Pensions: Too young to start a pension? Never

If you knew of a government savings scheme that gave you money, you'd want to know more about it, wouldn't you? So why do most people immediately switch off when anyone mentions pensions?

Simon Read has the answer.

"Every individual without a pension should ask themselves why they have decided not to let the Government give them free money," says Alastair Conway, managing director of Clark Conway, independent financial advisers. The fact is that a pension represents the most tax-effective savings opportunity you'll probably ever have. Nowhere else does the Government contribute cash to your own individual savings pot.

If your company has a pension scheme, then joining it is likely to be your best option. If not, then you should be making the most of your personal pension allowances.

There are limits that vary with age on the amount you can contribute each year to a personal pension. Up to the age of 35, you can put in up to 17.5 per cent of your net income. This rises to 20 per cent if you are 36, going up a further 5 per cent each five years until the time you've reached the age of 61. Then you'll be allowed to invest up to 40 per cent of your earnings into a personal pension.

All contributions qualify for full tax relief - at 40 per cent for higher- rate taxpayers. This means that for every pounds 60 you pay into a personal pension, the taxman chips in pounds 40. Growth in a fund is free of tax, which makes a personal pension an extremely tax-efficient way of investing.

Even if you've already made your maximum contributions in the current tax year, you can use a lump sum to catch up on past years if there has been a shortfall. The Inland Revenue allows you to put in the maximum allowable amounts up to six years later.

Despite all the tax advantages, the problem is that many people leave starting a pension until it's almost too late. "We did a survey of our clients recently which showed that the average under-50-year-old household spends more than pounds 900 a year on pensions compared with just pounds 600 put in by the under 30s," says Mr Conway.

Younger people shouldn't think that pension planning is only for the elderly. "A five-year delay in starting a pension halves the amount achieved at retirement," says Mr Conway. "It is crazy for anyone not to have contributed to a pension by the age of 30."

If you're in a company scheme it's likely that the way your scheme is run is undergoing changes. More and more companies are switching their pension schemes to "money purchase" or "defined contribution" schemes rather than the traditional "final salary" schemes.

Companies can choose between the different types of schemes but, under both, you are allowed to invest up to 15 per cent of your annual salary. What you can pay in to the different schemes therefore doesn't differ, but what you get out can be vastly different.

"The final salary scheme is the best for employees, but it is being phased out," says Mr Conway. The switch is being made in the name of cutting costs because final salary schemes are more complicated, and therefore more costly, to administer.

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