Personal finance: Contacts: Money Q&A: Are extra pension payments a good idea?

I have been a teacher for five years. I recently received a mailshot about pensions and I responded. This resulted in a visit from a Prudential salesman who advised me to make additional voluntary contributions to a Prudential scheme. Should I?

FF, LONDON

The teachers' pension scheme is a final salary scheme. You get a pension related to your salary before you retire and the number of years you have belonged to the scheme.

All employers with pension schemes are obliged to offer an additional voluntary contributions (AVC) plan for people who want to make extra provision. The tax rules allow employees in an employer's pension scheme to contribute up to 15 per cent of their pay towards a pension, spread across the employers' main scheme (if it is a contributory scheme) and an AVC scheme.

The official AVC of the teachers' pension scheme is managed by Prudential.

As an alternative to the Prudential scheme, you could pay your money into a so-called free-standing AVC plan. These are offered by many financial services companies. It is impossible to know in advance whether the Prudential AVC plan is going to give a better return than others on the market. You have to make a judgement based on the past performance of different plans, and their likely future performance, taking account of where your money will be invested, and the amount of money taken out in charges.

Plan providers are obliged to give projections of investment performance based on standard assumed rates of growth laid down by the regulators. You have to take these projections with a pinch of salt. The actual investment performance could be very different, but the projections do enable you to compare the different levels of charges creamed off by the main plan providers. Unlike the main teachers' scheme, which gives a predetermined, pay-related pension, the Prudential AVC and other AVCs are money-purchase schemes. Your eventual pension will depend on investment performance and annuity rates (the amount of money your fund will purchase) when you retire.

If you start making AVCs now, you will have to use the money to buy an annuity income and cannot take any of the money as a tax-free lump sum.

But teachers also have the option to buy back past years' membership of the main teachers' scheme for years when they were eligible to join the main scheme but did not do so. This option would be available to you. There is a good chance you would get a better pension from buying a past year than putting the same amount of money into an AVC scheme.

For details call Teachers Pensions on 01325 745746.

Write to the personal finance editor, 'The Independent on Sunday', 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or e-mail i.berwick@independent.co.uk

Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, nor can we guarantee to answer letters.

We accept no legal responsibility for advice given.

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