Don't let time pass you by

State provision won't amount to much by the turn of the century. Here and on page 14 we examine how to save for retirement

Are you one of the millions who has failed to plan for retirement? Are you relying on the state to provide you with a pension income? Start saving now.

After working hard all your life to sustain a good standard of living, it would be a shame to miss out on a comfortable retirement for lack of planning.

It is no good thinking the government will help you out. Whichever political party is in control when you retire, it is unlikely it will be able to afford to sustain state pension benefits at their current level, either in real terms or relative to salaries. All parties have made it clear that the system has got to change, and that people must make their own provision.

The government provides two types of state pension. The basic single person's state pension pays a maximum of pounds 61.15 a week. The second, the State Earnings Related Pension Scheme (Serps), is worth a maximum of pounds 101.44 a week to people who have been employees (the self-employed do not build up an entitlement to Serps).

A single person could therefore be entitled to a maximum state pension of pounds 162.59 a week or pounds 8,454 a year. The average national wage is pounds 18,678. Eligibility for both pensions is built up through the payment of National Insurance contributions. The rules are complex and many people do not qualify for the full amounts, usually because they have taken breaks from work or paid reduced National Insurance contributions.

But if you think pounds 162.59 a week sounds a mean pension now, the situation will be a lot worse in the new millennium. According to figures from the Organisation for Economic Co-operation and Development, there are four-and-a-half people working and funding state benefits for every pensioner in Britain. But by the year 2025 there are likely to be just three-and- a-half working people to support every pensioner. This has led the Government to reduce the value of benefits. However, the cuts will really bite after the year 2000, when the real value of Serps will begin to fall.

At the moment, 62 per cent of women and 38 per cent of men are relying solely on state pensions. But Amanda Davidson, a partner at Holden Meehan, an independent financial adviser in London, says: "People have got to make their own pension provision. The way state benefits are going, they are not to be relied on for a major part of your income. If you do rely on benefits, the chances are that you will be looking forward to a much reduced lifestyle."

There are two main ways to make your own pension provision: through company or occupational pension schemes; and through personal pension plans. The Government is so keen for people to make use of these schemes that it offers generous tax breaks. You get tax relief at your highest rate (that is, each pound of contribution costs you 60p of taxed income if you are a higher-rate taxpayer, or 76p if you are a basic-rate taxpayer); growth in the pension funds rolls up tax free; and up to one quarter of the eventual returns can be taken as tax-free cash.

Company pension plans are run by employers for their staff. Typically the employer meets the costs of running the scheme, and usually also contributes money on behalf of the employee. So such pensions should be regarded as part of the remuneration package - a sort of deferred wage - and employees should normally take every opportunity to join the schemes.

Those who are not eligible to join a company plan, either because they are self-employed or because their employer does not offer such a scheme, should consider setting up their own personal pension plan. A huge range of private pensions are sold by insurance and investment companies, and many can cost a lot to set up. Old-style personal pensions may absorb most if not all of the first few years' premiums simply in set-up costs and commission. But while the investor must meet the set-up costs himself with a personal pension, he may well benefit from a much greater choice in where his money is invested compared with a scheme offered through his employer. If he chooses a good pension provider, he could end up better off than someone in a company scheme.

The key to both types of pension is to invest as much as you can, as early as you can. The longer you leave it, the more expensive the premiums will seem to build up a decent pension.

Although pounds 50 a month might sound a lot to you now, especially when you save it regularly for many years, it will provide a surprisingly modest pension income when you retire.

According to figures supplied by the pension company Sun Life, a 25-year- old woman investing pounds 50 a month (and increasing that figure by 6 per cent each year) could expect to accumulate pounds 339,000 by the age of 65. This might buy her an annual pension of pounds 23,800 a year from then, or tax-free cash of pounds 84,800 plus an annual pension of pounds 17,500. Those figures may sound okay, but in 40 years' time inflation will have eroded their real value.

The earlier you intend to retire, the sooner you should start planning your pension. If our 25-year-old woman retired at 55, she could expect to accumulate a pension fund of only pounds 121,000, producing a pension of pounds 7,070 a year. If she took the maximum tax-free cash entitlement of pounds 30,400, she would get an even smaller annual pension of pounds 5,230.

Employees are limited to putting a maximum of 15 per cent of their annual income into a company scheme, with the aim of enjoying a pension equivalent to two-thirds of their final salary. Most save far less than this, however, and should consider bumping up their contributions, either through the main company scheme or through an additional voluntary contribution (AVC) scheme. The employer may offer a subsidised scheme. Alternatively, the employee can make payments into a free-standing AVC scheme (FSAVC) sold by an insurance company.

How pension contributions can grow

Fund size Pension or Pension income

at retirement income plus tax-free cash

Male, age 30, invests pounds 75 pm

(after tax relief), retires age 65 pounds 316,000 pounds 23,100 pa pounds 16,200 pa plus pounds 79,000

Male, age 30, invests pounds 75pm,

retires age 55 pounds 108,000 pounds 6,570 pa pounds 4,710 pa plus pounds 27,100

Male, age 45, invests a one-off

pounds 10,000, retires age 60 pounds 30,000 pounds 1,980 pa pounds 1,400 pa plus pounds 7,510

Female, age 25, invests pounds 50pm,

retires age 65 pounds 339,000 pounds 23,800 pa pounds 17,500 pa plus pounds 84,800

Female, age 25, invests pounds 50pm,

retires age 55 pounds 121,000 pounds 7,070 pa pounds 5,230 pa plus pounds 30,400

Female, age 25, invests a one-off

pounds 5,000, retires age 60 pounds 68,800 pounds 4,360 pa pounds 3,210 pa plus pounds 17,200

Monthly premium examples assume premiums increased by 6 per cent every year. All final pension fund calculations assume investment growth of 9 per cent a year. Pension income figures allow for automatic increases of 3 per cent a year. All contributions are quoted inclusive of tax relief, ie the cost to individuals is less. For example, a one-off investment of pounds 10,000 would cost a higher-rate taxpayer just pounds 6,000, and a basic- rate payer pounds 7,600.

Source: Sun Life.