THE MAN WITH THE PLAN

He used to know his place at the Pru. Now he's even popping up on the checkout at M&S. Should you really let him sell you a personal pension? Or anyone at all? Nic Cicutti has the answers

I see Marks & Spencer is launching a new personal pension. So should I buy one next time I go shopping?

Pensions with your plaice florentine you mean? It's not quite so simple. M&S is offering it only by mail-order at first, so the idea that you can nip in and pick one up is some way off.

Is it a good buy?

Depends on what you want. The M&S pension fund, like most others, invests in the stock market.The idea that your pension may plummet in the event of a crash like October 1987 is too much for some people, though M&S has tried to minimise the risk. This may suit you. It may not, and you really should talk to a financial expert about your needs.

Why do I need a personal pension anyway? Isn't the state supposed to provide for me in my old age?

Dream on. Today's basic state pension is no more than £59.15 for single people, or £118.30 for couples. This assumes that you have paid full National Insurance contributions. Of course, it's worse for women.

Why's that?

Many women stay at home part of the time and don't have an unbroken working record. They tend to live longer than men, but on smaller pensions. In any case, state pensions go up in line with inflation, not earnings. In effect, their value as a proportion of the average wage has fallen heavily and will drop even more in the next 30 years.

Isn't there some sort of earnings-related government pension?

Yes The State Earnings Related Pension, or Serps. It's designed to top up the basic state pension. Again, Serps has been cut over the years and is likely to fall further. In any case, the extra sums now being paid out are small, an average of £7.60 a week in 1993.

Why doesn't the Government simply bump up state pensions to a decent level?

Because it claims it can't afford to do so without massively bumping up our taxes. You see, we're all growing older ... In the next 40 years there will be fewer and fewer people of working age per pensioner.

So we're in trouble?

Of course. The Government's predictions are based on very pessimistic assumptions about future economic growth. But the fact remains that neither the Tories nor "new" Labour are keen on making promises they cannot keep.

So what else is there?

There are workplace or occupational schemes. About 19 million people belong to them. Your employer deducts money from your pay and the fund pays out when you retire. The trouble is that the quality of such schemes varies between excellent and stingy.

What do you mean?

Public sector pensions are best. They are called "final-salary". This is because they guarantee employees up to two-thirds of their final pay if they retire after 40 years' service. There may be additional benefits, such as inflation-proofing or generous early-retirement options. Ironically, that's what caused the recent pension transfer scandal.

The big rip-off?

That's right. Nearly 1.5 million people were wrongly advised to transfer their money out of their company pensions into private ones. The right advice was usually to stay put.

What if I don't work in the public sector?

There are lots of similar private schemes, although they are often less generous. For example, instead of inflation-proofing your pension, you may only get a small percentage rise each year. Then there are "money purchase" schemes ...

Money what?

Money purchase. This is where, as is increasingly happening in the private sector, employers find it too expensive to offer final-salary guarantees. So you pay contributions and the company also contributes a fixed amount, which is invested. At retirement, you should have saved up a pot of money.

Great! Cruises, toyboys, fast cars, the lot ...

'Fraid not. You won't get a fat cheque. You have to buy an annuity with it.

What's an annuity when it's at home?

Basically, it's an annual income for the rest of your retired life. Annuities are sold by insurance companies.

How much would I stand to receive?

Not as much as you might think. Insurers base the annuity on factors such as age and long-term interest rates then around. So what can at first seem like a telephone-number figure may only give you a small income. At the moment, a £100,000 fund might buy you up to £10,000 a year.

Generally, though, should I belong to a company pension scheme?

Usually, yes. In final-salary schemes, the firm guarantees you the pension no matter how much you pay in. With money purchase ones, it still pump- primes your personal fund.

Is there a risk? Didn't Robert Maxwell steal lots of money from his staff's pension fund?

Yep. There are always risks. The Government is pushing a Bill through Parliament right now, aimed at closing the loopholes that allowed Maxwell to do a vanishing act with his employees' money. After that, it's up to the pension scheme trustees to keep an eye on what happens to it. You could be a trustee if you want.

Don't fancy that much, thanks. Thing is, I can see myself switching jobs lots of times between now and retirement. I can't bear the thought of all these tiny pension gobbets all over the place.

You're right. What's more, if you change jobs regularly, you stand to gain a lot less from many pension schemes.

Why is that?

Take a company's final salary scheme. You work for that firm for five years and then move. When you leave, the pension you are entitled to is frozen at that pay level. Keep on job-hopping and you will never build up enough years at a high enough salary to give you a decent pension. By contrast, someone who sticks with the same firm for 40 years will get much more.

Sounds a bit naughty.

It is. That's why the Government brought in personal pensions in 1988.

So we're back to personal pensions ...

We are.

How do they work?

They're a bit like money purchase schemes in that you pay into your own pot, which is then invested. You can carry that pot around with you no matter who you work for. When you retire, you buy the annuity with the money.

What about tax?

The money is invested net of tax at the highest rate you pay. This is especially good news for those paying 40 per cent tax. For them, each £100 contribution is worth £140, although there is an age-related ceiling on contributions.

Sounds brilliant! Where do I buy one?

Hang on a minute. There are dozens of insurance companies offering hundreds of different pensions. You need to be able to choose the right one.

Can't I just pick one off the shelf?

You can. But they may not all suit you as well. For instance, some allow you to take a break between payments, others don't. Some charge you more to look after your money than others, or they have different investment performances. It's a bit like choosing a bra at M&S. You need a proper fitting from someone who knows what they're doing.

How can I be sure that the lump sum I get at retirement will be enough?

You can't. Investing in the stock market is a risky business and even with all the precautions in the world there is the chance of a nasty surprise.

What happens if my pension fund provider goes bust?

Your money is protected. The most important thing is fund performance.

Does it make sense for me to set up several personal pensions?

Not usually. The setting-up costs are often very high and mean that your first few premiums are often swallowed up by heavy up-front charges. There are cheaper plans available but you need an adviser to guide you.

Where do I find an adviser?

There is an organisation called IFAP, which promotes independent financial advice and will put you in touch with the three companies nearest to you. Shop around. You may also want to ask your friends if they can recommend anyone.

But aren't advisers all con-merchants interested only in selling you totally unsuitable products that earn them vast amounts of commission?

Some may be like that. Most are perfectly decent people who do a good job for their clients. Since the beginning of the year they have to tell you how much commission they will earn from what they want to sell you. You can also pay them a fee for their advice instead.

How do I spot the spivs?

Use your common sense. Ask them how long they have been around and what qualifications they have. Check with their regulator, the Personal Investment Authority, that they are telling the truth. Don't fall for easy-money promises. Don't pretend to understand their gobbledygook for fear of seeming stupid. Don't make out cheques in their name - they are not allowed to ask for it anyhow. Take notes of everything they say. If you don't like the look of someone, don't deal with him or her. Remember - if your adviser drives a Ferrari it's your money that paid for it.

I know what you mean about gobbledygook. Why do they talk like that? And why do their brochures read like they have been written by a Martian?

Stupidity on their part, mainly. Many of them think you'll be impressed by their arcane language. Don't be. The best adviser is one who answers your questions clearly and simply.

Anything else I should be doing?

You may already have an occupational pension but feel it won't be enough to give you the style of life you want. There are also pension top-up plans, available either through your own employer or from an insurance firm.

What happens if I am not working but still want to provide for my retirement?

It may be difficult to pay into a personal pension, especially for women, because contributions are linked to your earnings in that tax year. However, you can make lump sum payments based on your past six years' earnings.

Failing that, personal equity plans - PEPS - also offer tax-free advantages. The investment is not taxed, nor is the income. But you can only invest £6,000 in an ordinary PEP in any one year.

Personal Investment Authority membership department: 0171 538 8860 IFA Promotion: 0117 971 1177 Your Money: pages 20 and 21