Never too young for a pension plan

The old-age pension will be means-tested by the time today's 40- year-olds come to retire

FORTUNATELY for its ratings, the cast of the TV series Thirtysomething spent too much time in bed with each other to ever get round to talking about their pensions. But few people in their 30s and 40s can afford to adopt the same nonchalant approach to their retirement.

Relying on the state pension alone will in future guarantee, at best, a very sharp fall in living standards and, at worst, real financial hardship when you come to retire. The flat-rate old-age pension will almost certainly be means-tested by the time today's 40-year-olds retire, if not earlier.

What's more, the benefits paid under the earnings-related state scheme (Serps) have already been reduced and are set to be cut more in future.

There is a growing realisation of this trend. But it is one thing to be aware of the need to cover yourself; another to act on it effectively. While most people have made some additional provision - either via an employers' scheme or a personal pension plan - surveys indicate that in many cases the actual retirement income that people are set to get will fall far short of their expectations.

Pension planning is critical in closing this gap, and the longer you delay the more expensive it gets. The contributions needed for a man to achieve the same retirement income can more than double as a proportion of salary if you start paying them at the age of 50 rather than 30. For women who take a career break to have children, it is even more critical to start paying extra as soon as you can afford to.

Key points to consider are:

q Should I be contracted in or out? The idea behind contracting out of Serps is a relatively simple one - you get a rebate on your and your employer's National Insurance contributions, which you then put into a personal pension, in the hope that it will be worth more when you come to retire than the Serps you have given up. But the question of whether to contract out and how long to stay out is complex. The older you get, the more likely you are to be best advised to stay in, or rejoin, Serps. "You've really got to look hard at whether you should stay contracted out if you're over 35. And it's worth checking once you're over 30," advises Craig Foreman at independent adviser Touche Ross. Irrespective of age, most experts also advise anyone earning less than pounds 10,000 to stay contracted in.

q What pension am I currently likely to get? To check this, contact the Department of Social Security and ask how much state basic pension and Serps you are currently entitled to receive.

If you have contracted out of Serps, you should have been credited with National Insurance rebates from the date you did so. Check with the DSS that this has actually been happening.

If you are currently in a company scheme or have a personal pension, check the annual statement of projected benefits.

If you are married, check wheth- er your partner's pension will provide you with any benefits.

q How much do I need? The answer to this will lie, at least in part, in how much extra you can afford to save, either as a lump sum or on a regular basis.

Fewer than 1 per cent of company pension scheme members retire on the maximum benefits allowed by the Inland Revenue. If you are in a company scheme, you can contribute up to 15 per cent of your salary to pension arrangements. To top up the basic deal, you can take out an additional voluntary contributions plan from your employer or from a pensions company.

If you have a personal pension, you can increase the contributions you make to the plan up to limits set by the Revenue (currently between 17.5 and 40 per cent of earnings, depending on your age.)

One final caveat - the rules governing pension choices are horrendously complex, and good quality independent advice is indispensable.

q Next week, Your Money will include the first of a new series on Everything you need to know about pensions, starting with the basic state pension.