Inland Revenue limits

Contributions to and income earned in an approved scheme are tax free if the following limits are not exceeded.

Maximum pensionable salary - for joiners since 14 March 1989, £95,400 (this is reviewed annually in the budget). No limit for earlier joiners.

~ Maximum pension - two thirds of FPS (which can include fringe benefits).

~ Maximum for spouse on death of pensioner - two thirds of the maximum (i.e. 4/9ths of FPS).

~ Minimum service for maximum pension -20 years (i.e. SOths) for joiners since 17 March 1987, ten years if earlier.

~ Contribution limit for employee - 15% of salary (none for employer).

~ Post-retirement adjustment - full inflation.

~ Lump-sum cash - 2.25 times initial pension for joiners since 1 June 1988, 1.5 times FPS after 20 years' service (reduced in proportion if less service) for earlier joiners.

Hardly anyone reaches all these limits.

Early retirement

Pensions are lower if you retire early for two reasons - less service and earlier payment. The latter is dealt with by the application of an early-retirement factor (ERF) to the pension, usually at least 4% for each year not worked.

Many schemes waive the ERF in the case of ill-health early retirement and employers wishing to encourage early retirement may eliminate it by paying in extra.

Cash lump sum on retirement

Most schemes have an option to take a tax-free lump sum on retirement, the pension being reduced proportionally.

If the pension is fully inflation proofed, then it might be better to leave the money in. Otherwise, check whether you can buy an annuity with the cash to provide a higher income.

Additional voluntary contributions (AVCs)

All schemes are required to have a facility for AVCs and anyone who can afford it and is not up to the Inland Revenue limits should consider making AVCs.

Additional benefits earned are usually on a money-purchase basis but may be in the form of additional years of service, which should be better.

For AVCs commencing after 8 April 1987, it is not possible to take part as a lump sum. For this reason it is worth considering a stakeholder pension (see below) instead of some or all of your AVC, as it will then be possible to take the tax-free lump sum.

Free-standing AVCs (FSAVCs) are outside the company scheme. Whilst giving more freedom, they are probably more expensive as you must pay the administration costs instead of the company paying.

There is some debate about whether AVCs are better value than Individual Savings Accounts (ISAs). With AVCs the contributions are tax free, but the benefits are taxable. With ISAs it is the opposite. Most experts favour AVCs because the tax relief comes at the beginning, so funds accumulate on a tax-free basis. ISAs allow more freedom of action, but is this a good thing for pension money?

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