Pensions: Don't look back in anger

IT SOUNDS like an austere firm of Scottish solicitors or financial advisers, doesn't it - Gallagher & Gallagher. The fact that they have made the prudent decision to invest millions in a pension scheme confirms the image. But it's actually Liam and Noel we're talking about - you know, the fast life of drugs, drunken antics on planes and high-profile weddings lived by the brothers who front the band Oasis.

So what's the story about their pensions glory? Simply that they have recognised that the fickle world of pop could leave them out of fashion at any time. Planning ahead is an obvious decision if they want to maintain even a part of their present lavish lifestyles.

Sadly, we can't all stash away millions for our futures, and we are also limited on just how much we can put into a pension. The limits mean that pension schemes can be very inflexible, particularly if you want to retire early.

The answer, says Simon Holt of Skipton Financial Services, the independent financial adviser arm of Skipton building society, is to consider personal equity plans. "PEPs, and their replacement ISAs, are particularly well suited to retirement planning because their tax efficiency and total flexibility of when and how much can be taken out of them makes them ideal supplements to a traditional pension plan for funding early retirement."

The key word is "supplements". While PEPs and ISAs offer some tax benefits, pensions offer serious tax savings. There's no other savings vehicle where the government or your company contributes cash to your own individual pot.

If your company does not have a pension scheme, or if you're self-employed or one of the increasing number of workers employed on contract and so not eligible to join the company scheme, you should be setting up a personal pension. There are limits on the amount you can contribute each year to a personal pension, but the limits become more generous as you get older. All contributions qualify for full tax relief at present, at 40 per cent for higher-rate taxpayers although there are fears that this could be reduced in the Budget.

Any growth in a fund is free of tax, which makes a personal pension an extremely tax-efficient way of investing. Even if you have already made your maximum contributions in the current tax year, you can use a lump sum to catch up on up to six years of previous pensions contributions if they were not used, through what are called carry-back and carry-forward allowances. The two Gallaghers probably used these to stash so much away into their pension schemes.

Most personal pensions are operated by life companies, although other financial institutions have been getting in on the act in recent years, including unit trust groups, friendly societies, and banks through their own life company subsidiaries.

Pension fund managers do not work for nothing, of course. They can deduct initial charges, annual management fees and monthly administration charges from the value of your fund, regardless of how well or badly they manage it. An annual 1 per cent management charge may seem small at just pounds 10 for every pounds 1,000 in your fund, but it can still make a major dent in your pension pot by the time you retire.

When you've made the most of your pension allowances, turn to PEPs. You receive no tax relief on contributions, but the investments and income earn are tax-free. The fact that the new ISAs may have a smaller annual limit, however, reduces their effectiveness for pension purposes. "Cutting the PEP limit of pounds 9,000 a year to a maximum contribution of pounds 5,000 means the potential for higher net worth savers to take advantage of ISAs as a retirement planning vehicle is less," says Mr Holt.

However, he suggests that married couples use ISAs to create a separate retirement fund for the non-working partner. "This can't be done using existing pension products," he says.