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
Sport
The Aviva Premiership trophy
rugby union All the latest from Twickenham
Life and Style
tech
Sport
Aston Villa manager Tim Sherwood
footballDanny Higginbotham: Tim Sherwood must play game of two halves to cause major upset
News
Caber is trained to help child victims of serious crimes testify
news
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
The programme was a look back at the Mad Men-y age of the Sixties and Seventies

Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help

Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help

PPI complaints were down by about a half

Banks face fresh wave of PPI compensation claims after landmark ruling

The PPI scandal has already cost Britain’s banks around £24 billion

Some experts warn that the bond sell-off may continue until the autumn, when the US Federal Reserve is expected to lift interest rates

Is it really that bad in the bond market?

The great sell-off has sparked fears for our pensions as well as bonds. Simon Read asks if you should keep calm or panic
Up and away: rates will rise but your mortgage won't escape its moorings with a long-term fix

Is a 10 year mortgage deal a fix too far?

A cut-price deal for a decade-long home loan - where's the problem? Only, says Simon Read, that circumstances can change and it won't be easy to get out
In a surprise move the Tories have decided against putting a career politician into the job. Instead they’ve handed the responsibility to campaigner Ros Altmann

New pensions minister has massive job on her hands

The Tories have appointed campaigner Ros Altmann to the post

Promises, promises: David Cameron talks to staff at Asda's head office in Leeds today

General Election 2015: How you vote next week could affect your finances

Rival party pledges could shrink your savings or grow your nest egg
Logos for the 'Big Six'; energy companies (top row from left) British Gas, EDF, RWE npower, (bottom row from left) SSE, E.ON and ScottishPower

Winter heating underpayment brings summer pain

One reader’s monthly direct debit charge has been increased by 62 per cent

Almost 15,000 people died last winter through living in cold homes that they couldn’t afford to heat

Social tenants locked into energy tariff for 40 years

Many Londoners who live in social housing estates are not allowed to switch because their landlord has ‘locked’ them in to buying from one supplier

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

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

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

    The 161-page dossier that exposes Fifa's dark heart

    How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
    Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

    Exclusive interview with Tripoli PM Khalifa al-Ghweil

    'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
    Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

    Raymond Chandler's Los Angeles

    How the author foretold the Californian water crisis
    Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

    Art attack

    Chinese artist who posted funny image of President Xi Jinping facing five years in prison
    Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

    Cher is the new face of Marc Jacobs

    Alexander Fury explains why designers are turning to august stars to front their lines
    Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

    'I'm climbing Ben Nevis for my daughter'

    Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
    10 best wedding gift ideas

    It's that time of year again... 10 best wedding gift ideas

    Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
    Paul Scholes column: With the Premier League over for another year, here are my end of season awards

    Paul Scholes column

    With the Premier League over for another year, here are my end of season awards
    Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

    Liverpool have seen too much tragedy to forget Heysel

    Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
    Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

    Khan’s audition for Mayweather may turn into a no-win situation

    The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor