Pensions - who needs them?

If you're young, a tax-free investment may earn more for your retirement, writes Isabel Berwick

Most of us want to give up chocolate, or smoking, but we still love the "hit" from the bad stuff. It's all too easy to want two opposing things at the same time - and it's the same with being organised about our finances, especially with saving money for retirement. Most people in their twenties and early thirties feel they ought to have a pension. But at the same time many prefer to keep spending their earnings on more immediate pleasures.

In fact the hedonists have a valid point. Even if you are offered a no- effort pension scheme through your workplace, it may not be worth joining if you are just starting out after leaving school or university. Young workers are likely to change jobs four times before they are 25, according to a report last week from the National Association of Pension Funds (NAPF).

Older workers who aren't offered a pension scheme will find many of the personal pension choices available are unsuitable, inflexible and expensive. There are plenty of people who will be happy to sell you one of these pensions, but if you can take a step back from the sales pitch you may find you will be much better off avoiding personal pensions altogether.

Sounds heretical? Not at all. But, before you start cheering, taking the "no pension" path still means that you have to save a lot of cash.

Peter Quinton runs the Annuity Bureau, an independent financial advice firm which specialises in helping people coming up to retirement. He says: "The important message is you need to save, whether it's in a pension or through other means. The average retirement fund is very small - between pounds 20,000 and pounds 40,000 in total. However, the more you save and the earlier you can put it away, the more compound interest works."

Compound interest is the key to understanding why you need to save money when you would rather be spending it. It's the magic worked when you leave savings to grow for the very long term. Compounding means a small amount of cash can turn into a staggering amount over the years.

Someone of 20, who puts away pounds 100 a month between the ages of 20 and 30, will have pounds 1,347,806 at age 60 (assuming 14 per cent growth - this is optimistic, but stock market growth has been in double digits on average throughout the century). But don't save it until you are 30, and then save pounds 100 a month until age 60, and you'll have pounds 488,084 at 60. (For more on this see Motley Fool's website).

If you start to make stock market savings in a tax-free individual savings account (ISA) you can always transfer a lump sum to a pension later on. John Turton, head of pensions at BEST investment, says that it's vital to invest on the stock market, whether you choose a pension or an ISA.

"A young person should not go near with-profits investments or managed funds. They will dilute the compound capability that equities (shares) achieve."

The easiest and cheapest way to save for the long-term if you aren't very interested in investments is to opt for an index tracking fund. Pick a FTSE All-Share tracker for a good spread of shares. The cheapest deal over the long term is Legal & General's tracker fund.

If you aren't disciplined about money, the drawback with ISAs is that you can get at the cash. If you worry you might not leave it untouched, then take out a very cheap pension plan.

The Government is set to introduce a new type of cheap portable pension called a stakeholder, but this isn't coming until 2001. In the meantime, a link-up between brokers Hargreaves Lansdown and Friends Provident has produced what may be the cheapest personal pension ever. There are no charges other than a 0.85 per cent annual management fee, which makes it cheaper than many ISA plans. You can also transfer your money at no cost to any other pension.

Whatever you do, make sure you keep putting cash aside. The latest life expectancy figures, released last month, show that a 30-year-old-man can expect to live to be 85 and a woman to 88.

Annuity Bureau, 0171 620 4090; BEST investment, 0171 321 0100; Hargreaves Lansdown, 0117 988 9880; Legal & General, 0500 116622; Motley Fool: www.fool.co.uk

ALREADY GOT A PENSION?

Are you in a stable job with a good "final salary" pension scheme ? If you stay more than two years with your employer, this type of pension is very worthwhile. It's the employer, not you, who takes all the investment risk.

If you pay into a company pension that's a "money purchase" scheme then check which firm is managing the scheme and how much you are putting in. Make sure you understand where your cash is being invested - you may have been offered a choice of funds, but are your choices good?

Confused by the jargon ? Have a look at the Plain English campaign website, where you can download a free glossary of pensions terms. It's at www. plainenglish.co.uk.

If you are paying into a personal pension (or have let it lapse) it is worth getting it reviewed. There's no point paying into a poorly performing "dog" scheme. You should pay a fee for this (BEST investment charges pounds 250). According to pensions expert John Turton, schemes run by Lincoln, GAN, Windsor Life (which now owns GAN), Hill Samuel (now part of Lloyds TSB) and M&G need immediate attention.