Do some voluntary work

It's worth adding to your company pension contributions. Tony Lyons explains the choices

The value of the state pension is rapidly declining and whichever party wins the general election that trend is unlikely to be reversed.

The amount of your state pension depends on your National Insurance contributions record. If you have paid full NI throughout your working life, the basic pension for a single person is pounds 61.15 per week. The pension for married couples ranges from pounds 97.95 to pounds 122.30, depending on whether it is calculated on both husband and wife's contributions or on one partner's.

There is a top-up element, known as the state earnings-related pension scheme, or Serps, which can be worth anything from zero to pounds 101.44 a week, although most pensioners get less than pounds 60 from the scheme.

The value of Serps is being eroded and the whole scheme is likely to disappear under a government of whatever hue in favour of some form of private pension provision.

Occupational pension schemes are the best and cheapest means of pension planning. But out of an employed workforce of 22 million, only about half are in such schemes.

The usual type of occupational pension will pay out a proportion of salary at retirement based on the years you have been a member of the scheme.

Not many of us spend our entire working life with a single company. But you can purchase extra years' pension by paying additional voluntary contributions (AVCs). Since 1988 all new occupational pensions have had to allow AVCs. Setting up an AVC usually incurs little or no charge. The Inland Revenue rules allow members of occupational pension schemes to pay up to 15 per cent of net relevant earnings up to pounds 82,200 (pounds 84,000 after 6 April, 1997) in pension contributions, getting tax relief at their top rate of income tax. At retirement a company pension will not pay out more than two-thirds of final salary.

Most schemes involve members paying either no contribution or some 5 or 6 per cent of salary. Employees could, therefore, pay significant amounts in AVCs to make up for any deficiency. They could even find their firm matching their contributions. But current estimates are that only 11 per cent of those with company pensions pay AVCs. More people should do so.

Not every company pension set up before 1988 allows AVCs and sometimes employees do not want to pay additional contributions as they cannot be moved from job to job. So if you are thinking of changing jobs you would not want to make additional payments into a scheme that will become paid up or frozen when you move.

Free-standing additional voluntary contributions (FSAVCs) are the answer. FSAVCs work in a similar way to personal pensions except that the limit of 15 per cent of relevant earnings operates. Charges can be considerably higher than AVCs, although they are not usually as high as some personal pension plans. Often there are setting up charges, which can amount to the bulk of the first year's contributions. There are also annual management charges.

Like personal pensions FSAVCs can be invested in unit-linked or with- profits schemes. With the latter, bonuses are declared each year and once given cannot be taken away. However, the main bonus, the terminal bonus, which can be more than half of the final value, is only declared at maturity. As the rate of inflation has come down, so have bonus rates.

The unit-linked FSAVCs, in common with all other linked policies, offer a wide choice of funds. In most cases there is a 5 per cent or so difference between buying and selling prices of units. Purchasers have to decide how much risk they are prepared to take. Over the years equity-linked investments have outperformed most others. But the choice can be bewildering. The best unit-linked schemes will allow free switches from one fund to another.

Anyone planning to buy extra years of pension should seek independent advice from a qualified adviser. Charges and performance need to be examined. A good adviser will also list the benefits of increasing pension contributions through AVCs as against FSAVCs.