available from April next year) than an AVC. You can take out stakeholders alongside company pensions if you earn less than £30,000 and on payout you can take 25% of the money from your stakeholder as a lump sum but with an AVC 100% must be used to buy an income. If you earn more than £30,000 and want to put some extra away for your retirement consider ISAs as you get tax-exempt returns and you can get at your money.

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