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.

Start your day with The Independent, sign up for daily news emails
News
The two faces revealed by the ultraviolet light
newsScholars left shaken after shining ultraviolet light on 500-year-old Welsh manuscript
News
Rosamund Pike played Bond girld Miranda Frost, who died in Die Another Day (PA)
news
Arts and Entertainment
books
News
newsHow do you get your party leader to embrace a message and then stick to it? With people like this
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Loren Hughes: Financial Accountant

£45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

Sheridan Maine: Finance Analyst

Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

Day In a Page

General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?
How Tansy Davies turned 9/11 into her opera 'Between Worlds'

How a composer turned 9/11 into her opera 'Between Worlds'

Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
11 best bedside tables

11 best bedside tables

It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
Italy vs England player ratings: Did Andros Townsend's goal see him beat Harry Kane and Wayne Rooney to top marks?

Italy vs England player ratings

Did Townsend's goal see him beat Kane and Rooney to top marks?
Danny Higginbotham: An underdog's tale of making the most of it

An underdog's tale of making the most of it

Danny Higginbotham on being let go by Manchester United, annoying Gordon Strachan, utilising his talents to the full at Stoke and plunging into the world of analysis
Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

Steve Bunce: Inside Boxing

Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police
No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat