Even if you start a pension at 25 you must save £261 a month to retire on the average wage.

Save now to avoid pension misery 

THE average salary broke the £20,000 barrier for the first time last April, according to research by Income Data Services. Most people on or about the national average wage of £20,265 would hardly consider themselves rich, but unless they change the habits of a lifetime, they are going to be a great deal poorer in retirement. 

Two out of five workers in Britain have done nothing at all about a pension, according to a poll conducted by the Trades Union Congress (TUC). But although it is thought it is mainly the young who cannot be bothered with pension savings, older age groups are not that much better. The poll figures revealed that three out of five of the under-25 age group have done nothing about a pension, and neither have one in three over-55s. 

Relying solely on what the state will provide is going to mean constant penny-pinching during the years when we finally have the free time to enjoy ourselves. So why are more of us not prepared to save meaningful amounts in a pension plan to provide a decent level of income later? 

There are three reasons, say industry experts: first, the pensions mis-selling scandal of a few years ago that tarnished the reputation of pension companies and their plans; then there is the apathy factor - for many, retirement is just too far away to make any impact; and, most importantly, there is still so much ignorance about pensions: how they work, how much should be saved and how to choose a plan. 

To remedy this, a free helpline, the Pension Power line, jointly sponsored by the TUC, government and employers' organisations, is available for the next five weeks. 

Getting started on a pension requires finding the answers to two basic questions: what sort of plan to choose, and how much to save in it. 

The table below shows the level of monthly contributions needed if you are aiming to retire on an income equivalent to £20,000.

For many people, these figures will seem impossibly high: the chances of most 25-year-olds saving £261 a month in a pension are, frankly, fairly remote. However if you are in a company scheme your employer may pay a large part of the contributions. As the table shows, leaving it until later only makes the going harder. Most 50-year-olds simply could not afford to pay £1,300 a month into a pension, and if they could, they are likely to be hit by Revenue rules that restrict the amount you are allowed to save in a pension. 

Michelle Cracknell, pensions adviser at Advisory & Brokerage Services, an independent adviser, says: "We generally find there's a huge rush of people in their fifties to put money into their pension plans, once their other major commitments have disappeared. By then you're almost facing a losing battle; it is simply too late to build up meaningful sums." 

But anything is better than nothing; if you can afford to start contributing even small sums in your twenties and thirties, it will be worth doing. 

One of the problems is that nobody can say precisely how much you should be saving to produce a given income in retirement, because it depends on how fast the pension fund grows. The figures in the table assume growth rates of 7% - the rate stipulated by the Personal Investment Authority (PIA), the pensions industry regulator. But they might grow more slowly - or more quickly. 

So where does that leave you? Graham Hooper of Chase de Vere, an independent financial adviser, suggests: "As a rough rule of thumb, you can work out how much you ought to be saving in a pension by taking your age and dividing it by two - the result is the percentage of income you should be saving, if you have made little or no pension provision in the past ." So, for example, 30-year-olds should be saving 15% of their salary. 
Joanne Hindle, pensions development director at NatWest Life, says: "We reckon that if you save 10% of your income throughout your working life, you should retire on a comfortable pension." 

But how do you go about choosing a plan? If your employer runs a company pension scheme, you should join that because contributions from the firm will be added to your own. 

If not, you must organise your own plan. At present, that means choosing a personal pension, but in April 2001 a new stakeholder pension will be launched aimed at people earning between £9,000 and £18,500 a year. Stakeholder pensions will have their charges capped by the government and will be the best choice for people with earnings around that level. 

If your earnings are above this, you will probably do best to take out a personal pension: the government has not yet decided whether to allow people to have both a stakeholder and a top-up personal pension. 

But even if you think you will qualify for a stakeholder pension, it is not a good idea simply to wait for the next couple of years until the scheme becomes available. Even this delay can make it much harder to produce meaningful sums. 

Instead, you should choose a personal pension that guarantees not to impose penalties if you decide to convert to a stakeholder later. Early cancellation of a pension plan can mean you are left with far less than you paid in because of the high upfront charges - levied to cover sales commission and administration costs. 

The PIA has now told all financial advisers that they must take into account any penalties imposed for transferring from a personal pension into the Stakeholder scheme before recommending a particular plan. But it is still a good idea to question them on this point and obtain an answer in writing. 

Pension companies are beginning to offer guarantees that those taking out their new-style personal pensions will not be penalised if they later want to switch to a stakeholder scheme. But some guarantees are more far-reaching than others. Legal & General's guarantee is the strongest and its scheme has among the lowest charges. 

Even if you do not expect to swap to a stakeholder pension in a couple of years, you should still pick a plan that lets you stop, re-start, increase or decrease contributions without penalties. That is especially important if you expect to join a company scheme later, as you will not be allowed to continue saving in the personal pension. 

SAVING GETS HARDER WITH AGE	
How much you need for a pension of £20,000 per year	
Retirement Age 65	Retirement Age 60	
Age Now	Monthly saving	Age Now	Monthly saving	
25	£261	25	£380	
30	£329	30	£495	
35	£422	35	£647	
40	£551	40	£874	
45	£745	45	£    *	
50	£1063	50	£     *	
* The amount that would be needed breaks the govt's rules on the pensions cap 	

Figures assume that no previous savings have been made and relate to male
savers only. Pension increases at 3% a year after retirement to protect its 
spending power. Payments are net of basic rate tax and savers will get tax 
relief at either 23% or 40%. Figures don't include a widow's pension.

Case studies 

Early starter 

Bryony Parkin, 25, is a property management administrator in West London. She started making regular savings of £30 a month into a Virgin Direct personal pension about a year ago. "My company doesn't provide a pension and I thought it was important to get started as early as possible. I realise the amount isn't much at the moment but I plan to increase it as and when my salary increases. It's direct debit, so after a bit, you hardly notice it going out of your account. For many people of my age, pensions can seem a scary thing: the great thing is to get something in place, and then you can add to it later." 

Balancing a budget 

Norman Denyer, 41, is the works director of a printing company in Middlesex. He is saving around £200 a month in a Legal & General personal pension. "I've got various pension plans; the first one I started when I was around 18 or 20. Basically I want to retire at a healthy age and enjoy the rest of life without struggling financially. The problem is, of course, that it's a balancing act. I want to enjoy my income now, not just save it for the future. I know my adviser will be nagging me soon to increase my contributions. We moved house recently, which means a bigger mortgage and that takes some adjusting to. I've tried to get some of the young people at work interested in starting a pension but they all say, "I'll worry about that when I'm older". It's a shame, really." 

Seasoned savers 

Gordon Rogers, 51, has been saving in pension plans for about 30 years. He learned the hard way that some regular savings schemes impose high upfront charges, and for the past 10 or 15 years has stuck to making lump-sum payments once a year, advised by independent financial advisers Best Investment. "In the last few years I have aimed to put in between 15% and 20% of my income each year into a pension," he says. "As the years go by you increasingly realise the importance of pensions." With his wife Bernadette, Rogers owns a tyre distribution company; last year was particularly successful and the two of them were able to salt away pension contributions totalling £45,000. 

Source: Sunday Times 11 July 1999