Frank and the blunt truth on pensions

Not enough of us are putting away sufficient money to provide for a comfortable old age, writes Tony Lyons. The value of the state pension is rapidly declining and by 2010 it is estimated that it will be worth less than one fifth of average earnings. Frank Field, the Social Security Minister, is carrying out a review of pensions but until this is published, we should save for retirement in the most tax-efficient ways available.

Around 11 million employees are members of company pension schemes, where contributions are paid by employer and individual. The best of these schemes pay out a pension equal to two-thirds of final salary after 40 years.

Unfortunately, few of us now expect to work that long for the same employer. Don't worry. The taxman allows us to make additional contributions to make up for any missing years, known as additional voluntary contributions (AVCs).

Up to 15 per cent of salary can be invested in total in pension contributions, with tax relief given at the top rate of income tax. If your company pension scheme does not allow for AVCs, you can purchase free-standing schemes (FSAVCs) from insurance companies and other pension providers. The rules are the same as for AVCs, but the charges are higher as a rule.

Those who work for bosses without a company pension scheme or who are self-employed have to make their own provisions, usually by investing in a personal pension. All premiums paid into one of these attracts tax relief at the person's top rate of tax.

Traditionally, pension premiums were paid into a with-profits fund of an insurance company. Every year a bonus is declared that cannot be taken away. At retirement, a one-off terminal bonus is added to reflect the fund's overall performance during the life of the policy.

Nowadays, modern pensions are unitised with no guarantees about future values. They usually invest in equities and because their unit prices are published regularly, investors can work out how much the fund is worth.

There is a wide choice of unitised funds and most good pension providers allow investors to move easily between the funds, usually at minimal or no cost. Some pension funds carry very high charges that can seriously affect performance. Others impose high charges if premiums are stopped. Pension providers now have to show these charges, but sometimes it is difficult to make comparisons.

Over the last few years, direct providers have been offering personal pensions. Merchant Investors Assurance was the first to do so, offering a range of funds linked mainly to investment trusts. It has been joined by a number of other companies, including Virgin and Eagle Star. Generally, anyone buying a pension from one of these companies will pay lower charges. However, some of the traditional pension firms, such as Equitable Life, Scottish Equitable, Norwich Union, Standard Life and Legal & General, offer competitive pension plans providing performance is as they project.

The best personal pensions treat each contribution as a single premium, thereby not attracting any charges if contributions are stopped because of a change in employment, redundancy or whatever. In addition they carry low annual management charges, typically under 1 per cent.

q Contacts: Merchant Investors Assurance, 0117 9266366; Virgin Direct, 01603 215717; Norwich Union, 01603 622200; Equitable Life, 0171-606 6611; Scottish Equitable, 0131 339 9191; Legal & General, 0171-528 6200; Standard Life, 0131 225 2552.