Pension that is too much: A driving instructor's unhappy plight highlights the perils of overfunding a retirement plan. Maria Scott reports

INSURANCE companies continually exhort people to top up their pension contributions to avoid retiring on a pittance. But John Petty has retired on a pittance partly because he put too much into his pension.

Mr Petty, a draughtsman turned driving instructor, took out a pension plan with Allied Dunbar in 1977. By the time he retired in 1990, his fund was worth pounds 35,000, but he had to hand over nearly pounds 15,000 of it to the Government.

He had accumulated more money in the fund than Inland Revenue regulations allow, and therefore received too much tax relief.

Mr Petty's pension scheme was designed for executives and it is not uncommon for these to become overfunded. The Inland Revenue is discussing the rules of such schemes with the insurance industry because of this problem.

But it is unusual for an executive to have to forfeit his money, plus interest, to the Treasury. Mr Petty's pension plan was funded by contributions from his small driving instruction company. The surplus would have been returned to the company, minus a tax charge, had it still been trading.

Allied Dunbar says it did not find out about the overfunding problem until Mr Petty's company had been wound up.

He feels angry and confused and cannot see how his fund came to be nearly twice as big as it should have been. He thinks Allied Dunbar encouraged him to make large contributions with little thought for the consequences.

His experience is a lesson to any executive with one of these plans to keep a close eye on it. Executives who decide to wind up their company should take speedy advice on how this could affect their scheme.

Mr Petty, now 67, started his business after being made redundant twice during his career as a draughtsman. He contributed to his pension scheme from 1977 until 1982, when he felt he could no longer afford to do so. Allied Dunbar made his policy 'paid up'.

'At 62, I realised that I wasn't young any more, so I dissolved my company and retired,' he said. 'However, when my pension plan matured in 1990 at 65 years, Allied Dunbar told me that my plan was overfunded.

'It meant that of my pounds 35,000 fund value, pounds 3,300 was paid to me tax free but only pounds 17,300 could be realised for me to arrange an annuity to comply with Inland Revenue limits.'

The Allied Dunbar pension eventually bought him an annuity worth just pounds 84.39 a month and he and his wife have a total weekly income of pounds 145. They now live in Spain. 'We have to be careful,' said Mr Petty.

The rules governing executive pensions are complicated. The executive's company - even if controlled solely by him - can make contributions as an employer. The executive can also make an employee's contribution of up to 15 per cent of his annual salary although Mr Petty's contributions came solely from his company.

There are limits to the amount the individual can draw in pension when he retires. The maximum is two-thirds of the salary on retirement.

While a small business can, technically, put unlimited amounts into its executives' pensions, there is no point in shovelling money away if this will result in a pension that would be more than two-thirds of salary. The possibility of this happening increases at times of strong investment growth. Thus, the individual's salary must be monitored carefully, and forecasts made about how it will increase.

Mr Petty did not realise that this was how these schemes worked. He claims his salary from his company was never more than pounds 2,000 during the 1980s.

'To me it was a simple issue. I put in the maximum I could and at the end of the day drew out the best pension I could.'

Allied Dunbar claims the salary figures Mr Petty originally gave its salesman did not tally with the amounts he actually earned in the relevant years - a contention he disputes. It also claimed to have warned him in the early 1980s that the plan was in danger of becoming overfunded - which he does not recall.

The company said it had no correspondence from Mr Petty between 1987 and 1990, the crucial years when the business was being wound up and when, if action had been taken quickly, the surplus could have been returned to the company.

Mr Petty said: 'The scheme should not have been overfunded in the first place.'

Allied Dunbar denied this: 'We see no evidence of a mis- sale,' it said. 'The plan was a standard pension plan, which was appropriate to the client's needs.' The company has agreed, however, to discuss the matter further with Mr Petty, and to review its procedures to see whether it can avoid similar problems in future.