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: See how much you could save by switching credit cards. Compare now
Geoffrey Macnab reviews American Hustle, also starring Christian Bale and Bradley Cooper
elephant appealThe first 23 lots in our charity auction have now gone. But there are 22 more still up for grabs
Michelle Nijhuis' daughter insists (s)he is, and she learnt a valuable lesson on gender in books
news Opponents claim it would stop performers such as Beyonce and Madonna appearing on TV
It takes a platoon of chefs, litres of brandy and rum, and almost 100kg of dried fruit
newsThat most ancient of crimes is on the rise, threatening farmers' livelihoods, community trust – and human health
- 1 America's 'virgin births'? One in 200 mothers 'became pregnant without having sex'
- 2 Sun will 'flip upside down' within weeks, says Nasa
- 3 Christmas comes early: Justin Bieber is 'retiring from music'
- 4 Iain Duncan Smith leaves Commons food banks debate early
- 5 Children evacuated from swimming pool after prosthetic leg mistaken for paedophile
Exclusive: Young people ‘want UK to stay in Europe’: Four in 10 adults aged 18 to 24 are ‘firmly in favour’ of membership, poll shows
Tom Daley ‘is gay because his father died’ says UK evangelist
Iain Duncan Smith leaves Commons food banks debate early
Kiss and yell: Italian protester charged with sexual assault after kissing riot police officer
PM denies two child limit for benefits is part of Tory welfare policy
Anachronistic and iniquitous, grammar schools are a blot on the British education system
- < Previous
- Next >
iJobs Money & Business
£500 - £650 per day: Harrington Starr: Harrington Starr is working with a Glob...
£27000 per annum: Harrington Starr: Junior Consultant (Excel, Financial Spread...
£500 - £600 per day: Harrington Starr: .NET Quantitative Developer - Contract ...
£55000 per annum: Harrington Starr: Technical Operations Analyst (UNIX, Linux,...
Day In a Page
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.