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
Wednesday 05 February 1997
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.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Exodus Gods and Kings: Ridley Scott never considered casting 'Mohammad so-and-so from such-and-such' in lead role
- 2 This letter from a reader explains why women can’t play football
- 3 'You should come to my house and eat cheeses with me': 4-year-old sends adorable love letter to girl at school
- 4 Scientists predict green energy revolution after incredible new graphene discoveries
- 5 Michael Buerk wishes he'd killed Jimmy Savile when he had the chance - by pushing him overboard a cruise ship
Ukip says babies born to immigrants in the UK should be classed as migrants – which would include Nigel Farage’s own children
The young are the new poor: Sharp increase in number of under-25s living in poverty, while over-65s are better off than ever
Tamir Rice: 12-year-old boy playing with fake gun dies after being shot by Ohio police
Obama: The only people with the right to object to immigration are Native Americans
Rochester aftermath: Sacking of Emily Thornberry will make work of Labour MPs '10 times harder'
Ed Miliband's 'north London set' must be demolished to save Labour, say critics
iJobs Money & Business
£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...
£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...
£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...
£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...
Day In a Page
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens