Your money: Could you survive on pounds 65 a week?

Continuing a series

on financial planning, Rachel Fixsen steers

a path through the pension-plan maze

for those who have yet

to prepare properly

for retirement

It's hard, in your twenties, to get excited about pensions. Retirement seems a long way off, and pension plans pretty hard to understand. But unless you want your standard of living to plunge when you're 65, you should start planning for a private pension.

"The earlier people put money aside for a pension the better," says Jim Preston, regional manager of Wesleyan Financial Services. "When you consider that only 1-2 per cent of the working population will manage to fund their pension to the maximum the Revenue allows, you get some idea of how underfunded we are." The state pension can give a false sense of security. If you were living on it now, you wouldn't starve. But the maximum single person's basic state pension is only pounds 64.70 a week.

Things are going to get worse. The baby boom, longer life spans and lower levels of employment conspire to make pensions an ever greater burden for the state - which may be less and less willing to finance them. And the state pension does not keep pace with average earnings.

Of private pensions, occupational schemes are often best.

There are two main types of occupational scheme: final salary and money purchase. With a final salary scheme, the amount of money you get in the end is a proportion of your earnings at or near retirement, and also depends on the number of years you have been in the scheme.

With a money purchase scheme, contributions from you and your employer are invested. When you retire, the fund that has built up is used to buy an annuity income. The amount you end up with depends on the performance of the investments.

If you stay with an employer's scheme for less than two years, instead of keeping that pension or transferring it, you usually have to have your contributions refunded and lose anything your employer contributed. But this is not always the case. With money purchase schemes, employers sometimes waive the two-year rule and genuinely treat the scheme as deferred pay.

If you are self-employed or change jobs a lot, an occupational scheme is not an option. Instead, you have to look to a personal pension plan. This is basically a tax-efficient wrapper for investments. You use it to keep assets free from most income and capital gains tax. Your contributions get full tax relief, so a basic rate taxpayer has to pay only 77p for every pounds 1 invested.

The Inland Revenue limits the amount you can pay into a pension plan according to how much you earn. In an employer's pension scheme, you can pay in up to 15 per cent of your salary. Depending on your age, with a personal pension plan you can contribute between 17.5 per cent and 40 per cent.

There are quite a few different types of personal pension plans around. Unit-linked plans are the most common type. At retirement, the size of the fund your premiums have grown to is linked to the investment performance of a fund. With-profits plans are less risky than unit-linked plans. They are insurance policies where you share in the profits of the insurer with bonuses - which cannot be taken away. Unitised with-profits plans are a cross between unit-linked and with-profits.

In a unit or investment trust plan, your contributions are invested in unit trusts or investment trusts. The lump sum you end up with depends on the performance of the trust. These tend to have low charges and are often highly flexible. Women who have career breaks may find them suitable.

Marshall Williams & Co: 01403 210534. Wesleyan Financial Services: 0800 22 88 55. 'The Independent' free guide, 'Making Your Investments Work for You', is sponsored by Wesleyan Financial Services. Call 0800 1379749 or fill in the coupon below for a copy.