Tax-Free savings: Save hard, or face an old age in poverty

It's good news we're living longer but it means we have to build up a bigger pension, writes Harvey Jones

More of us can look forward to a lengthy retirement but many will spend it in relative poverty. Life expectancy continues to rise. A 30- year-old man will typically live to 79 years and three months, a woman can hope for a further five years.

This sounds like good news but it means that whatever your pension pot, it will have to go that much further.

State pensions alone are no longer enough and occupational pensions are only valuable if you spend your working life with a single employer. If you move jobs a lot you or work for yourself, you will need a personal pension plan, and the amount of money you will need to buy a decent pension income is massive. A couple aged 60 wanting pounds 15,000 a year income would need a pot of pounds 225,000, according to figures from Equitable Life. If they wanted that income to rise in line with inflation, they would need pounds 333,000.

The earlier you start saving, the better. The good news is, particularly for higher rate taxpayers, that the Government allows tax relief on personal pension contributions to encourage sensible saving. You can also take a quarter of your pension pot as a tax-free lump sum when you retire.

If you are lucky, your employer will offer an occupational pension and you should join, as your employer should boost your fund by matching your own contributions.

Occupational pensions come in two forms, money-purchase and final-salary schemes. The former invests your contributions, which are used to buy an annuity on retirement, while the latter pays a fraction of your final salary (usually 1/60 or 1/80) for each year you contributed to the scheme. Most people find the final salary scheme preferable, if available.

If your company has no scheme or you are self-employed, you should take out a personal pension. These are in essence a straightforward investment vehicle. You put money in, it grows, and you have a larger fund at retirement. Many personal pensions remain restrictive, imposing penalties for all manner of things, but the much-touted Government stakeholder pension, when it finally arrives, should make them cheaper and more flexible.

It aims to help lower earners save for retirement through a personal pension, by allowing them to save a greater percentage of their earnings, up to a maximum of pounds 3,600 a year. The Second State Pension will replace SERPS and will aim to help those earning less than pounds 9,000 a year.

People without a personal pension may be tempted to wait for the stakeholder version but Nic Nicolaou, head of advice for pensions direct at Hargreaves Lansdown, says this would be a mistake. He said: "Stakeholder pensions are at least a couple of years away, so if you delay you will have missed out on two years' growth. A better idea would be to choose a plan that allows you to move to a stakeholder pension easily."

If you have the money to spare, there are several ways to boost your pension provision. If you are in a company or occupational pension you can make additional voluntary contributions (AVCs).

These are usually cheap, with annual charges of around 1 per cent, but the investment choice with your occupational provider may be limited. Alternatively you can choose a life assurer to manage your investment in a free-standing AVC (FSAVC).

Buying a property to let has been hugely popular. The rental income should usually cover the mortgage, and you can continue to earn this on retirement, or sell the property and use the capital to boost your income. But do remember that the profit on selling a rented property counts as a capital gain.