Your questions answered by an expert panel from Coopers & Lybrand
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I have been saving for retirement using personal pension policies. I would like to secure the maximum pension possible from the accumulated fund through an annuity but I have been advised to take the maximum tax- free cash out of the plan first. Is this appropriate?

With personal pension policies you have to use at least 75 per cent of the fund to purchase a pension annuity, known as a compulsory purchase annuity.

The remaining fund (maximum 25 per cent) can be taken as tax-free cash. If you use the entire fund to buy a compulsory pension annuity then all the annuity paid is subject to tax.

However, if you take 25 per cent of the fund as tax-free cash and choose to invest it in what is called a purchased life annuity (these are bought voluntarily by individuals looking for guaranteed extra income) an element of the payments from this annuity is regarded as a return of the capital invested and is not subject to tax.

Only that portion of the payment that is regarded as income is taxable. By doing this you can increase your overall return on the same amount of money invested into annuities.

I have heard conflicting reports about the merits of investing in unit trusts that aim to track a specific index. Should I be investing in tracker funds or are actively managed funds better?

Unit trust performance statistics have shown that in certain periods tracker funds have outperformed the average unit trust. However, there are investment managers who have demonstrated their ability to outperform consistently the underlying index of their markets.

If you regard yourself as a cautious equity investor you may prefer to invest in a fund that tracks an index rather than rely upon the future judgement of the investment manager.

Should I invest in an endowment policy to fund future school fees?

Endowment policies are just one of many investment options. Whether they are suitable for you will depend upon such issues as your tax position, your attitude to risk and your requirements for access to the funds.

If you have not already invested in tax-efficient investments such as personal equity plans and tax exempt special savings schemes (Tessas), you should probably consider these as an alternative to an endowment.

You should also be certain that for any endowment policy taken out you can maintain the premiums for its full term (minimum 10 years), as the overall charges are relatively high and the best results are achieved when endowments are held to maturity.

The representative of the insurance company I invest with suggests that I should have all my investments under one roof. Is this wise?

A potential advantage of having your investments under one roof is simplicity since you need contact only one company to deal with all your investments.

However, your investments may suffer if the company performs poorly and good past performance is not a guarantee that future performance will also be good.

It would be prudent to diversify and avoid being exposed to the fortunes of one company.

I started my first full-time job in October 1992 at the age of 33 and joined the Universities Superannuation Scheme. My national insurance contributions up to then were negligible. Can you advise me as to additional voluntary contributions?

For example, would it be better to stay with the USS or make free-standing AVCs? Would I have the option of varying contributions without penalty, and which method of payment (monthly or yearly) would incur lower costs?

Once you pay AVCs they are locked in until retirement age and so are not accessible for emergencies such as school fees and medical expenses. If you have a mortgage, you may wish to consider repaying this first.

When you are in your mid-40s it will become clearer just how big a gap there is between your USS entitlement and the maximum the Inland Revenue will allow.

However, if you do wish to begin AVCs now, free-standing AVC contracts are most unlikely to be suitable unless you have a desire for a non-standard investment medium, for example some specialised Far Eastern equity fund.

In-house AVC schemes usually have attractive terms and those with the USS, like other big employers, rarely involve commission.

Readers should send their questions regarding financial and investment matters to our panel of experts at Question Time, Personal Finance Department, The Independent, 1 Canada Square, Canary Wharf, London E14 5DL. We cannot guarantee to answer all readers' questions but they will be sent to Coopers & Lybrand and a representitive selection will appear in Money each week.

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