Retire with profit

TAX PLANNING: For a prosperous retirement, think ahead. Make sure you get an appropriate pension and back it up with personal equity plans
If your savings goal is to be better off in retirement, look first at your pension arrangements - and take money from the tax man, rather than handing it over in the usual direction. You can do this because payments into a pension plan attract tax relief. An occupational pension scheme is usually the most efficient way to provide a reasonable pension. The best, called final salary schemes, will pay a percentage of earnings. After 40 years, these often pay two-thirds or more of the final year's salary.

Most of us, however, can no longer look forward to 40 years' work in the same company or occupational pension scheme. These days, we change job and occupation much more often. The tax system allows us to make up for some of the lost time.

With most company pension schemes you pay 5 per cent or 6 per cent of salary into a pension, matched by the employer. However, the tax rules allow us to contribute up to 15 per cent of earnings with additional voluntary contributions - from either the occupational scheme or an independent pension provider.

For those who do not have an occupational pension, it is essential to invest in a personal pension plan. Payment is usually made net of basic rate. Top rate tax-payers reclaim the additional relief in their annual tax returns. Unlike occupational schemes, the amount that can be contributed depends on age. Under 35s can invest up to 17.5 per cent of their relevant earnings. The amount rises on a sliding scale, up to 40 per cent for someone aged 61 or over. The maximum earnings allowed is pounds 82,100, going up to pounds 84,000 after 6 April.

Further tax help is given to those who have failed to maximise their personal pension contributions in the past. Payments can be backdated for up to seven years to the maximum allowed. So if there is surplus cash, a bonus is received or you come into a windfall, it can be used to maximise pension contributions with full tax relief.

Personal pensions are portable. This means that if you go to work for someone, the new employer can if they wish contribute to the scheme.

If you are buying a personal pension for the first time, you can either buy it directly from the pension provider or consult an independent financial adviser.

Whichever route you choose, it is important to check the level of charges which will be levied by the company providing the pension and the people involved in selling it - many of whom may collect commissions on the deal. And, as many people have recently discovered, the level of charges can make a massive impact on the value of your retirement pension.

When you buy a pension, the pension company will give you several pieces of paper, starting with a "personal illustration" of how your pension will grow and the benefits which it could, in theory, provide on retirement. The representative or adviser may well use this document to talk about the performance of the fund manager concerned: how successful the company has been in recent years.

But do not ignore another piece of paper which refers to the key features of your pension. The regulations say that you must not only be given such a document, but your attention must be drawn to it - for example, in a covering letter.

Read it before you sign anything - because it will tell you how much of your pension contribution will go in charges, rather than being invested for your retirement. If you are shopping around, make sure that you compare the charges.

Another point to remember about pension plans is that they tend to be inflexible. They cannot be used before a specified retirement date. As contributions receive full tax relief, all the pension payments after the specified date are liable to income tax. Because of this, personal equity plans (PEPs) are becoming increasingly important in retirement planning, again with the tax man`s help.

As PEP investments are made out of taxed income, all the income and capital gains are tax free. Unlike pension plans, PEPs can be cashed in at any time, they offer great flexibility and charges tend to be much lower than for personal pensions.

Savers should use all means available to plan an adequate income for old age. A combination of pension scheme and PEPs, both with their tax efficiency, should ensure a rich and varied retirementn

The Independent has produced a free 52-page `Guide to Pensions Planning', sponsored by Equitable Life, a leading life insurance company. To obtain a copy, call 0800 137372.

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