TAX PLANNING AND SAVING: Work the system to retire in comfort

Many people are missing out on chances to boost their pension
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In the next few weeks the 250,000 pension customers of the TSB will face a financial challenge. It will arrive in the form of a statement that will show how much retirement income they can expect to receive if they continue with the same level of payments.

The TSB is asking its customers whether or not they think the projected income will be enough to live on. The bank will be giving examples - showing, for instance, what the difference is if payments are increased by pounds 50 a month.

This is not just to increase business, but a way of alerting people to the real danger of their pensions proving inadequate. According to research by Norwich Union, as many as one in three people could find that in retirement they will be surviving on less money than they thought would be the case.

So what can you do? Initially you should review your pension arrangements. And if your pension provider does not provide a statement as full as that given by TSB, you may need expert advice to help sort out your options. Whether you are in a company scheme or a personal pension plan, you are in effect saving for what could be the longest holiday you will ever have. Working out how much you will need should not be too difficult. From that sum you should be able to calculate just how much you should be saving now.

One of the key elements in all this is tax planning. The Government is keen to encourage all of us to make provision for our retirement and not become a "financial burden" on the state. Pensions, therefore, are tax-efficient, allowing savers to make tax-free payments into schemes.

If you have a company pension scheme your pension contributions are taken out of your gross salary, so you pay no tax on them. Additionally, depending on the type of pension you have, your company could be contributing a large additional amount to your scheme.

Even if you are not in a company scheme, or if you are self-employed, the Government allows equal tax breaks on contributions to personal pensions. For every pounds 76 you put into a personal pension in the current tax year (now 1996/97), the Government adds another pounds 24 to make it up to pounds 100.

With the basic rate of income tax falling to 23 per cent in April, however, you will need to put in pounds 77 to gain the Government's contribution of pounds 23, to reach pounds 100. For those in the 40 per cent tax bracket, the Government will add pounds 40 for every pounds 60 put into a pension, and that is not set to change in April.

So, when considering any savings opportunities, you should make full use of your pension allowances; the fact that many people do not is one reason why a portion of the population could end up poor rather than prosperous in retirement.

There are various ways to add to your pot. If you are in a company scheme you can make additional voluntary contributions (AVCs). You should be able to do this through your company scheme. But before signing up you should consider the alternative of a free-standing AVC (FSAVC) scheme, which will be run by an insurance company, independently of your com-pany scheme. Both arrangements can be used to buy extra pension or other benefits in your employer's pension scheme. FSAVCs can offer a wider choice of investment possibilities, but while this could mean getting better returns, FSAVCs are generally more expensive since customers must meet the administration and investment charges. If you have an AVC your company is likely to contribute towards these costs.

As with other investment decisions, you need to assess your attitude to risk, the likely performance of your company's AVC, and the likelihood of your changing jobs. If you are likely to move, the FSAVC option may be the sensible choice because it can be transferred to a new company pension scheme.

The amount you get from your AVC or FSAVC will depend on four factors: how much you have paid in, how long you have been paying, the rate of return on your contributions, and annuity rates after you retire.

The resulting fund must be used to buy an annuity on or after retirement. The fact that your cash is locked away until retirement, and then must be used to provide an income, can be seen as a big drawback with AVCs and FSAVCs.

An alternative is to invest in personal equity plans where you can take cash out whenever you want it, and do with it as you wish. You will get no tax relief on investments in a PEP, but all the gains are tax-free.

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