Pensions - who needs them?

If you're young, a tax-free investment may earn more for your retirement, writes Isabel Berwick

Most of us want to give up chocolate, or smoking, but we still love the "hit" from the bad stuff. It's all too easy to want two opposing things at the same time - and it's the same with being organised about our finances, especially with saving money for retirement. Most people in their twenties and early thirties feel they ought to have a pension. But at the same time many prefer to keep spending their earnings on more immediate pleasures.

In fact the hedonists have a valid point. Even if you are offered a no- effort pension scheme through your workplace, it may not be worth joining if you are just starting out after leaving school or university. Young workers are likely to change jobs four times before they are 25, according to a report last week from the National Association of Pension Funds (NAPF).

Older workers who aren't offered a pension scheme will find many of the personal pension choices available are unsuitable, inflexible and expensive. There are plenty of people who will be happy to sell you one of these pensions, but if you can take a step back from the sales pitch you may find you will be much better off avoiding personal pensions altogether.

Sounds heretical? Not at all. But, before you start cheering, taking the "no pension" path still means that you have to save a lot of cash.

Peter Quinton runs the Annuity Bureau, an independent financial advice firm which specialises in helping people coming up to retirement. He says: "The important message is you need to save, whether it's in a pension or through other means. The average retirement fund is very small - between pounds 20,000 and pounds 40,000 in total. However, the more you save and the earlier you can put it away, the more compound interest works."

Compound interest is the key to understanding why you need to save money when you would rather be spending it. It's the magic worked when you leave savings to grow for the very long term. Compounding means a small amount of cash can turn into a staggering amount over the years.

Someone of 20, who puts away pounds 100 a month between the ages of 20 and 30, will have pounds 1,347,806 at age 60 (assuming 14 per cent growth - this is optimistic, but stock market growth has been in double digits on average throughout the century). But don't save it until you are 30, and then save pounds 100 a month until age 60, and you'll have pounds 488,084 at 60. (For more on this see Motley Fool's website).

If you start to make stock market savings in a tax-free individual savings account (ISA) you can always transfer a lump sum to a pension later on. John Turton, head of pensions at BEST investment, says that it's vital to invest on the stock market, whether you choose a pension or an ISA.

"A young person should not go near with-profits investments or managed funds. They will dilute the compound capability that equities (shares) achieve."

The easiest and cheapest way to save for the long-term if you aren't very interested in investments is to opt for an index tracking fund. Pick a FTSE All-Share tracker for a good spread of shares. The cheapest deal over the long term is Legal & General's tracker fund.

If you aren't disciplined about money, the drawback with ISAs is that you can get at the cash. If you worry you might not leave it untouched, then take out a very cheap pension plan.

The Government is set to introduce a new type of cheap portable pension called a stakeholder, but this isn't coming until 2001. In the meantime, a link-up between brokers Hargreaves Lansdown and Friends Provident has produced what may be the cheapest personal pension ever. There are no charges other than a 0.85 per cent annual management fee, which makes it cheaper than many ISA plans. You can also transfer your money at no cost to any other pension.

Whatever you do, make sure you keep putting cash aside. The latest life expectancy figures, released last month, show that a 30-year-old-man can expect to live to be 85 and a woman to 88.

Annuity Bureau, 0171 620 4090; BEST investment, 0171 321 0100; Hargreaves Lansdown, 0117 988 9880; Legal & General, 0500 116622; Motley Fool: www.fool.co.uk

ALREADY GOT A PENSION?

Are you in a stable job with a good "final salary" pension scheme ? If you stay more than two years with your employer, this type of pension is very worthwhile. It's the employer, not you, who takes all the investment risk.

If you pay into a company pension that's a "money purchase" scheme then check which firm is managing the scheme and how much you are putting in. Make sure you understand where your cash is being invested - you may have been offered a choice of funds, but are your choices good?

Confused by the jargon ? Have a look at the Plain English campaign website, where you can download a free glossary of pensions terms. It's at www. plainenglish.co.uk.

If you are paying into a personal pension (or have let it lapse) it is worth getting it reviewed. There's no point paying into a poorly performing "dog" scheme. You should pay a fee for this (BEST investment charges pounds 250). According to pensions expert John Turton, schemes run by Lincoln, GAN, Windsor Life (which now owns GAN), Hill Samuel (now part of Lloyds TSB) and M&G need immediate attention.

PROMOTED VIDEO
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Horst P Horst mid-fashion shoot in New York, 1949
fashionFar-reaching retrospective to celebrate Horst P Horst's six decades of creativity
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Service Desk Analyst- Desktop Support, Helpdesk, ITIL

£20000 - £27000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Service Desk Analyst - (Active Directory, Support, London)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst - (Active Di...

Junior Quant Analyst - C++, Boost, Data Mining

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Junior Quant Analyst (Machine Learning, SQL, VBA)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

Day In a Page

All this talk of an ‘apocalyptic’ threat is simply childish

Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
Mafia Dons: is the Camorra in control of the Granite City?

Mafia Dons: is the Camorra in control of the Granite City?

So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Once the poor relation, the awards show now has the top stars and boasts the best drama
What happens to African migrants once they land in Italy during the summer?

What happens to migrants once they land in Italy?

Memphis Barker follows their trail through southern Europe
French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

Frank Mugisha: 'Coming out was a gradual process '

Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

Radio 1’s new top ten

The ‘vloggers’ signed up to find twentysomething audience
David Abraham: Big ideas for the small screen

David Abraham: Big ideas for the small screen

A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

Florence Knight's perfect picnic

Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

Horst P Horst comes to the V&A

The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

Mark Hix's summery soups

Soup isn’t just about comforting broths and steaming hot bowls...
Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

Tim Sherwood column

I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
Eden Hazard: Young, gifted... not yet perfect

Eden Hazard: Young, gifted... not yet perfect

Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
Tim Howard: I’m an old dog. I don’t get too excited

Tim Howard: I’m an old dog. I don’t get too excited

The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

Tom Peck on Match of the Day at 50

The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition