Regular Savings: Plan now for the golden years

It's never too early to sort out a proper pension, says Simon Read
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The Independent Online
Many people turn off immediately when pension planning is mentioned. That's understandable if retirement is years or decades away - but you could be missing out on the best savings opportunity of all.

Over the past few years, the Government has encouraged us to take control of our own pension planning, so pensions are now very tax efficient. There's no other savings vehicle where the Government contributes to your own individual pot. And if you're a higher-rate taxpayer, this amounts to pounds 40 for every pounds 60 you put into your pension plan.

If that doesn't persuade you, consider this: with life expectancy increasing, the chances are you'll spend nearly as much time retired as you will in employment. That's great news for those looking forward to the longest holiday of their lives. With our pension cash we'll finally be able to do exactly what we like: sail round the world, buy a Jaguar or just spend more time in the garden. But to pay for this fun we have to save for it now.

At this point many simply say: "I'm in a company pension plan so I'm OK." But very few people in occupational schemes actually retire on the full amount allowed by the Inland Revenue. Many work for years planning to retire on an income worth two-thirds of their final salary, but they fail to do so. Why?

For a start you'll need to be in a final-salary scheme, but to qualify for the maximum allowable you'll have had to work and pay into a scheme for 40 years. With more of us not starting pensionable employment until our early 20s, and with an increasing number of people retiring earlier aged 60 or even 55, the chances of racking up that many years are slim.

Many employees these days are in money-purchase schemes, where the final amount paid out is linked to how much you've paid in, irrespective of your length of service. And the simple truth is that if you don't pay in, you won't be able to take out.

So signing up for a company pension scheme shouldn't be the end of our pension planning. With just pounds 50 extra a month, we can help make up the shortfall.

You need to work out how much cash you'll need in retirement. If you're planning to potter around the garden, that's likely to be less expensive than sun, sand and surf in Hawaii. A retirement income of half final salary is reckoned to be good enough for most people, but even this is unlikely to be attained by many. You'd need to put in 10 per cent of your salary throughout your working life to achieve that kind of return.

If you want to boost your pension, you have two main options. If your company has a pension scheme, there will be an additional voluntary contribution (AVC) scheme. The alternative is a free-standing AVC (FSAVC) scheme, which is run independently of your employer's plan by an insurance company.

Both schemes are similar to personal pension plans but, unlike personal policies, AVCs and FSAVCs can only be used to buy extra pension or other benefits in your employer's scheme. What you get with AVCs and FSAVCs is a very tax-efficient savings scheme. They both offer tax relief on contributions, and the fund you build is allowed to grow without attracting any tax liabilities.

FSAVCs offer a wider choice of investment possibilities than AVCs, which could mean better returns. However, they are generally more expensive as you pay administration and investment charges - whereas with an AVC your company will usually contribute towards these costs. You need to assess your attitude to risk, the likely performance of your company's AVC scheme and whether you may change jobs. An FSAVC is fully portable, so if you move on you can take it with you, while an AVC would remain in your old company's pension scheme.

With AVCs and FSAVCs, your cash is locked away until retirement and must then be used to provide you with an income - which is seen by some as a big drawback. If your plans change, you could be stuck with the wrong kind of investment.

An alternative is to invest in a personal equity plan (PEP). Many advisers now include PEPs as part of pension planning because they offer more flexibility: you can take the cash whenever you want it and do with it as you wish. On the other hand, many of us could do with the discipline of an investment we can't touch. Talking to financial advisers should give you an idea of which kind of investor you are.

Only pension contributions attract tax relief, but Tessas, PEPs and some National Savings schemes give a tax-free income. All three offer opportunities to set up regular savings schemes with pounds 50 a month.