The Basics on Private Pensions  Part 2

PICKING the right pension is one of the most important financial decisions you will ever make. If you have not got one already you should waste no time in tracking down a suitable retirement fund.

If you do have a pension you should monitor its performance and consider putting more money into it. If you are worried that pensions tie up your money too much then consider making separate investments which will produce income or a lump sum for your retirement.  There are limits to the amount which can be paid into a pension and most of us do not even get close to them.

WORKING out how much money you will have in retirement is fiendishly complicated. But the tables on these pages should help you. They cover the main types of pension funds and show how much your investment will be worth to you.

The tables look at the pensions per week offered by final salary and money purchase schemes as well as the effect of annuity rates on your pension pot.

On top of any payouts from these pensions, workers today will be entitled to the State Pension - currently £72.50 -a-week for a single person - plus the State second pension which depends on how many years you have been working. However young workers should be aware the State pension is likely to be heavily restricted, if it exists at all, by the time they reach retirement age.

If you are in an Occupational final salary scheme, the amount of pension you receive will depend on how long you have worked for and your salary. Manual workers usually get a less generous payout than
office workers.

And if you are in a money purchase scheme - whether a company scheme, personal pension or stakeholder - the contribution size and the length of time you contribute will affect the investment.

Employers and pension providers can give you more guidance on how much you should expect as a pension and also explain how you can invest more to boost your pot.  Women tend to get poorer pensions than men because their careers are shorter and they are expected to live longer.

PENSION SCHEMES

On average those who pay into pensions pay between 5% and 8% of their salaries. But those with company schemes could be paying up to 15%. Others with personal pensions could pay up to 17.5% at age 35 and the limit increases to 40% between age 61 and 74.

Remember there are tax benefits to encourage us to invest in a pension - you do not get an immediate 22% uplift on many other investments. But with a pension a basic rate taxpayer gets just that. To contribute £1 to a pension fund he/she has to pay in just 78p.

For a higher rate taxpayer there is a 40% uplift so he/she has to pay in only 60p of every £1 contribution. Here is Isabelle Kassam's guide to the types of pension available and who should have them.

OCCUPATIONAL PENSIONS

THESE are pensions set up by your employer and you need to work with the firm for more than two years to benefit.

In most cases the employer and employee will contribute and it is the contributions from both parties which make these pensions the first and best choice for most. You can contribute up to 15% of your annual salary if you wish but most people contribute between five and eight per cent.

Often there are additional benefits in the scheme including life insurance, a pension if you have to retire from illness or a pension for your dependents if you die.  Each scheme is different so employees need to ask about the rules of their company's scheme to see which benefits apply.

WHO NEEDS IT: All employees should consider joining the company scheme unless they are planning to move jobs frequently.

FINAL SALARY SCHEMES

FINAL salary schemes are known by a number of names including salary based, defined benefit or superannuation pensions.

Recent figures from the TUC show there are 1.8million fewer workers in these popular schemes than there were ten years ago. The reason is that these pensions - considered the best for workers are being closed to new entrants by many companies because of new accounting rules. If you are in one of these schemes you should feel lucky and if your employer has one and you are not in it you should get in as soon as possible.

The risk that there is enough money to pay you at retirement rests with your employer under this scheme and you'll have a good idea how much pension to expect.
WHO NEEDS IT: If you have an option to get into one of these schemes grab it now.

MONEY PURCHASE SCHEMES

THESE schemes are also known as defined contribution pensions. All private pensions are money purchase schemes and increasingly occupational schemes are more likely to be money purchase
- especially for new employees.

The amount of pension built up in these schemes depends on the amount of contributions and how that money in invested.  On retirement you can take a tax-free lump sum but you have to use the rest of your pension to buy an annuity (before age 75)

An annuity is an investment which will pay you an income for the rest of your life. But the amount you will get depends on annuity rates at the time you decide to buy.

WHO NEEDS IT: Still a good deal for employees if the company is contributing.

SERPS

THE State Earnings Related Pension Scheme is an additional state pension linked to what you earn.  You may have been building it up if you have been working since 1978. The scheme is being reformed in April 2002 and will become the State Second Pension. 

Eventually this will be a flat-rate, not linked to earnings. The Government are also planning to introduce a new idea - the Pension Credit - in 2003.
This will guarantee that pensioners' incomes cannot fall below a certain limit. But this may be as little as £100 a week in 2003.

WHO NEEDS IT: Anyone who has not built up savings and who may not have paid enough National Insurance contributions for a full basic state pension.

GROUP PERSONAL PENSION

ALTHOUGH these are provided through employers, they are not occupational schemes. But sometimes employers do contribute to them and they may have negotiated a deal with the pension provider to reduce charges.

The amount you can put in depends on your age and it can be deducted from your salary every month. Your employer may have asked for the scheme to include a lump-sum death benefit or insurance against ill-health. But you will need to check the details with your employer or pension provider. If you change employers you can take your pension with you.

The amount of pension built up in these schemes depends on the amount of contributions and how that money in invested.  On retirement you can take a tax-free lump sum but you have to use the rest of your pension to
buy an annuity.

An annuity is an investment which will pay you an income for the rest of your life. But the amount you will get depends on annuity rates at the time you decide to buy.

WHO NEEDS IT: Still a good deal for employees if the company is contributing.

STAKEHOLDER PENSIONS
THE newest form of pension - which were introduced in April 2001, are low-cost retirement savings plans. They are designed to encourage people on average incomes to save money while they are working so they aren't a burden on the state.   Their low-charging structure has helped to cut pension costs across the industry. But the schemes have not been as popular as the Government had hoped. Your employer might offer
one but does not have to contribute or you could set up one through a pension firm yourself.

At the moment, national insurance contributions are simply paid in by workers and taken straight out to pay existing pensioners - there is no element of investment. But the number of workers in the UK is falling and this is what has created the problem. Because the population is ageing, the government believes there will be insufficient money in the pot to provide adequate pensions and wants to boost levels of self-provision.

Some existing pension plans aimed at individuals can have high charges - typically 2.5% of a fund - compared to the 1% cap with stakeholder. They have also been tainted by the mis-selling scandal, which happened when some people were encouraged to move away from company plans by commission-hungry sales staff and advisers.

The younger you start the better. One of the main providers, the Prudential, estimates that a 30-year-old starting a stakeholder plan this year would need to contribute £160 a month to receive an income of £20,000 a year at 65.

You do not have to be working to get one but you cannot contribute more than £3,600 a year to the stakeholder. The amount you have to pay will actually be less because of the tax incentive. You can take a stakeholder pension with you if you move jobs and they do not have any surrender penalties. You can also take out a plan if you have an irregular income or want to take a career break. Stakeholders can also be taken out for children. They are money-purchase schemes.

WHO NEEDS IT: People who have no earnings including full-time mums and carers. Also useful for employees of small firms with no company scheme.

STATE PENSION

MOST pensioners struggling on the state pension wish they had saved more while working. Do that while you have the chance. Everyone gets some basic state pension but do not assume you will get the full state pension.

Only those with full National Insurance Contribution records do. If you have been or were out of work for a few years you could miss out. Check your entitlement and find out how to buy back missed years by contacting your local DSS office and completing form BR19.

WHO NEEDS IT: All workers, especially those who cannot afford to make better provision for their retirement.

Its a bit late for us pensioners but for all you younger people:

The clear message is that to get a decent pension you must start investing early.
That means NOW!