If, after adding up all your various pension entitlements, you have worked out that you are unlikely to hit your income in retirement target, it is time to take remedial action.
There are two main pension-related options: in-house top-ups, called Additional Voluntary Contributions (AVCs) or private versions of the same thing, called Free-Standing AVCs.
In both cases, top-up schemes allow you to make up the difference between your ordinary pension contributions and the 15 per cent of total salary allowed by law.
For example, if your company scheme involves a payment of 7 per cent, AVCs allow you to pay in an extra 8 per cent. What are the main differences between them?
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AVCs: the advantages
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- They are generally cheaper to manage than a private alternative. The company usually meets some or all of the administration and fund management costs
- If you are in a final salary scheme, some AVCs, mainly in the public sector, allow you to buy "added years".
- The fact that the AVC scheme is monitored by the main scheme’s trustees offers a means of checking on performance and other issues.
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AVCs: the disadvantages
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- Your choice of funds is unlikely to be as extensive as with FSAVCs.
- Some pension scheme trustees are less conscientious than others. Their investment strategy or risk profile may not match with yours.
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FSAVCs: the advantages
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- Flexibility of retirement dates: an FSAVC can be accessed at any time between 50 and 75, provided you are retired or no longer work for that employer. This may be useful if you want to retire early but intend to continue in part-time work.
- A far greater choice of funds to invest in.
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FSAVCs: the disadvantages
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- Despite investment choice, most FSAVC savers opt for a similar investment mix as AVC ones.
- If your FSAVC is small, early retirement won’t be an option anyway.
- A large element of fund performance is determined by charges. FSAVCs can be highly expensive and inflexible.
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Most experts recommend that unless you have special reasons for choosing a private FSAVC, it almost always makes sense to go for the cheaper in-house AVC scheme.
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Copyright The Financial Times Limited 2008
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