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
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

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue