The appliance of science to savings

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Rob Davies, 31, is unmarried - unattached, as he puts it. He is a development scientist with ICI, earning pounds 21,000, with an annual bonus worth about another pounds 1,000. Rob lives in Manningtree, Essex, and is nine months into a pounds 38,000 repayment mortgage. He has pounds 7,500 of savings in a C&G postal account and about pounds 4,500 in other building societies that he hopes will yield windfalls. He puts pounds 150 a month into his company's "share save" scheme and also joined the company pension scheme two years ago.

Rob, like increasing numbers of youngish people, is becoming more aware of pensions. He joined the company scheme when he was 29 but even if he stays in this or a similar arrangement until retirement, it may not be enough. Rob wants to increase his pension provision.

What should he do?

To many people, Rob will seem in good shape financially - not overburdened with a massive mortgage, putting money aside regularly, and, by today's standards, in reasonably stable employment. He is prudent to be looking at boosting his pension, but he should also consider rejigging his shorter- term savings.

He expects to buy a new car in the next six months so, depending on how he funds this, there may in fact be little scope to improve the savings returns he is currently getting.

That said, it is worth making the general point that while it is all very well spreading his money around a range of building societies in the hope of windfalls, Rob may well be disappointed at the paltry amount of interest he is earning. Opening a Tessa account with one of the building societies he hopes will convert into a bank is an obvious way of improving his returns while retaining his right to any windfall.

As well as being tax-free, the interest rates on Tessas tend to be among the most competitive available from building societies, even for relatively small amounts of money. The important point to check, however, is that any Tessa opened does give membership of the society. Most of them do have this share account status, but it is worth checking none the less.

There are Tessas that can be opened with as little as pounds 100 - which is the recommended minimum for gaining entitlement to any windfall.

PEPs are another way of improving savings returns and can be started with as little as pounds 50 a month, although, as with Tessas, these should be seen as longer-term investments and are definitely not suitable for money that Rob may need in the short term to buy his car.

Rob could also use a PEP to top up his pension provision; he would gain the flexibility of having access to this money before retirement.

More obvious ways to top up the pension are by way of additional voluntary contributions (AVCs) to his occupational scheme. Or he could set up a free-standing AVC plan (FSAVC) with a separate pension company. Both types of AVC plan offer upfront tax relief - in Rob's case at the basic rate of 24 per cent (falling to 23 per cent from the new tax year, starting 6 April).

There are a number of differences to consider. An employer-provided AVC will mature at the same time as the main occupational pension scheme, whereas an FSAVC can be set up to mature earlier or later; the FSAVC can also be taken from job to job. An in-house AVC may have a cautious investment strategy based on building society deposits or a with-profits investment.

A relatively young man like Rob may prefer, and stand to benefit from, the more adventurous investment choice that an FSAVC offers. But an FSAVC will usually have higher charges than an in-house AVC.

Pensions are sufficiently complicated to encourage Rob to get further specialist advice. He should also note that any money he puts into an AVC or FSAVC will be tied up until his retirement. A PEP, however, can be cashed in at any time.

Finally, aged 31 and showing such interest in pensions, Rob is clearly past the stage of thinking he will live forever. He doesn't need to be thinking about life insurance, partly because his company pension scheme already gives free life insurance equivalent to four times his annual salary. But he may want to consider other types of cover. For example, many lenders offer insurance to cover mortgage payments in the event of losing a job or of not being able to work because of accident or sickness.

Rob Davies was talking to Graham Baxter of JWH Financial Planning, a member of DBS Financial Management, a leading network of independent financial advisers.

If you would like to be considered for a financial makeover, write to Steve Lodge, Personal Finance Editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Please include details of your current financial situation and state why you think you need a makeover.

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