Fill up, lean time ahead

Even a good company pension may pay only a third of your salary. Nic Cicutti says the way to avoid future struggle is to contribute more, without delay

The growing recognition that retirement planning is an issue to be dealt with as early as possible in one's working life has led to more importance being attached to the benefits of a company pension scheme. It is increasingly common to hear people say, with pride in their voice, that they have joined a firm because it has a relatively good pension scheme.

But that leaves one issue unresolved. It is what happens in circumstances where despite membership of an occupational scheme, the pension eventually paid will not be enough to meet your needs at retirement.

This could be for several reasons. One is that, however generous it is - and for some groups, including nurses and civil servants, it is just that - you may not be a member of your present scheme for long enough to build up enough benefits. This could be caused by the fact that you are a late joiner and are already in your 30s, or you may not be working for the firm beyond your 50s.

Alternatively, the scheme you are a member of is not very generous. The Association of Consulting Actuaries recently carried out a survey of money- purchase pension schemes, where your money is invested and the fund at retirement used to buy an annuity, or annual income.

The ACA survey found that, on average, employers' contributions into money-purchase schemes were about 5.65 per cent. Staff contributions brought the total to 8.2 per cent. But according to the ACA someone with that level of contributions will receive a pension of only 32 per cent after 45 years of service. To improve on this, annual contributions of at least 10 per cent are needed.

The stark reality is that there is a need to do more than you are doing if you want an adequate income when you stop work. This means leaving no stone unturned when it comes to adding to your pension pot.

The question is: what is the best way of doing this?

There are two main ways of topping up your pension. The first is by making additional voluntary contributions (AVCs) to your company's own pension. In effect, you are allowed to increase your contribution to 15 per cent of your income. There is full tax relief at the marginal rate on contributions and they can include shift allowances and overtime pay, which can be useful if your employer does not recognise this additional pay.

All employers must now offer AVC schemes and details are usually available from the company's pensions administrator trade union or personnel officer. In some cases, public sector (and some private sector) pension schemes allow you to buy extra years of service.

However, most company AVC schemes buy in the facility from insurance companies or building societies. For instance, Prudential runs AVC schemes on behalf of teachers, the Halifax and Abbey National do so for some employers, while Equitable Life is popular among many companies because its fund management charges are among the lowest.

There are one or two drawbacks to AVCs. One is that your pension at retirement must not be more than two-thirds of total earnings. But you can re-arrange other parts of your benefits, such as increasing the spouse's pension. AVCs tie you to the retirement date of your employers' pension scheme and, since 1987, none of the AVC fund can be commuted to a lump sum.

There is a second option. It is a "free-standing AVC", which unlike a company scheme, is sold separately by insurance companies. The tax relief is the same as for personal pensions, but higher-rate taxpayers must claim the difference between theirs and the basic rate.

Known as FSAVCs, the schemes have the advantage that if you move between jobs they are far more portable. They also allow you to choose your retirement date between 50 and 75, although this is a illusory benefit if you don not have enough money in the scheme to retire on.

And with an FSAVC you can choose your fund's investment strategy, rather than leave it to the provider your employer has chosen.

However, because the employer usually meets a large slice of the expenses of running an AVC, they are often far more expensive. This can make a significant difference to your pension pot in retirement, with a 0.5 per cent difference in charges over 30 years potentially leading to 15 per cent less in your fund when you stop work.

Generally, it pays to choose the company's AVC scheme, although if in doubt, you should consult an independent financial adviser. The important point is to be prepared to act now. Unless genteel poverty is all you are expecting when you finally retire

Nic Cicutti, personal finance editor of `The Independent', has written a free `Guide to Pensions Planning'. The 52-page guide, sponsored by Equitable Life, a leading pensions provider, is available by calling 0800 137372. Or fill in the coupon on this page.

