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

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
On the money: Yorkshire building society has demonstrated that it is taking the P2P industry seriously

Is peer-to-peer lending a risk worth taking?

The P2P industry must do more to shake off an unjustified image of being too complex and risky for the everyday saver, says Andrew Hagger

Generating grievances: Scottish Power's Longannet station in Fife

Questions of Cash: Scottish Power says it's sorry - again and again

Six of the energy company's customer have cause to blow a fuse this week

Will Patisserie Valerie be the portfolio's sweet spot?

Derek Pain: 'Patience is a virtue but maybe I should cut and run'

Derek's portfolio is currently suffering because of his failure to be more ruthless

There are now more than three million people in “severe problem debt”

Debt managers are misleading vulnerable people, warns watchdog

One debtor was given a repayment plan that would have taken 125 years to repay

Challengers are smashing the traditional high street banks when it comes to offering decent savings rates

Ignore the new breed of savings institutions and you'll lose interest

NatWest has ripped up its pledge to never be the last bank in town

NatWest pledged five years ago it wouldn't close the last bank in town. Now villagers have been told the branch shuts in September

When the last bank closes, local shops quickly go out of business

Under new state pension rules we will all be much worse off

Why did no one notice? The Government hides behind complexity, says Neasa MacErlean

Bogus Islington landlord scams public for £20,000 in fake deposits

It’s not just Islington... Simon Read warns renters and landlords about a nationwide fraud operation

Questions of Cash: The paperwork wasn't right so I was left high and dry with a broken washing machine

A reader encountered a problem with a Currys washer/dryer care plan

Borrowers should steer clear of established providers to get the best rates

Interest rates have never been cheaper if you want a five-figure personal loan but for lower-value loans it's a very different picture

Personal banking: Banking chiefs at NatWest and RBS insist that they are over the worst of the technical issues but customers are still complaining of payment issues. NatWest has waived overdraft fees and told customers they can withdraw £100 more than their limit over the next few days

People’s bank in crisis again: What should you do about the NatWest/RBS meltdown?

Thousands still waiting for payments to go through

The average UK household is set to hold close to £10,000 in unsecured debt by the end of 2016

If they don't get help, debtors face 30 years of financial hell

There are many people in dangerous debt who don’t seek advice

RBS/NatWest meltdown: some customers may have to wait until Saturday for their cash

Some 600,0000 payments have been delayed many of which could be crucial

Renters' warning: bogus landlords are tricking potential tenants out of thousands

An army of tricksters are using online websites to trap their victims

The heat is on: two comparison sites have come under fire from the energy regulator

Comparison sites face accusations of price-fixing and hiding better deals from British consumers

Last week Moneysupermarket.com and uSwitch.com faced accusations of price-fixing from Ofgem

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    SThree: Talent Acquisition Consultant

    £22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

    Recruitment Genius: Experienced Financial Advisers and Paraplanners

    Negotiable: Recruitment Genius: This extremely successful and well-established...

    Day In a Page

    Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

    Making of a killer

    What motivated a shy student to kill 38 holidaymakers in Tunisia?
    UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

    Just when you thought your commute couldn't get any worse...

    Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
    Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

    The Real Stories of Migrant Britain

    Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
    Cheaper energy on the way, but it's not all sunshine and rainbows

    Cheaper energy on the way, but it's not all sunshine and rainbows

    Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
    Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

    No grace of God for Katy Perry as sisters act to stop her buying convent

    Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
    Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

    Residents just want water and power in a city chosen to be a ‘smart’ metropolis

    The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
    Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

    Something wicked?

    Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
    10 best sun creams for body

    10 best sun creams for body

    Make sure you’re protected from head to toe in the heatwave
    Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

    Nick Bollettieri's Wimbledon files

    Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
    Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

    There is more than a shiny trophy to be won by England’s World Cup women

    The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
    How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

    How to stop an asteroid hitting Earth

    Would people cooperate to face a global peril?
    Just one day to find €1.6bn: Greece edges nearer euro exit

    One day to find €1.6bn

    Greece is edging inexorably towards an exit from the euro
    New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

    'Iron Man' augmented reality technology could become reality

    Holographic projections would provide extra information on objects in a person's visual field in real time
    Sugary drinks 'are killing 184,000 adults around the world every year'

    Sugary drinks are killing 184,000 adults around the world every year

    The drinks that should be eliminated from people's diets
    Pride of Place: Historians map out untold LGBT histories of locations throughout UK

    Historians map out untold LGBT histories

    Public are being asked to help improve the map