Pensions: To step out of the rat race, step up your payments

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The Independent Online
AFTER a hard day's work, taking time off or retiring early look particularly attractive. If you are in a company pension scheme, this dream could come true if you act now. By maximising your contributions you can build up your pension more quickly, making early retirement or a career break a real possibility.

If you started pension planning late in life, or have had several years out of work, this is more difficult. But increasing contributions will help make up for some lost time and mean the difference between a frugal or a comfortable retirement.

Investing in your pension scheme is the best way to save for retirement because contributions are tax free. For a basic rate tax payer, pounds 100 of gross income is worth pounds 77 after tax. But, put into a pension, the full pounds 100 is contributed.

As an employee you can put up to 15 per cent of salary into an occupational pension scheme each year, on top of contributions from your employer. There is an annual earnings cap of pounds 84,000, so the maximum you can contribute is pounds 12,600 a year.

Some company pension schemes are non-contributory, others require contributions from you - typically between 4 and 8 per cent of salary. If you are contributing less than 15 per cent of your salary into your pension scheme, you can make additional voluntary contributions (AVCs) into your pension up to the limit.

"You should first talk to your employer about its AVC scheme to see what it is offering," says Martha Catherall, senior financial planner at London- based independent financial advisers, City Independent Financial Planning. "The overriding advantage of AVCs in-house is cost. Your employer will probably have negotiated a special deal with a pension provider to offer a low-charge scheme."

But the choice of investment funds may be dull, so you may prefer to invest AVCs with an outside provider. This is called a free-standing AVC (FSAVC) and is portable: that is, if you change employers and have to leave the pension plan, you still contribute to the FSAVC.

"Younger people and the more adventurous should not ignore FSAVCs," says Ms Catherall. "Set-up costs may be higher but there's likely to be more choice of funds. I've never, for example, heard of a company AVC scheme offering ethical funds. If time is on your side, a fund with a higher equity content should offer better returns than a building society fund or a with-profits fund, often the only choices available with an in-house AVC scheme."

You can only invest in one FSAVC scheme, but you can invest in your company AVC scheme as well. This can make sense if you want to invest part of your additional pension contributions into a low-cost conservative with- profits fund through your company, putting the rest of your extra contributions into potentially more rewarding funds in a FSAVC scheme elsewhere.

So if you're dreaming of early retirement and spending more time in the garden, upping your pension contributions is a step in the right direction.

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