Fill up, lean time ahead

Even a good company pension may pay only a third of your salary. Nic Cicutti says the way to avoid future struggle is to contribute more, without delay

The growing recognition that retirement planning is an issue to be dealt with as early as possible in one's working life has led to more importance being attached to the benefits of a company pension scheme. It is increasingly common to hear people say, with pride in their voice, that they have joined a firm because it has a relatively good pension scheme.

But that leaves one issue unresolved. It is what happens in circumstances where despite membership of an occupational scheme, the pension eventually paid will not be enough to meet your needs at retirement.

This could be for several reasons. One is that, however generous it is - and for some groups, including nurses and civil servants, it is just that - you may not be a member of your present scheme for long enough to build up enough benefits. This could be caused by the fact that you are a late joiner and are already in your 30s, or you may not be working for the firm beyond your 50s.

Alternatively, the scheme you are a member of is not very generous. The Association of Consulting Actuaries recently carried out a survey of money- purchase pension schemes, where your money is invested and the fund at retirement used to buy an annuity, or annual income.

The ACA survey found that, on average, employers' contributions into money-purchase schemes were about 5.65 per cent. Staff contributions brought the total to 8.2 per cent. But according to the ACA someone with that level of contributions will receive a pension of only 32 per cent after 45 years of service. To improve on this, annual contributions of at least 10 per cent are needed.

The stark reality is that there is a need to do more than you are doing if you want an adequate income when you stop work. This means leaving no stone unturned when it comes to adding to your pension pot.

The question is: what is the best way of doing this?

There are two main ways of topping up your pension. The first is by making additional voluntary contributions (AVCs) to your company's own pension. In effect, you are allowed to increase your contribution to 15 per cent of your income. There is full tax relief at the marginal rate on contributions and they can include shift allowances and overtime pay, which can be useful if your employer does not recognise this additional pay.

All employers must now offer AVC schemes and details are usually available from the company's pensions administrator trade union or personnel officer. In some cases, public sector (and some private sector) pension schemes allow you to buy extra years of service.

However, most company AVC schemes buy in the facility from insurance companies or building societies. For instance, Prudential runs AVC schemes on behalf of teachers, the Halifax and Abbey National do so for some employers, while Equitable Life is popular among many companies because its fund management charges are among the lowest.

There are one or two drawbacks to AVCs. One is that your pension at retirement must not be more than two-thirds of total earnings. But you can re-arrange other parts of your benefits, such as increasing the spouse's pension. AVCs tie you to the retirement date of your employers' pension scheme and, since 1987, none of the AVC fund can be commuted to a lump sum.

There is a second option. It is a "free-standing AVC", which unlike a company scheme, is sold separately by insurance companies. The tax relief is the same as for personal pensions, but higher-rate taxpayers must claim the difference between theirs and the basic rate.

Known as FSAVCs, the schemes have the advantage that if you move between jobs they are far more portable. They also allow you to choose your retirement date between 50 and 75, although this is a illusory benefit if you don not have enough money in the scheme to retire on.

And with an FSAVC you can choose your fund's investment strategy, rather than leave it to the provider your employer has chosen.

However, because the employer usually meets a large slice of the expenses of running an AVC, they are often far more expensive. This can make a significant difference to your pension pot in retirement, with a 0.5 per cent difference in charges over 30 years potentially leading to 15 per cent less in your fund when you stop work.

Generally, it pays to choose the company's AVC scheme, although if in doubt, you should consult an independent financial adviser. The important point is to be prepared to act now. Unless genteel poverty is all you are expecting when you finally retire

Nic Cicutti, personal finance editor of `The Independent', has written a free `Guide to Pensions Planning'. The 52-page guide, sponsored by Equitable Life, a leading pensions provider, is available by calling 0800 137372. Or fill in the coupon on this page.