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

Independent Partners: 10 top tips for retirement. Get your free guide here

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    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...

    Guru Careers: FX Trader / Risk Manager

    Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

    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
    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
    Lionel, Patti, Burt and The Who rock Glasto

    Lionel, Patti, Burt and The Who rock Glasto

    This was the year of 24-carat Golden Oldies