Virgin needs help to make pensions sexy

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The Independent Online
Everyone looks forward to enjoying a comfortable and secure retirement - and the tax system can help us make sure we do, through the special tax treatment pensions receive.

Thanks to this, a pension plan is possibly the best way to put money aside for retirement. First you get tax relief on the premiums you pay into your pension plan. Then, when you retire, there's no tax to pay on the capital growth - and you can take up to 25 per cent of your pension fund as a tax-free lump sum on retirement.

If you are 35 or under, the tax rules allow you to put 17.5 per cent of your salary into a pension plan, and this rises with age, reaching 40 per cent of net earnings for those over 60.

If your earnings at 35 are, say, pounds 35,000 a year, this means you can put pounds 500 a month into yourplan, but it's worth noting that the tax relief is allowed on a percentage of "net relevant earnings" - a phrase which, for salaried employees, means gross salary plus taxable benefits.

So someone with earnings of pounds 35,000 plus a further pounds 10,000 in benefits - car, health insurance and so on - could make pension contributions of pounds 650 a month. Assuming you were just starting the plan, this would provide a pension of about pounds 20,000 a year.

However, to most twenty- somethings - and even many thirtysomethings - talk of pensions is a turn-off. Just try it and see how soon someone changes the subject to football or what's on the box. But if you aren't investing in an adequate pension now, you might not be able to afford a ticket for the 2021 Cup Final, or even the pay-TV subscription to watch it at home. And delaying the start of your plan by just five years could hit your retirement income by thousands of pounds.

The trouble is, pensions suffer from an image problem which even the arrival of Virgin in the market may not dispel. Many people are simply not willing to make the long-term financial commitments that a pension involves. And when people do put some of their current income into a private pension, it is often woefully little.

A recent Abbey Life surveybacks this up. While 90 per cent of those questioned knew that the state pension would not be enough to maintain their standard of living in retirement, one-third had still not taken out a pension, and of those who had a personal pension plan, half were investing pounds 50 or less a month - even though a 30-year-old investing pounds 50 towards retirement at 60 would be left with a pension of just pounds 2,000 a year.

The Association of British Insurers is also tackling the subject and has put forward proposals for reform of the industry for the Budget in November. Mark Boleat, ABI's director general, says: "The Government must introduce measures to reduce the burden of administration for the Revenue and the pension provider and our recommendations are in this direction. Paying pension contributions needs to become a lot simpler and more attractive."

Once you have decided to take the plunge, the next issue is performance. Which pension provider will be the most successful at managing your money? In other words, who will deliver the biggest "pension pot" by your retirement date?

As a recent investigation by the Independent has shown, the key factor in performance is not simply the growth of the underlying investments; the level of management charges can make a huge difference in the size of your pension.

One cynical accountant comments: "There was a bit of a fuss when fund managers were forced to reveal how much commission they were paying their sales agents - but they thought it would all blow over. Now the real truth is emerging: it's not the commission on sales that's the problem, it's the amount they are taking out in charges."