Start here for the golden years

Take advantage of the tax breaks; start a personal pension plan as soon you can. Simon Read advises on the best ways to save for a trouble-free retirement

If your company doesn't have a pension scheme, or if you are self- employed, you should start a personal pension as soon as you can.

A personal pension attracts some major tax advantages - and if you are saving towards retirement it makes sense to channel a large part of the money into your pension rather than into other forms of saving. Pension plans are tax-efficient in two ways. First, you get tax relief on the premiums which you pay into your pension plan. Then, when you reach retirement, there's no tax to pay on the capital growth - and you can also, if you wish, take up to 25 per cent of your accrued personal pension fund as a tax-free lump sum.

If you are 35 or under, the tax rules allow you to put 17.5 per cent of your salary into a pension plan; this amount rises with age, reaching 40 per cent of net earnings for those aged over 60.

If your earnings at age 35 are, say, pounds 35,000 a year, this means that you can put pounds 500 a month into your pension plan, and the tax relief is allowed on a percentage of gross salary plus taxable benefits.

With earnings of pounds 35,000 plus a further pounds 10,000 in benefits - car, health insurance and so on - you would be able to make pension contributions of pounds 650 a month.

In simple terms, all this means that for every pounds 75 you put into a personal pension, the Government adds another pounds 25 to make it up to a round pounds 100. If you're in the 40 per cent tax bracket, for every pounds 60 you put in your pension, the Government will add pounds 40.

You can pay in monthly amounts, or put in a larger lump sum once a year. That means you can contribute to your pension when you can afford to. The Inland Revenue allows you to catch up on past years' pensions contributions; you can put in the maximum allowable amounts up to six years later.

However, the value of your personal pension can be seriously affected by charges. As a recent investigation by The Independent revealed, there are substantial differences in the amounts which pension providers charge: and these can have as much impact on the size of your final pension "pot" as the investment performance of the fund concerned.

Pension providers generally offer a range of funds with different potential for growth and different levels of risk. It makes sense to go for growth in the early years before switching into safe but steady investments later on.

How do you decide which pension to choose? There are some simple rules to follow.

First of all, make sure you invest with companies you can trust: what is their financial strength, and what's their recent track record? And do look in detail at the charges - the higher they are, the less money will be invested on your behalf.

Charges vary, but they often include an initial sum, annual management fees, and monthly administration charges. An annual 1 per cent management charge may seem small at just pounds 10 for every pounds 1,000 in your fund. But work out the figures for yourself to see how quickly that can grow to a make a major dent in your final pension pot.

When you finally reach retirement, the tax man will also have a say in the amount which you can draw in cash. You can take out a lump sum from your pension pot when you retire, which in simple terms is roughly equivalent to 25 per cent of the fund.

The rest of the money must be used to buy an annuity to give you a retirement income, which must not be more than two-thirds of your final salary

Start your day with The Independent, sign up for daily news emails
Suggested Topics
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

MPs call for Equitable Life policyholders to be paid £2.8bn owed by government

Hundreds of thousands of people's policies were hit when the mutual insurer almost collapsed at the turn of the century

The elderly woman's family discovered the mistake

DWP criticised after it left a pensioner £26,000 worse off

The Department for Work and Pensions has been slammed after a series of cock-ups left an elderly pensioner £26,000 worse off.

The FCA has today issued a consultation paper on its plans to tighten up consumer credit rules to give consumers greater protection on guarantor loans and in other areas

Payday loan companies must publish their rates, says CMA

A 20-month investigation concluded that a lack of price competition between lenders has led to higher costs for borrowers

Vulnerable consumers are defined as those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the old

Financial companies are not meeting the needs of vulnerable consumers, says City Watchdog

The Financial Conduct Authority said the industry needs to start thinking about solutions to these challenges

The FTSE 100 is inching closer to its record high but can it maintain these levels?

In 1999 stock markets quickly tumbled, losing many a fortune in the process

Tax-free savings: Freedom dawns for the junior savers caught in low-income accounts

The parents of six million children stuck with low-interest saving accounts worth more than £5bn will be able to move the cash from this April. But what are their options? Samantha Downes reports

How much lower will mortgage rates go?

Another day, another cut. As lenders compete to offer the cheapest deals, Simon Read asks if borrowers should jump in now or wait for further falls

Are bills ruining your family life? Try the lover's guide to coping with debt...

If you're in the red and can't find a way out, it's time to get some help. Neasa MacErlean hears that relationships will suffer unless you are open with your partner, but there are organisations that will put you on the right track and get you talking

How to complain: From retailers to energy suppliers, it's easier than you think

When companies let us down, millions of us just take it on the chin. Simon Read shows how to make your voice heard

The dark side of debt: Descending into financial desperation is not due to self-indulgence

Three stories reveal financial desperation that was born of other, serious concerns, from being a victim of sexual assault, to losing a family member
The Financial Conduct Authority took the unprecedented step of making Wonga cancel the outstanding debt of 330,000 borrowers and scrap the fees and charges of 45,000 more

Wonga escapes prosecution after sending fake threatening letters to struggling borrowers

The City of London Police’s investigation into Wonga was scrapped because 'there is not sufficient evidence to progress a criminal investigation'

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

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Beverley James: Accounts Payable

    £22,000 - £23,000: Beverley James: Are you looking for the opportunity to work...

    Beverley James: Accounts Assistant

    £30,000: Beverley James: A fantastic opportunity has arisen for a person looki...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower