Added Years

The acceptance of the new proposals will restrict a member's ability to buy in extra service within the TPS. If the new proposals are ratified, the Current and Past Added Years facilities will be replaced with a facility to purchase up to £5,000 per annum of added pension benefits. At the moment there is no restriction on the amount of benefits Added Years can purchase. The adoption of the new rules will mean a member is less likely to be able to fund for a maximum pension within the TPS.
 
This is an incredibly important point. Under the current system, purchased Added Years are used to provide the extra pension benefits based upon the final pensionable salary. Each Added Year buys 1.25% of that final salary as a pension and in addition it also provides 3-x pension as a tax-free cash sum. In most cases, your final salary is likely to be the highest salary you will ever earn so the Added Year gives you a guaranteed percentage of an unlimited future salary, hence an unlimited benefit. The pension is then Index Linked and also provides spouse's and dependents' benefits.
 
The new rules appear to restrict the total benefit to £5,000 per annum. This is a significantly lower potential benefit than the current rules allow, yet the cost of buying the additional benefits will actually increase. In effect, it is likely you could receive less benefits for your money. The link between future earnings and the pension benefits derived from the payment of additional contributions will therefore be lost.
 
We strongly recommend all staff are made aware of this potential change. Anyone who is serious about funding for their retirement should maximise Added Years before 1st December whilst the benefits are unrestricted. We also generally recommend that Added Years be now chosen in favour of AVCs, even if a member is currently contributing to the AVC.
 
The new rules will allow a member to save more than the current 9% of salary into the AVC so we recommend you should use Added Years as first choice for your initial 9%, with any surplus funds being paid into AVCs (or more likely a flexible personal pension).
 
Although we can only offer an individual specific financial advice when requested, we would urge those members wishing to improve their pension benefits to review their decision and to consider maximising the Added Years facility whilst the benefits remain unrestricted. As a rule of thumb, the younger the member, the greater the benefit to be gained from Added Years although even those within 5 years of retirement will benefit from the guaranteed pension benefits that Added Years can offer.
 
Please e-mail us at info@affinity-ifa.co.uk if you have any specific questions.

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