Is your retirement an underfunded pipe dream?

Occupational pension schemes offer a false sense of security. Even if you are a member of an occupational scheme and enjoying a good contribution from your employer, you should not assume that your income in retirement will be sufficient.

The chances are that your retirement plans, however vague at this stage, are already underfunded - especially if you harboured the notion of retiring early.

Many pension schemes now have an across-the-board retirement age of 65. This follows the 1990 Barber versus Guardian Royal Exchange judgment, in which the European Court ruled that it was discrimination for men to be penalised for retiring at 60 when women were not.

If you retire earlier, even at 60, there can be varying degrees of penalties depending on the company arrangements.

Even the best schemes can penalise you by deducting as much as 4 per cent for each year that you retire early. It is possible to have 20 per cent lopped off your pension for retiring at 60. If you want to retire at 55 you could be looking at a 40 per cent reduction in your pension.

Occupational schemes broadly fall into two types. There are final salary pension schemes and money purchase schemes. Final salary schemes provide a pension that is determined by the number of years that you have worked for the company and is a percentage of your final salary. A money purchase arrangement depends on the investment performance of the pension.

To qualify for the maximum pension in a final salary scheme, you usually need to have worked for one company for 40 years. Changing jobs fragments your pension.

So how do you go about valuing your pension arrangements? And how much more should you be investing for your retirement?

As a guide, an investor who is 30 next birthday, wishing to increase his or her retirement income at 60 by £5,000 per annum in real terms, needs to pay £84 a month net of tax. Someone who is 40 next birthday wishing to provide the same increase in benefits will need to put in £156 per month net of tax. This assumes contributions increase over the term by the rate of inflation.

First you must establish just what your occupational scheme provides. Annual statements are sent to each member. But you should also ask for a statement based on early retirement - both for five years and 10 years. If you have left your job, ask the scheme administrators for a projection of your pension.

With money purchase arrangements, you may receive a statement that does not provide you with all the information you need. Inflation is the largest single enemy of long-term investment and needs to be taken into account when assesssing what your pension is likely to be.

Undoubtedly the first vehicle one considers for topping up a pension is an additional voluntary contribution. AVCs come in different packages. Some companies will operate the purchase of additional years. Other AVCs are investment-orientated. Which is best for you will need analysis as it will depend on such factors as your age, expectations and risk sensitivity.

Contributions of up to 15 per cent can be offset against your highest rate of tax.

It may be more suitable to have a free-standing arrangement rather than one that is linked to your occupational scheme. This is particularly useful for people who expect to move jobs several times in their careers. Free- standing AVCs can also be converted, without penalty, to personal pension plans, should you become self-employed. If you need to invest more for your retirement than is allowed under the AVC rules you need to look at other forms of savings, including personal equity plans.

The author is a partner at Holden Meehan, the independent financial advisers.