Your Money: Pensions: who's sorry now?

Don't keep putting off the decision: plan for a pension now if you don't want to be poor in later life

Even disgustingly efficient people have pet hates or difficult decisions they put off for as long as possible. Some delay having children until they are less busy, while others prevaricate endlessly before filling in their tax return. Whatever your personal bete noir, delaying is an easy way of keeping a problem at arm's length.

Take pensions -many people wake up with a start at 40 or 45, realising they have still not got around to saving for a private pension. More than a third of people in paid employment and the self-employed are making no private pension provision at all.

There is no doubt that financially, the future looks grim for anyone having to rely solely on the state pension to provide them with an income in retirement. At present, the maximum basic state pension is just pounds 66.75 per week.

"There is a remarkably high number of people in full-time employment on a reasonable salary who are making no provision at all," says Martin Campbell of Virgin Direct.

But why do so many of us fail to save for a private pension? Inertia and a hope than the future will take care of itself are probably the main factors. But many people are actually put off by the products and the way they are marketed.

Terrifying pensions tables show that a 45-year-old would have to contribute more than 40 per cent of his earnings to a personal pension each month in order to have a retirement income even approaching his current one.

Philip Telford of the Consumers' Association says these figures are used by salespeople who want to frighten people in to taking out personal pension plans. "But they are so frightening that they put you off doing anything at all," he says.

Many people feel pensions do not suit them because they are so inflexible. No matter how desperate your circumstances may become, you cannot raid your pension fund before you are at least 50.

And when you do retire, only a quarter of your pension pot can be taken as a tax-free lump sum; the rest has to be used to buy an annuity, or income for life. If you die after you start receiving your pension, the money you hoarded is often simply swallowed up by your pension or annuity provider.

On the other hand, pensions do give huge tax breaks, particularly for higher-rate taxpayers.

To counter the less popular aspects of pension plans, the Government is planning to introduce stakeholder pensions in April 2001. This is a new type of low-cost, flexible private pension, which should be particularly suitable those on below-average earnings.

But it is not a good idea to delay starting a pension in anticipation of stakeholder pensions, say advisers. If someone with 20 years to retirement delayed making monthly pension contributions of pounds 50 a month for 18 months, this could reduce their potential pension fund by around pounds 4,000.

But if you do take out a personal pension now, make sure it will be easy and cheap to transfer to a stakeholder pension later.

What can you do if you are one of the many with no private pension provision? The important thing is not to bury your head in the sand, say advisers. It is better to do something than nothing.

"If you've got 20 years to go until retirement, that is still a significant period," says Mr Telford. And you may have more time than you thought. With work patterns changing, in the future it could become common to do some form of work after your 60th birthday, he says.

Advertising gives personal pensions a higher profile. But if you have access to an occupational pension scheme, this is nearly always the best option, because the employer is making a contribution as well, says Sheila Longley of the National Association of Pension Funds.

If you can choose only a personal pension and the commitment is putting you off, choose a pension which allows you to change your contribution level and stop altogether for periods of time. Friends Provident, Standard Life and Virgin Direct are among many providers offering such flexible pensions.

"Pensions no longer come with handcuffs," says Mr Campbell. "You don't have to be confident that you will be able to stick to a rigid pounds 150 a month for the rest of your career. You can now treat the better pensions as a place for your money to go whenever it's available," he says.

It is never too late to start putting money away for retirement "unless you are 59", says Roddy Kohn of Bristol-based independent financial advisers Kohn Cougar.

But if you have left it late, at least make sure the money you do save works as hard as it can. Putting your pensions savings into slightly riskier investments - which should produce higher returns - could make a little go a lot further.

Mr Kohn says: "If you've left it a bit late, consider taking a more aggressive investment strategy. You could invest in European equities, North American equities, Japan or the technology sector. Don't find yourself talked into making fixed- income investments."

Choose a pension product which has low costs, possibly one which is CAT-marked. A CAT-mark indicates that a product meets certain good- value criteria set out by the Government.

