From top-up to PEP-up: stretch your savings

SPECIAL REPORT: PENSIONS; Neil Baker looks at four alternative ways of boosting your retirement funds

Top-ups

If you are part of an employer's pension scheme, you can make top-up payments, known as additional voluntary contributions on top of the money you have to pay to the main scheme. You can use these AVCs to increase the benefits you will get when you retire. Some employers offer a range of AVC schemes so that you can use your extra contributions to top up a particular benefit, such as life insurance.

You are also allowed to make additional contributions to a separate pension scheme run by someone other than your employer, such as an insurance company. These are known as free-standing AVCs. Both types are tax deductible.

Like the rest of your pension, you cannot get your hands on the benefits until you retire. That inflexibility can be a drawback. So far, only 10 per cent of people in occupational pensions have used this top-up facility to lift their pension entitlement, but if you are in such a scheme it is something you should consider.

Free-standing AVCs are simple to understand and a relatively safe form of investment but as with all financial services it pays to check the charges. If your contributions are paid into a unitised fund there is often a 5 per cent spread between the buying and selling price. There is also commission.

Most of the leading pension providers offer FSAVC schemes, so it pays to shop around. If you do it by telephone, make clear that you are only interested in topping up your existing occupational pension; you do not want to switch to a personal pension plan.

Moving offshore

There is something illicit, mysterious, even a little bit sexy about the idea of offshore investment. But if you are approaching retirement it can be a fairly simple and effective way to reduce your tax bill. Offshore centres such as Jersey, Guernsey and the Isle of Man have their own arms of mainstream UK financial institutions offering savings products with a different taxation basis.

Savings and investments made through these havens pay returns without deduction of tax, although UK residents are still required to pay the equivalent of the undeducted tax to the Inland Revenue. Depending on when the interest is credited to your account, you can delay paying tax for up to 18 months.

But some offshore products allow you to roll-up the potential tax liability until you cash in your investment. Gains are only taxable when they are brought back into the UK. Higher-rate taxpayers can benefit by putting off taking profits until they have stopped work and moved to a lower tax rate. While the value of the fund accumulates, investors can also take a form of income by selling fund shares. Offshore centres such as the Channel Islands have designated territory status, which means their regulation and investor protection is of a high standard.

PEPs

Contributions made into a personal equity plan are not tax deductible, but any income or capital gains are tax free. Each year every adult is allowed to invest up to pounds 9,000 through PEPs. Up to pounds 6,000 can be put into a general PEP and the remaining pounds 3,000 can be invested into a single company PEP. The attraction of using PEPs is that you can sell them as you want and you do not have to sell them in the same order that you bought them. If you buy from a number of different organisations, you can check how much each has grown over the years and decide whether to hold or sell. With the most common type of plan the manager will put your money into one or more unit or investment trusts. These are vehicles that pool investors' money to buy shares. Different unit trusts are managed to achieve different aims: they might go for good capital growth, high income, focus on small companies or just make sure they own shares in the big companies that make up the FT-SE 100.

When you put money into a PEP you will be charged an initial fee based on a percentage of the amount invested. Anything more than 5 per cent should be questioned. There will also be an annual management charge. The size of this will vary according to the type of fund. Anything over 1.5 per cent should be questioned, unless the fund is very specialised.

Endowments

With-profits endowment policies are usually used as an investment plan to pay off a mortgage but can also be a way of saving for the long-term. With an endowment policy you agree to make regular payments for a fixed period, normally of at least 10 years. You can surrender the policy early if you want to get your money back sooner than planned. But the policies are structured so that much of the value does not come until the last few years before it matures. Historically only a third of policies taken out reach maturity. Some 30 per cent are cancelled in the first three years and 40 per cent are surrendered or sold. If a policy is surrendered early, the amount the policy-holder gets back from the company that sold the policy varies. Many people who want to cash in early are disappointed when they discover that the surrender value of the policy is a lot less than they expected. But it is possible to get more from the policy by selling it in a growing second hand market. And buying a policy in the second hand market can be an attractive investment because it offers a guaranteed minimum value on a specific date.