A safe investment in your retirement

Those considering pension plans can now get a clearer picture of their eventual value. Clifford German gives some pointers

PENSION plans have overtaken property as the biggest and best investment for retirement. How well a particular personal pension fund will perform is one of the great unknowns. But it is possible to measure past performance, and since the beginning of this year it has also been possible to project possible effects of charges on future yields.

The latest survey by Money Marketing magazine shows that over the past 20 years a monthly contribution of pounds 25 a month with Scottish Widows would this year have paid out pounds 43,728 including the terminal bonus. Scottish Equitable Commercial Union, AXA Equity & Law, Norwich Union and Equitable Life (pounds 40,411) filled the next five places, with Scottish Amicable, Provident Mutual and Britannia Life (pounds 28,333) bringing up the rear in the top 20 companies.

But lump sum investments, contributions over shorter periods, and other important factors such as size of terminal bonuses and early surrender values, would have shown slightly different patterns.

Projecting future investment of pounds 100 a month at a standard 9 per cent compound growth for 20 years from the age of 45, and deducting known charges, puts Equitable Life in first place with a likely fund of pounds 60,961 in the year 2015, with Clerical Medical, Scottish Equitable, Scottish Amicable, Scottish Life and National Mutual in the next five places. The smallest fund of 24 companies would yield just pounds 51,200.

But that ignores differences in actual investment performance. Anyone choosing a pension fund to invest in must consult an independent financial adviser, or at least get the full Money Marketing Guide, available at pounds 3.75 (tel 0171-439 4222).

For individuals within a few years of retirement, there is little point in trying to switch from one pension fund to another, because of the inevitable charges imposed by actuaries on the transfer values.

There is also relatively little advantage in starting regular contributions to a new pension scheme at this stage in a career, because most funds still levy their charges and commissions on contributions made in the early years. It will probably make more sense to go for a single premium investment bond, a single premium pension plan, or perhaps a shorter-term investment, such as a personal equity plan or a tax-free savings scheme. Or perhaps one of the proposed new PEPs investing in corporate bonds; these are the private-sector equivalent of government bonds, but corporate bonds are riskier and therefore yield more. They can be held tax-free as a PEP, which makes a spread of bonds held in a PEP look quite an attractive future choice.

Financial advisers often draw up idealised investment portfolios for individuals and couples as they approach and finally reach retirement.

The emphasis is on higher-risk elements such as share portfolios for secure high-income people at the peak of their careers, down through unit trusts and PEPS for those who prefer a broader spread of risk, to long- term but relatively secure investments, such as government stocks and guaranteed growth or guaranteed income bonds for individuals who are perhaps five years from retirement.

At the other extreme, such secure investments as Tessas (tax-exempt savings accounts offered by banks and building societies) are recommended for pensioners, and especially those with limited means who cannot afford to take any risks.

Pensioners with small incomes, especially wives who have never worked, will be eligible to have interest on bank or building society deposits paid gross. National Savings accounts which pay tax-free income may appeal to those with higher tax liabilities. No two circumstances are the same, and it is always a good rule not to have too many eggs in one basket.

Last but not least, pensioners should keep an eye on their entitlement to benefits. Many pensioners need income support to top up their state pensions. Anyone who will be 65 during the tax year is entitled to a higher personal allowance of pounds 4,630 in the current year before starting to pay tax., rising to pounds 4,800 in the year in which you reach 75.

Likewise the married couple's allowance, albeit restricted to 15 per cent tax relief, goes up in the tax year in which the elder partner reaches 65 and again at 75.

But, since you are dealing with the taxman, these extra allowances are halved if your total income in retirement exceeds pounds 14,600.

Start your day with The Independent, sign up for daily news emails
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
Robert De Niro has walked off the set of Edge of Darkness
news The Godfather Part II actor has an estimated wealth of over $200m
Arts and Entertainment
Fearne Cotton is leaving Radio 1 after a decade
radio The popular DJ is leaving for 'family and new adventures'
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

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...

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