Hand over plenty, for a prosperous old age

Buying a home used to be the biggest financial expense most of us faced. Nowadays it is more likely to be saving up for our retirement.
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The Independent Culture
To achieve a comfortable old age, good pension planning is essential, whether through a company pension scheme or a private pension plan. The more you can save, the better. Pension contributions are tax free and the relief on your premiums is at your highest rate of tax. Because of these generous tax breaks, there are limits on the amount that can be saved in a pension plan.

If you are in an occupational scheme, the maximum amount you can contribute is 15 per cent of your earnings. There is an earnings cap of pounds 84,000, so any pay over this will not be counted. Your earnings will include your basic salary, bonuses and any benefits in kind. Not included are any "golden handshakes", or money from employee share schemes.

With many occupational schemes your employer will match your contributions; if you contribute 5 per cent of your salary, your employer pays likewise into your pension. "Your employer's contributions do not count towards the 15 per cent you are allowed to put in," says an Inland Revenue spokesman, "and they will not be treated as part of your taxable pay, as long as they are made into an approved scheme."

If you are a late starter, or have not contributed enough in the past, you may want to beef up your pension provision. You should first talk to your employer about making additional voluntary contributions (AVCs) into its pension scheme. If you do not want to make extra contributions into your employer's scheme, perhaps because you think you may be moving on to another job, you can start what is known as a free-standing AVC with an outside provider. This will cost more, and any premiums must be within the overall limits of 15 per cent of your earnings.

If your boss does not operate a company pension scheme, or you are self- employed, then you must look to personal pensions, which have different contribution limits, although the earnings limit for this year is still pounds 84,000. The amount that you can invest in a personal pension increases as you get older. Up to age 35 the maximum contribution is 17.5 per cent of earnings; from age 36 to 45 the limit is 20 per cent; from 46 to 50 it is 25 per cent; from 51 to 55, 30 per cent; from 56 to 60, 35 per cent; and from 61 to 74, it is as high as 40 per cent.

If you have not made the maximum personal pension contributions in the previous six tax years you may be able to carry over some of this tax relief and make extra contributions now. So if you earn a large bonus, or receive a significant one-off payment, you can use some or all of it to make up for previous years' contributions, if you have not paid in the maximum allowable.

You can save into any pension scheme until and including age 74, but you must start taking your pension benefits by the time you reach 75.

As we have become more aware of the need to save towards our retirement, so many of us have started increasing our pension contributions. Some will have been paying into their pension scheme for years, and will have been making the maximum contributions possible. If you are one of these people, it is worth bearing in mind that there is a limit on the amount of pension you can receive. The maximum for any employee is two-thirds of the final salary. The Inland Revenue offers guidance on how this is calculated. "We regard final salary as the `best' you had in the five years immediately before retirement," says a spokesman, "or, alternatively, the average of the best three or more consecutive annual salaries you received in the 10 years before your retirement."

If you are in an occupational scheme, your employer may have its own rules on what counts as your final salary. If so, and you are thinking of retiring gradually by going part time and taking a lower salary in the run-up to finally leaving your firm, you should check with your employer to see whether this will affect how your pension is worked out.

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