Better safe than in the safety net

PENSIONS: as state support shrinks, we study the options for boosting your retirement funds and see how the industry is being reformed

The state pension is not enough to supply basic needs and its value is rapidly declining. Estimates are that in 20 years, if it continues in its present format, it will be worth just 20 per cent of average earnings. Can you afford to live on one-fifth of your present income?

The most fortunate are the 11 million people in the type of occupational pension schemes that pay out a proportion of final or best year's salary based on the number of years they have been members of the pension plan. The best schemes pay out a maximum pension of two thirds after someone has been a member of a scheme for 40 years. Nowadays, few of us will spend this long with one company so, particularly if you are in a reasonably secure, well-paid job, you should consider topping up your entitlement by buying extra years' contributions. In the jargon of the pensions business these are known as additional voluntary contributions, or AVCs.

For most of us without company pensions, we have to make our own provision, through a personal pension, for which the premiums attract tax relief. The maximum amount you can put into such plans increases with age, although it must be said that most people fail to reach the limit. Under 35s can pay in up to 17.5 per cent of earnings, and this rises in stages to 25 per cent for those aged 46-50 and again in stages up 40 per cent for those over 61. If you are a high-earner, note that these limits are percentages of income up to pounds 84,000 a year.

Many people wonder what happens to their pension contributions. Traditional personal pensions put the money into the insurer's with-profits fund, a portfolio that usually includes a mixture of fixed-interest stocks (including gilts and corporate loan stock), property and shares. Every year, a bonus is declared, which cannot be taken away. At retirement, a sizeable one-off terminal bonus, which is not guaranteed in advance, will be declared. The modern personal pension invests in unit trusts, investment trusts or similar unitised funds, whose future value will hinge on fund performance.

The main factor affecting retirement value, apart from the underlying performance of the fund manager, is the charges levied by the provider. Today, these are explained in detail, and whether you are buying your pension direct from the provider or through an intermediary, you must be given a statement showing charges and growth projections. Most retirement values project fund growth at 9 per cent a year. With no charges, the value of a pension with contributions of pounds 200 per month would be pounds 15,054 after five years, pounds 38,217 after 10 years, pounds 128,691 after 20 years and pounds 213,062 after 25 years, according to a recent survey by Money Management, the specialist magazine. The table shows projected values from some of the top performers.

Monthly contributions attract higher charges from most companies so the best personal pensions treat each contribution as a single premium with a lower charge. Fund management charges should be under 1 per cent a year. Unless you are buying direct, look out for any commission paid to the seller. Just as important, look at transfer charges. Personal pensions cannot be cashed in before you retire. If regular contributions are stopped or the fund is transferred to another company, most firms impose high charges, although Eagle Star has recently introduced a plan that refunds all premiums if an investor is unhappy with it and wants to transfer within two years. But whether you are looking to start a personal pension, or to top up an occupational scheme, remember that it pays to shop around - and to check the charges.

PROJECTED FUND VALUES

After 25 years (taking into account current charges)

Company Fund value

Standard Life pounds 166,000

Legal & General pounds 164,000

Norwich Union pounds 175,000

Virgin Direct pounds 176,000

Eagle Star pounds 177,000

Foreign & Colonial pounds 180,000

Scottish Equitable pounds 180,406

Merchant Investors pounds 183,000

Equitable Life pounds 186,276

Flemings pounds 188,000

No charges pounds 213,062

Source: Money Management

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