News
Ross Burden pictured in 2002
people
News
scienceHad asteroid hit earlier or later in history, the creatures might have survived, say scientists
News
President Obama, one of the more enthusiastic users of the fist bump
scienceBumping fists rather than shaking hands could reduce the spread of infectious diseases, it is claimed
Voices
voices
PROMOTED VIDEO
Life and Style
Upright, everything’s all right (to a point): remaining on one’s feet has its health benefits – though in moderation
HealthIf sitting is bad for your health, what happens when you stay on your feet for a whole month?
Arts and Entertainment
Peter Griffin holds forth in The Simpsons Family Guy crossover episode
arts + ents
Sport
Laura Trott with her gold
Commonwealth GamesJust 48 hours earlier cyclist was under the care of a doctor
Arts and Entertainment
Gal Gadot as Wonder Woman
arts + entsFilmmaker posted a picture of Israeli actress Gal Gadot on Twitter
News
Bryan had a bracelet given to him by his late father stolen during the raid
people
Arts and Entertainment
Chris Pratt stars in Guardians of the Galaxy
arts + ents
Arts and Entertainment
Pedro Pascal gives a weird look at the camera in the blooper reel
arts + entsPrince Oberyn nearly sets himself on fire with a flaming torch
News
Danny Nickerson, 6, has received 15,000 cards and presents from well-wishers around the world
newsDanny loves to see his name on paper, so his mother put out a request for cards - it went viral
Sport
France striker Loic Remy
sportThe QPR striker flew to Boston earlier in the week to complete deal
News
Orville and Keith Harris. He covered up his condition by getting people to read out scripts to him
People
Arts and Entertainment
Zoe Saldana stars in this summer's big hope Guardians of the Galaxy
filmHollywood's summer blockbusters are no longer money-spinners
Arts and Entertainment
O'Shaughnessy pictured at the Unicorn Theatre in London
tvFiona O'Shaughnessy explains where she ends and her strange and wonderful character begins
Life and Style
Workers in Seattle are paid 100 times as much as workers in Bangladesh
fashionSeattle company lets customers create their own clothes, then click 'buy' and wait for delivery
Finacial products from our partners
Property search
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

    Training/Learning and Development Coordinator -London

    £28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

    Training Programme Manager (Learning and Development)-London

    £28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

    .NET Software Developer (.NET, C#, ASP.NET, front-end)

    £30000 - £45000 per annum: Harrington Starr: A Global Financial Service Organi...

    C# Web developer (C#,MVC,ASP.NET,SQL)

    £30000 - £40000 per annum + Bonus+Benefits+Package: Harrington Starr: C# Web d...

    Day In a Page

    A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

    A new Russian revolution

    Cracks start to appear in Putin’s Kremlin power bloc
    Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

    Apartheid’s sadistic killer that his country cannot forgive

    The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
    Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

    Standing my ground

    If sitting is bad for your health, what happens when you stay on your feet for a whole month?
    Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

    Greene prays for chance to rebuild after injury agony

    Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
    Israel-Gaza conflict: Secret report helps Israelis to hide facts

    Patrick Cockburn: Secret report helps Israel to hide facts

    The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
    The man who dared to go on holiday

    The man who dared to go on holiday

    New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
    Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

    Best comedians: How the professionals go about their funny business

    For all those wanting to know how stand-ups keep standing, here are some of the best moments
    The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

    The Guest List 2014

    Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
    Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

    Jokes on Hollywood

    With comedy film audiences shrinking, it’s time to move on
    It's the best of British art... but not all is on display

    It's the best of British art... but not all is on display

    Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
    Critic claims 'I was the inspiration for Blanche DuBois'

    Critic claims 'I was the inspiration for Blanche DuBois'

    Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
    Sometimes it's hard to be a literary novelist

    Sometimes it's hard to be a literary novelist

    Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
    Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

    Edinburgh Fringe 2014

    The comedy highlights, from Bridget Christie to Jack Dee
    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    The woman stepping down as chair of the Heritage Lottery Fund is worried