Investment: Personal Pensions - Act now if you want the good life when you retire

MILLIONS OF people have no access to a company pension scheme. If you are self- employed or work for a company too small to run its own scheme, a personal pension plan is probably the best way to save for a retirement income.

But the personal pension mis-selling scandal has made many people wary of this type of investment.

Between 1988 and 1994, financial advisers hungry for commission persuaded many people to leave occupational pension schemes (or not to join in the first place) and sign up for personal plans instead.

But thousands were worse off. They no longer benefited from their employer's contributions, or from the fact that the administrative costs of the scheme were shared. The lesson to be learnt from this episode is that where an occupational pension scheme exists, it is usually the best option. But because of the tax breaks they offer, personal pension plans may be better for some people.

They are suitable for anyone who receives earned income and does not have access to a company scheme, says John Turton, head of pensions at brokers BESt Investment.

"Everyone should try to put money away for their retirement," he says. "I don't think the Government is going to look after you in old age."

The basic state pension currently pays out a maximum of just pounds 64.70 a week, although anyone contracted into Serps (the state earnings-related pensions scheme) could get more.

Government proposals for new stakeholder pensions (low-cost pensions for those on low incomes) unveiled in December, and the dismantling of Serps make clear that with only a state pension, people earning more than pounds 18,500 will be worse off when they retire than are current pensioners.

"People who are earning under pounds 9,000 will get more, and people earning between pounds 9,000 and pounds 18,500 will get a slightly better pension, but it is still not enough," says John Turton. "That's why they have to make their own provision."

Stakeholder pensions won't come into effect until 2001. And proposals are afoot for a new pensions savings account, the "Lisa" (lifetime individual savings account), which will be a personal pension that meets certain standards on charges, flexibility and portability. They will also offer a wide choice of investments.

But you shouldn't wait to start saving for retirement in anticipation of these changes, says Stephen Dight of independent financial advisers Grosvenor Financial Services. "If you delay by two years, and annual returns turn out to be around 12 per cent, then you will have cut your pension pot by a quarter," he says.

If you do start a personal pension plan in the next two years, it is vital to choose one that can be transferred easily to a new scheme - possibly to one of the new stakeholder schemes. "You need to look at level-charged products [where charges are spread throughout the life of the pension] which you can get out of without significant costs," says Mr Dight.

Providers such as CGU, Standard Life, Sun Life and Norwich Union have level charges on their personal pensions.

But about 80 per cent of personal pensions will penalise you if you stop paying into them, or if you transfer the fund after two years, says Mr Turton. This is because the bulk of the charges made by the investment provider are levied in the first few years. "The reason they have got these charging structures is because the salesman or independent financial adviser has a truckload of commission to collect," he says.

A cheaper way to buy personal pensions is through a discount broker such as BESt Investment, or Hargreaves Lansdown. Because of their high sales volumes, they can repay most of this up-front commission into the pension plan, often taking only a proportion of the level commission offered. An independent financial adviser who charges you a fee rather than taking commission should also be able to repay the commission.

There are other ways to save for retirement. Investments such as PEPs, soon to be replaced with Individual Savings Accounts, offer tax-free investment up to certain limits. These are far more flexible than pensions, which lock away your money until you retire.

But none of the alternatives gives the tax-relief on contributions that pension schemes offer. If you are a basic-rate taxpayer, for every 77p you pay into a pension scheme, another 23p is effectively added by the Inland Revenue. For higher-rate taxpayers the gains are more marked, with an extra 40p for every 60p paid in.

There are thousands of different personal pension plans to choose from, with a vast range of features. Some offer a wide choice of investments and the freedom to keep switching your pension pot from one investment fund to another. Others may be very flexible, allowing you to vary contributions and to stop and start paying in whenever you choose.

So it is vital to get good advice. "Financial products are complicated and it can be difficult to know where to go for advice," says Jackie Blyth of the Personal Investment Authority, an industry watchdog. The Financial Services Authority, of which the PIA is part, has published a booklet to help people to find good financial advice.

Grosvenor Financial Services: 01491 414145; BESt Investment: 0171 321 0100; Hargreaves Lansdown: 0800 850 6611; for a copy of the FSA Guide to Financial Advice: 0800 9173311

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Recruitment Genius: Mortgage Administrator

£20000 - £25000 per annum: Recruitment Genius: We are a vibrant and establishe...

Day In a Page

Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
Markus Persson: If being that rich is so bad, why not just give it all away?

That's a bit rich

The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

Coleman on course to end half a century of hurt for Wales

Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference
Rugby World Cup 2015: The tournament's forgotten XV

Forgotten XV of the rugby World Cup

Now the squads are out, Chris Hewett picks a side of stars who missed the cut
A groundbreaking study of 'Britain's Atlantis' long buried at the bottom of the North Sea could revolutionise how we see our prehistoric past

Britain's Atlantis

Scientific study beneath North Sea could revolutionise how we see the past
The Queen has 'done and said nothing that anybody will remember,' says Starkey

The Queen has 'done and said nothing that anybody will remember'

David Starkey's assessment
Oliver Sacks said his life has been 'an enormous privilege and adventure'

'An enormous privilege and adventure'

Oliver Sacks writing about his life
'Gibraltar is British, and it is going to stay British forever'

'Gibraltar is British, and it is going to stay British forever'

The Rock's Chief Minister hits back at Spanish government's 'lies'
Britain is still addicted to 'dirty coal'

Britain still addicted to 'dirty' coal

Biggest energy suppliers are more dependent on fossil fuel than a decade ago
Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition

Orthorexia nervosa

How becoming obsessed with healthy eating can lead to malnutrition
Lady Chatterley is not obscene, says TV director

Lady Chatterley’s Lover

Director Jed Mercurio on why DH Lawrence's novel 'is not an obscene story'
Farmers in tropical forests are training ants to kill off bigger pests

Set a pest to catch a pest

Farmers in tropical forests are training ants to kill off bigger pests