A pension or a Lotus, the choice is yours

Saving for your old age when you are young may not be thrilling, but it's the only way to avoid poverty in retirement.

What is the most exciting thing that you could spend your money on? A trip to the Maldives, a set of new clothes, a Lotus Elan...or a pension perhaps?

What is the most exciting thing that you could spend your money on? A trip to the Maldives, a set of new clothes, a Lotus Elan...or a pension perhaps?

For most people, locking their money away for 40 years in the hope of getting a good investment return is not exactly thrilling. But unless you are prepared to live in poverty when you retire, making some sort of provision for retirement is a must for most.

The basic state pension is just £66.75 a week for a single person. And the Government has made it clear more people will have to contribute more to their pension income in future.

Saving for a private pension is advisable for nearly everyone, says Julie Lord of financial planners Cavendish Financial Management in Cardiff: "The very first contributions you make will grow the most, so the sooner you start the better."

The exceptions are people who have a reduced life expectancy, and many people earning less that £9,000 a year. In most cases, the state second pension would cover these lower earners, she says.

If you are employed and lucky enough to have access to an occupational pension scheme, it is nearly always the best option, advisers say. If you join the scheme, your employer makes a contribution on top of the money you pay in. Some schemes are non-contributory, which means you don't have to put in any money yourself.

But if you are self-employed, or your employer does not offer a pension scheme, a personal pension plan is the obvious option. A personal pension plan is a packaged investment product which carries tax breaks, but does have restrictions on when you can get at the money and what you can do with it.

As with occupational pension schemes, the government boosts your contributions to a personal plan by refunding the income tax you have paid on that money. This means that for every £78 a basic-rate taxpayer contributes, the Inland Revenue puts in another £22. And if you pay income tax at the higher rate the advantage is even greater.

The snag is you can't get at the money until you retire, though this can be as early as age 50. Once you do get your hands on the money, a quarter of the pension pot which has built up can be taken as a tax-free lump sum, but the rest must ultimately be used to buy an annuity - an income for life.

There are hundreds of pension plans on the market - how do you decide which is best for you? "With any pension, you have to look at the charges, the contract's flexibility and the company's underlying fund performance," says Stephen Brady, pensions expert at Bath-based Chartwell Investment Management.

In April, stakeholder pensions are due to be introduced. These will be personal pension plans which meet Government guidelines for good value and flexibility. The current guidelines are 100 per cent allocation - which means all of your contribution is invested, £20 per month minimum contribution and a maximum management charge of 1 per cent.

The move towards stakeholder pensions has prompted many pension providers to offer products which broadly meet stakeholder standards. These are usually called "stakeholder-friendly" pension schemes. Those which already match the blueprint are called "pre-stakeholder" pensions. It would be unwise right now to take out a plan which did not come near the guidelines as it could be expensive to transfer out of it later.

When taking out a personal pension, considering the level of fee levied is vital. Research from the Consumers' Association has shown if you choose a personal pension which carries high charges, the pension you end up with could be half the amount you would have had with a better value plan.

You should also consider how flexible the plan is. In today's employment climate it is important to have the ability to stop pension contributions and restart them without penalty, and to vary the level of contribution made. While it is possible with most pension plans to stop and start, the charges made for doing this can be onerous, says Ms Lord.

Pensions are not the only way to save for retirement. Other tax-efficient savings vehicles such as Personal Equity Plans and Individual Savings Accounts have less restrictions on when you access that money and how you can use it.

"Some people don't like being tied up with pensions legislation and losing control over their capital," says Mr Brady. But others like the imposed discipline of pensions: "If you plunder your pension pot, it is ultimately going to disadvantage you at retirement."

Probably the best way through the pensions maze is to take good independent advice, although you do have to pay for it. Advisers may charge £250 to £500 for setting a personal pension up depending on how complicated it is.

With the introduction of stakeholder pensions, the Government plans to develop decision trees - flow charts to help consumers make a choice on which pension to buy without having to pay for advice. But Ms Lord argues that this initiative is misguided. "It's such a very complicated decision that not to take advice could be very costly," she says.

Chartwell Investment Management: 01225 321700

Cavendish Financial Management: 01222 665588