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The age old question


Choosing the right pension is not easy. Peter Duffy, of independent financial advisor IFS, says you need to understand your options whether you are self employed or on the company payroll. With compulsory retirement likely to be abolished and a new pensions minister in place, this is a good time to get to grips with this tricky subject.

Nobody needs a pension - what we do need is an income in retirement. And for the average pensioner, financial security means a weekly income of around £193, or £10,000 a year.

But in today's world of contract working and career breaks, fewer people than ever are going to have paid full national insurance (NI) contributions which entitle them even to the full basic state pension. So unless you are in a good company scheme you need to start saving fast.

Company pensions are usually superior to personal and stakeholder pensions - because employers make a contribution.

This is in effect extra salary, put aside while you are working to provide for you in retirement.

If you are eligible to join a company scheme, do so straight away. If you are thinking of going it alone, factor pension costs into your calculations.

The next best thing to a company scheme is a personal or stakeholder pension. These give tax relief at your highest rate on contributions and 25 per cent of your fund can be taken as tax free cash. On retirement, take the tax free cash lump sum: pension income is subject to tax .

Do not assume a pension is the only option. If you have no pension yet, there may be equally effective ways of saving money. ISAs enjoy much the same freedom from tax on capital gains and interest payments as pension plans, and are more flexible. Money can be withdrawn from an ISA at any time, tax free. But they do not enjoy the same tax breaks on contributions. And flexibility is also their weakness: it is tempting to cash in early and leave nothing for retirement. Combining an ISA and personal pension may be ideal.

Knowing something about the pensions market can pay dividends. When you take your pension fund, use what is called 'the open market option'. This means you can take your pension fund to any annuity provider - you are not obliged to buy your annuity from the company which managed your pension. Many people do not realise this and few providers mention it. You can get up to 30 per cent more by shopping around.

If you do not have time to study the market yourself, talk to a good independent financial advisor. Many personal pensions are already as flexible as stakeholder pensions with similar, or lower, charges. It is vital to avoid providers who have penalties for early retirement or reducing payments or who have complicated charging structures.

The charges on these plans can have a devastating effect on your final return.

And finally: if you are not going to take it seriously do not bother. The minimum income guarantee - currently £78.45 for a single pensioner aged 65 or £121.94 for a couple of the same age - is paid to the poorest pensioners and is to be uprated each year in line with earnings, rather than inflation. If you cannot accumulate a fund of at least £20,000 you may be better off relying on state benefits. But you will certainly not live in luxury.

Key points

For the average pensioner financial security means £10,000 a year.

Company pensions are usually the best value

ISA's are a good alternative to a personal pension

Take is seriously or do not bother at all

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