So
what are the attractions of the various products which can boost your retirement income?
Starting with pensions, you get full tax relief on your contributions while the fund
builds up free of capital gains tax and virtually free of income tax.
In most cases the fund must be
used at retirement to purchase a taxable annuity income. Isas, like Peps before them, do
not attract any tax relief on the way in but the fund builds up virtually tax-free and you
can take the proceeds free of tax and at any time.
The annual allowance for your
company pension is 15% of pensionable pay (this is restricted for certain higher earners).
A typical contribution to a company pension scheme is 5%, which means that members can
contribute up to 10% of total earnings (including bonuses and sales commissions) into the
AVC/FSAVC provided you do not exceed the maximum company pension, which is two-thirds of
your final salary.
The annual allowance for Isas --
£5,000 a year (£7,000 in 1999-2000) -- is separate from and additional to the pension
allowance. The Government has proposed that investors should be allowed to switch funds
that have been built up in an Isa into their pension plan, although given the
incompatibility of the tax regimes for these two types of investment, it is not
immediately clear how this would work.
Isa or AVC/FSAVC
If you have a limited amount to pay into a monthly plan to boost retirement income, which
is the better product? The answer will depend on your individual circumstances but there
are some important considerations which may point you in the right direction.
Your decision may be influenced
by recent history. FSAVCs have undergone a period of intense scrutiny recently and have
been found wanting. Many employees have been sold the more expensive free-standing version
when their employer’s scheme offered a cheaper AVC alternative. |
An
in-house AVC scheme is generally likely to offer better value than an FSAVC as group terms
are more economical and the employer usually bears some or all of the running costs.
AVCs and FSAVCs are classed as
pension products and therefore follow a rather complicated set of rules which restrict the
timing and the format of the emerging benefits. Broadly speaking, you have to wait until
you reach pension age under your main company scheme before you can take your AVC benefits
(FSAVCs can be more flexible).
Low annuity rates
We are in a period of low inflation. The long dated gilt yield on which annuity rates are
based has fallen from more than 10% at the start of the decade to its current rate of
about 4.5%. With market conditions such as these, the conventional wisdom that older
investors should lock into gilt yields through an annuity purchase should be challenged.
Inflexibility
Compared with the Isa, the FSAVC is an inflexible product and is unlikely to be able to
compete with Cat standards for charges, access and terms. AVCs tend to offer competitive
charges but they are still inflexible. Remember, the Isa fund can be withdrawn at any time
in cash. You do not have to wait until retirement and you do not have to use the fund to
purchase an annuity to provide a regular, taxable lifetime income.
Restricted access
You can pay into an Isa at any time. The only time you can contribute to an AVC/FSAVC is
when you are a member of a company scheme. You would have to stop the AVC if you changed
jobs and this can lead to penalties. In theory the FSAVC is more portable, but if your new
employer offers a good quality AVC scheme this would probably be a better option. Most
FSAVC plans also incorporate early termination penalties.
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