The Financial Services Authority issued a stiff warning this week to people approaching retirement. It said that decisions they make now will have a crucial effect on their standard of living after they stop work. It has published a guide to help avoid wasting years of careful planning by tripping at the final hurdle - buying an annuity.
The "FSA guide to pension annuities and pension-fund withdrawal" warns people to shop around for the best value annuity, because many assume they must buy it from the same insurance company they used to build their pension fund.
But decisions made at the start of the pensions-planning process can be equally important. Unfortunately, they can also seem complex, which deters many people from doing anything.
Procrastination may be the thief of time but it can also do criminal damage to your pension planning. Delaying setting up a pension by two years can have a huge impact on the income you receive in retirement.
Somebody aged 30 paying £200 a month into their pension should build a fund worth £194,000 by 60, says Adam Norris, managing director of Hargreaves Lansdown Pensions Direct. This assumes they increase premiums each year in line with the average earnings index. If they delayed starting their pension by just two years, they would cut that final sum by a quarter, to just £147,000 at 60, because contributions paid in the early years have much longer to grow in value.
The message is simple - start early. "The lucky ones join an employer's scheme in their first job and stay in company schemes for their entire working life," says Philippa Gee, a financial adviser based in Shrewsbury.
Occupational pension schemes are valuable because employers should also contribute to your pension fund. If you are offered one, join immediately. "Unless, that is, you plan to stay with the firm for less than two years. Some schemes may cancel your membership if you leave shortly after joining and return nothing except the money you put in."
But you must be certain you actually will leave. Many people start a new job boasting they will stay just a few months, only to find themselves at the same desk five years later with no pension to show for their efforts.
If you do not have access to a company scheme, start a personal pension plan. Don't rely on the state to provide, unless you think you could survive comfortably on the current basic pension of £67.50 a week.
From April 2001 new stakeholder pensions should be available. These aim to offer greater flexibility than traditional personal pension plans, allowing you to stop, start, increase or reduce your contributions as it suits you.
If you have little money to spare you can start small, from just £20 a month, and increase contributions later. Stakeholder pensions should have lower charges than many pension plans, with no initial fee and an annual management charge of 1 per cent or less.
A growing number of providers, including Hargreaves Lansdown, Tesco and Virgin, are already offering pension plans that claim to comply with stakeholder rules. All employers with more than five staff must also offer a stakeholder pension, unless they already offer employees an occupational pension or group personal pension plan.
But what if you are one of life's procrastinators and have put off all pension decisions - only to suddenly find retirement looming? Some people leave it very late to start a pension, particularly those with family commitments, who may have little money to spare until their children leave home.
"A lot of people think you can retire at 50 or 55 without having concentrated heavily on pension planning for many years" says Ms Gee. "Some say they want to retire within five years, but have built no pension whatsoever.
"The good news is that it is never too late to start saving. But the later you start, the more you will need to contribute." The table on page 2 shows how much your premiums must increase to catch up.
The advantage of paying into a pension is that contributions attract tax relief at your marginal rate. So a higher-rate taxpayer contributing £1,000 to their pension effectively pays just £600.
There are limits to the amount you can pay into a personal pension each tax year. The maximum is 17.5 per cent of net relevant earnings before age 35, rising in increments to 40 per cent as you get older.
The Inland Revenue allows you to mop up unused tax relief from the previous six years. This "carrying forward" will be axed next April. If you have unused relief and need to play catch up, pay in as much as you can afford before then. If your workplace pension needs a boost consider topping it up with additional voluntary contributions (AVCs), says Andrew Jones, investment partner with the David Aaron Partnership.
An AVC is a lump sum payment into your existing pension fund. Alternatively, you can pay freestanding additional voluntary contributions (FSAVCs). These are similar to AVCs, but managed by an outside pension provider. The maximum you can contribute each year to your company scheme and an AVC plan is 15 per cent of your salary.
Paying into a pension is not the only way to save for your retirement. Individual savings accounts (ISAs) allow you to invest up to £7,000 in stocks and shares, cash or life insurance each year, and take the returns free of income and capital gains tax. Unlike pensions, you get no tax relief on the money paid into an ISA. But pension income is taxable, and payouts from ISAs are not.
"There is a big debate about the pros and cons of pensions compared to ISAs," says Mr Jones. "The drawback with pensions is that you cannot get at the money until you retire. You may then take a tax-free lump sum, but most of the money must be used to buy an annuity. ISAs do offer more flexibility."
Higher-rate taxpayers may find the balance swings in favour of pensions, because of the 40 per cent tax relief they receive on contributions. Basic rate taxpayers get only 22 per cent. Under stakeholder, even non-taxpayers will get basic rate tax relief on their contributions. If retirement is imminent and your pension threadbare, you have one more option. If you own your house, instead of living in genteel poverty and letting your children benefit when you die, you can borrow money against your home, and stay there, through equity release schemes. Mr Jones recommends a scheme run by Northern Rock. It allows you to borrow a percentage of the value of your home at a fixed interest rate, 8.4 per cent APR.
Homeowners aged 60 can borrow 20 per cent of the value of their property. This figure rises to a maximum of 50 per cent as you get older. Interest on the loan rolls up and is repaid from your estate at death. Norwich Union runs a similar scheme.
Patrick Bunton, senior manager at mortgage specialists London & Country, warns the schemes are unlikely to make you popular with anybody hoping to inherit some of your estate. If you live a long time, there could be little left. "Equity release can be dangerous - you sign it away forever. You should take legal advice before you do it."
The only other option to avoid an impoverished retirement is to keep on working. This will prove unpopular too many but has a double benefit. Firstly, you have that much longer to contribute to your pension. You should also be able to buy a larger annuity, as you will not have so long to live.
But careful planning now can help you retire while you are still young enough to enjoy it, without having to raid your hard-earned assets. Only then will you have enough money to start worrying about where to buy your annuity.
The FSA guide to pensionannuities and pension fund withdrawal can be ordered on0800 917 3311Reuse content