Pensions

Taking out a pension does not guarantee you a comfortable retirement. You have to pay enough into it to make it worth while. How much you need to pay in will depend on what type of pension scheme you are a member of and also whether you are self-employed or not.

Currently there are complicated limits surrounding how much you are allowed to put into a pension each year. These limits will be scrapped in a radical overhaul that takes effect in 2006. From then there will be one overall life time limit of £1.5 million on how much money you can pay into your pension.

At the moment, if you are a member of an occupational pension scheme you can pay in up to 15% of earnings up to a limit of £102,000 a year. Usually employees see 5 or 6% taken out of their pay packets each month for this. Employers pay in money on top. This can be double the employee contribution and it does not affect the 15% allowance.

Use any extra money wisely

So employees often have an extra 9 or 10% of salary they can use to put money into their pension. They can do this in one of three ways. Some traditional final salary pension schemes let you buy what are called added years. These schemes work by building up a percentage of your final salary - hence the name - for each year you are in the scheme. Most people do not stay with one company long enough to get the maximum pension possible, so you can buy added years to make up your final pension.

If you do this you will know what pension you will get. For example, if you expect to be a member of a pension scheme that builds up one sixtieth for each year, and you earn £20,000 then for 15 years' membership you will get £5,000 a year. If you buy a further five added years you will get just under £6,700 a year.

Other kinds of pension

Added years are not always available. Instead schemes set up additional voluntary contribution (AVC) schemes. These are separate pensions used to top up the amount the main scheme will pay out. They are money purchase schemes, so the amount you get out is not guaranteed.

Many newer company pension schemes work in this way too. If it is labelled as an occupational pension then you will have the 15% limit, despite the fact that it works differently to a final salary scheme. The money you pay in is invested on the stock market and used to get the best income possible at retirement.

Workers earning £30,000 a year or less can take out a stakeholder pension scheme while also being a member of an occupational pension scheme. They can pay in £2,808 a year (topped up to £3,600 by the taxman) for the next five years.

If you have a personal pension you are able to pay more in. This rises with age. See the table below for an example. These more generous limits, also capped at £102,000 for this tax year, reflect the fact that most people with personal pensions have to look after themselves on their own.

Start a pension early and it will save you money

The earlier you start saving, the less money you need to save each month. To target a pension of £20,000 a year a 20 year old needs to save £99.50 a month, assuming average annual growth of 7% a year, says Legal & General. Leave it until you are 30 and you need to save £189 a month to target the same income. A 40 year old would have to save £383 a month and a 50 year old starting out would have to save a massive £895 a month to get a £20,000 annual pension.

While the State pension may be small - currently £4,139 a year for a single person and £6,617 a year for a couple, it should still be part of your thinking. To find out if you have paid enough National Insurance to qualify, contact The State Pension Forecasting Team, The Pension Service, Room TB001, Tyneview Park, Whitley Rd, Newcastle-upon-Tyne, NE98 1BA or call 0845 3000168.

Age         % of earnings

35 or less       17.5
36 to 45         20
46 to 50         25
51 to 55         30
50 to 60         35
61 and over    40

Source: Virgin Money