Money: Tax Tips - The forgotten part of pensions

Remember those ads for an insurance company showing the face of a man in his 20s, 40s and 60s getting progressively more worried because he didn't have an adequate pension? I used to think there should have been one more picture - a grinning skull, delighted he'd had a good time and spent his cash.

Still, the rising numbers of people retiring early and living longer mean pensions are important.The prerequisites for sensible saving are a balanced approach, a reasonable knowledge of investment principles, an understanding of your top rate of tax and a crystal ball. Surprisingly, many people fail on the tax requirement. Tax is important because you are in a long-term partnership with the Inland Revenue. Investment returns matter, but only as measured after tax.

To do that properly, you must know what tax relief you receive when you invest; what tax you pay as the investment grows; and what tax you pay when it pays out. Consider the tax position for the complete life of the investment, and remember that when you come to cash in the government of the day may have changed the tax rules.

Sellers of investments tend to emphasise only the good parts of the tax story. Broadly, the current system is more generous for long-term savings in approved pension plans, through tax relief on contributions and a tax-free lump sum on retirement.

The tax relief will be given up front and at your top rate of tax. Tax relief up front is good, but if you pay tax on getting your cash, such as tax on your pension, some of the advantage is lost. And find out what tax will be charged over the investment's life. In approved pension schemes, value growth is usually tax free except for unreclaimable dividend tax credits.

Knowing your top rate of tax is important. Your top rate would probably be lower when you retire so it would be better for top-rate taxpayers to get tax relief on contributions rather than the pension. But this may change.

Other types of investment that may be suitable for long-term savings, such as PEPs, the Individual Savings Accounts (ISAs) that will replace the PEP in 1999, and National Savings Certificates, have a different regime. Here you don't get tax relief when you invest, but there is no tax charge when you cash in your investment.

q John Andrews is president of the Chartered Institute of Taxation and a partner at Coopers & Lybrand.