Where appropriate, allocate lump sums to a pension contract rather than regular savings. This usually keeps the cost of contributions down. And self-employed people should try to make those payments early in their accounting year, rather than waiting until accounts are prepared, to get the maximum growth, says Mr Kohn.

Is a pension the only way to save money for retirement? Everything that works like a pension is not a pension, says Peter Smith of IFAs Hill Martin. So if it is the mechanics of pensions which puts you off, you can still save for retirement.

Individual Savings Accounts are the first alternative to consider. As opposed to pensions, the contributions you make into an ISA are out of your taxed rather than gross income, but the capital growth and income returns are tax-free.

The end result of this different tax treatment is that there is often little difference between the two forms of investment, at least for basic- rate taxpayers. And ISAs have some advantages over pensions.

Fees and charges are likely to be lower with an ISA, and they are far more flexible. Funds in an ISA can be accessed at any time, and in retirement, the fund can be kept in place while producing an income. After you die, the capital can then be passed onto your children.

Investing in property is another alternative to taking out a pen- sion. "Anyone who's got the capital to form a deposit on a flat to let out has the makings of a good income in retirement," says Peter Smith. Many lenders now offer buy-to-let mortgages.

But there are always risks with buying property to let. If you borrow a high proportion of the value of the property, you could end up saddled with negative equity if property prices plummeted.

This could make the property effectively impossible to sell. Or you could be unlucky with tenants and end up with people who damage your property.

Some people are able to save only if the money is taken out of their accounts compulsorily. But whichever way you decide to save for retirement, the sooner you do it the better. "Discipline in savings can yield substantial results," says Mr Smith. "I'm astonished how much people with high outgoings can save."

Consumers Association: 0171-830 6000. Kohn Cougar: 0117-946 6384. Hill Martin: 0171-227 3800. The Financial Services Authority publishes a free guide to pensions: 0800 9173311

20 REASONS FOR PUTTING OFF A PENSION

1. You don't earn enough yet

2. Most pensions on offer are a rip-off

3. You might change jobs

4. You have just changed jobs

5. You haven't got time to think about it right now

6. Your grandfather died when he was 64

7. Pensions are too complicated to understand

8. Hopefully, you'll inherit enough money to give you an income in retirement

9. You can't afford to support a family and contribute to a private pension

10. You are waiting for stakeholder pensions to be introduced

11. You'd rather spend your money now while you're young enough to enjoy it

12. You're still paying off a mortgage

13. It's too early

14. It's too late

15. You're still ploughing everything you can into your business

16. You're planning to marry a millionaire

17. When you retire, you'll sell your house, trade down and live on the profit

18. You're about to go on maternity leave

19. Life will be cheaper when you retire. Your dodgy hip will take the fun out of holidays, so you'll develop a taste for soap operas instead

20. You might die before you retire

HOW DO PERSONAL PENSIONS WORK?

PERSONAL PENSION plans are investment schemes run by fund managers, insurance companies, banks or building societies to provide you with an income in retirement.

At your chosen retirement age, from 50 to 75, you use your pension fund to buy an annuity, an annual income for life. You can choose to take up to 25 per cent of the fund as a tax-free lump sum.

The Inland Revenue gives you tax relief on your contributions. This means if you are a higher-rate taxpayer, for every pounds 60 you contribute, the tax man adds another pounds 40. For basic rate taxpayers, the Inland Revenue pays in pounds 23 for every pounds 77 of contributions. When you draw an income from your pension fund, this is taxed, but seldom at the higher rate.

You can take out a personal pension whether you are employed or self- employed, but an employer's pension scheme is usually the best option. Up to age 35, you can contribute 17.5 per cent of net earnings, rising to 40 per cent for those over 61.

There are many types of personal pension, and it is worth shopping around or consulting a good independent adviser.

Pension companies charge for setting up and administering plans, and for transferring the pension to another provider, and these cost should be compared. Some plans are far more flexible and cheaper than others.