INCOME VERSUS GROWTH: Don't put your nest eggs in one basket

There's more to retirement planning than a pension, writes Tony Lyons

Saving for retirement isn't just about throwing money at a pension. You need to make a range of investments and make sure you leave some of your money in a place where you can get to it in an emergency.

"Be flexible," says Philipa Gee of Gee & Co, an independent financial adviser. "Build yourself a portfolio of investments wherever you can, being as tax-efficient as possible."

The Government is setting up low-cost "stakeholder pensions", likely to be introduced in April 2001. If you have not got a company or personal pension, you can either wait for a stakeholder or keep an eye out for pensions that already fit the low-cost, flexible guidelines set out by the Government.

Virgin Direct's pension and a new product from Friends Provident and Hargreaves Lansdown both claim to offer pensions that meet the standard. To give some idea of the figures involved, aiming for a nest egg of pounds 100,000 at retirement sounds a lot. But at the moment this would only buy an annual income of around pounds 5,800 for a man of 60 with a 55-year-old wife, or pounds 6,300 a year if they were five years older. If the annuity was indexed to grow at 5 per cent a year, then they would start at pounds 2,600 and pounds 3,300.

And to end up with that pounds 100,000 nest egg at retirement, BEST Investments has worked out that if you are 25 you would need to save pounds 90 a month if you want to retire at 60, or pounds 68 if retirement age is 65. Start saving 10 years later and the monthly savings would go up to pounds 171 and pounds 123 respectively. And if you don't start putting money away until you are 45, then you will need to save pounds 377 or pounds 246 a month. These figures assume a conservative growth rate of 6 per cent a year from the underlying investments and a 1 per cent reduction in yield from charges made by the provider, much lower than the cost of most conventional pension plans.

These figures make frightening reading. If interest rates remain low for many years and the current system of swapping a pension fund for a contract to provide an income is not changed, then many people will find that they will need much more than pounds 100,000 when they eventually retire.

Unless you are in a final-salary pension scheme and are likely to stay with the same employer until retirement, then you should start to gear up your retirement plans. Many people choose to make a pension the core of their retirement savings. Tax relief is very generous.

If you work for an employer who offers a company pension, you should probably join it. These are cheaper than the alternatives, and up to 15 per cent of your relevant earnings can go into the pension plan.

If you are self-employed, change jobs often, or work for a company with no pension scheme, then you should consider a personal pension. The mis-selling and scandal of the past is still uppermost in many people's minds and sadly there are still a lot of high-charging schemes around.

The basic problem is the large sums paid in commission to salesmen and independent advisers eats into the amount invested on your behalf, especially in the first few years.

There are a number of discount providers, including Hargreaves Lansdown and TQ Direct Choice, which sell a small range of selected pensions at vastly reduced cost. BEST Investments also publishes research on the best personal pensions in terms of costs and performance. It recently surveyed 90 pensions and found it could recommend only five providers, including Standard Life, Winterthur Life, and Royal & Sun Alliance. The full report from BEST is available for pounds 10 (see below).

The maximum contribution you can make to a personal pension is determined by your age (see table). If you have not made maximum payments in the past, you are allowed by the Inland Revenue to mop up any under-payments from the past six financial years, useful if you have a lump sum to invest.

If you are coming up to retirement it is vital to get some independent advice. Consult an IFA or one of the retirement specialists, such as the Annuity Bureau.

n Contacts: BEST Investment's independent personal pensions research is available for pounds 10 with a credit card on 0171-321 0100.

Discount pensions: Hargreaves Lansdown, 0800 138 5838; TQ Direct Choice, 0800 056 1836; Virgin Direct, 0345 900900.

CONTRIBUTION LIMITS

Percentage of relevant earnings, subject to cap of pounds 87,600, that can be invested in personal pensions in the current financial year

Age Earnings Capped amount

proportion

Under 35 17.5% pounds 15,330

36-45 20% pounds 17,520

46-50 25% pounds 21,900

51-55 30% pounds 26,280

56-60 35% pounds 30,660

Over 61 40% pounds 35,040

Source: BEST Investment