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How can I max out my pension?
BD, South Lanarkshire: I am a single, 57-year-old male working for BT, with whom I have a final salary pension scheme (1/80th). By April 2010 - four months after my 60th birthday - I will have worked for BT for 40 years I have also been contributing to the Abbey Life Target Financial Series 2 fund and have gathered over 40,000 units since 1990. Each month, I pay £156 into this scheme. I would like to use the tax-free cash on my BT scheme to help me in retirement. What is your advice? Philip Pearson, P&P Invest, Southampton: As your main priority at this time is building your funds for your future retirement, you should maximise the tax-efficiency of your pension - contributions benefit from tax relief at your highest rate. For every £1,000 contributed to a pension, £1,282 gets invested as it benefits from tax relief at basic rate at source. The Abbey product - which is likely to be a life assurance policy structured for investment purposes - probably has a high level of charges. You could achieve better value and boost your savings by using a stakeholder pension. Under new pension legislation, members of an occupational pension scheme can also fund a private pension with a maximum total contribution between each scheme being limited to 100% of your taxable salary. This gives you good scope for an increase in pension funding, which should be achieved through encashment of units within the Abbey fund. A stakeholder pension will provide tax-free returns on savings, with the option of a tax-free lump sum equal to a quarter of the fund when benefits are taken. These schemes offer good value in that there is no initial charge to invest, with a maximum annual management charge of 1.5%. You should also consider completing your payments into the Abbey Life plan and redirecting the monthly contributions into the stakeholder pension. After that, I recommend that you open an ISA in this financial year. You can invest up to £7,000 (£7,200 from next April) and benefit from tax-free growth on savings, with the ability to draw a tax-free income in the years to come. You should go for a mix of fixed interest, commercial property and UK equity funds for the pension and ISA. This would help to maximise your capital while minimising risk over the years leading up to your retirement.
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