Personal Finance: We must still plan pensions, despite Mr Blair's safety net

Cheap, simple and flexible pensions for all will be available within two years, when the arrival of Stakeholders puts the prospect of a comfortable retirement within everybody's grasp. In one fell swoop, the Government has pledged to sweep away the complexities and corruption of the old pensions world, and give consumers simple contracts which are easily understood.

Charges will be set at very modest levels and there will be no penalties for switching from company to company. Those not in work, such as mature students, early retirees, the recently-divorced, mothers and carers, can also save for retirement via one of these new-style contracts.

Yet the Stakeholder initiative on its own will not save Britain's pensions crisis. Individuals will need to carefully plan for their retirement, exploiting to the full the various options available to them. This means that despite the pledge of simplicity, many still face some tough decisions. What kind of plan should they open and how much should they invest?

What will the State provide?

MOST PEOPLE will continue to qualify for a basic state pension, provided they have either paid national insurance for 40 years or received credits for bringing up children or caring for an elderly relative. But the value of the pension, currently pounds 66.75 weekly for a single person and pounds 106.70 for married couples, rises in line with prices rather than earnings.

Poor though it looks today, its real value is continually eroded by inflation. Anyone in work now who relies exclusively on a state pension for a retirement income will experience poverty and hardship in old age.

Seven million people in Britain also contribute to the earnings-linked top-up State Earnings Related Pensions Scheme (Serps). However, this is also being scaled down and although maximum additional payments are set at pounds 120 weekly, the average Serps top-up for a 20-year member is pounds 20 weekly for men and pounds 11 for women. In the future people may get even less.

The Government plans to replace Serps with a state second -tier pension, but this too will only provide a safety net for the lower paid. Details so far are scant, but it will be designed to help those earning less than pounds 10,000 who cannot be expected to afford other savings.

What's so good about the Stakeholders?

THREE THINGS. They will be very cheap with maximum charges of just 1 per cent. They will also, like other pensions, offer tax breaks. As contributions are taken from your pre-taxed earnings every pound you invest costs you just 78p. The taxman puts in the other 22p.

The amount which you can invest tax-free rises with age. Higher earners save even more tax, 40p in every pound. Young people can save up to 17.5 per cent of their annual wage tax-free or pounds 3,600, whichever is the greater, while those over 61 can put in 40 per cent.

How long will you have to wait to get the tax back?

NO TIME at all because you contribute net of tax. This means you pay the company 78p for every pound you wish to invest (60p for higher-rate taxpayers) and they sort out the tax.

How will stakeholder work?

ALL EMPLOYERS will have to offer their workforce a stakeholder pension, or equivalent, by April 2001, which can be deducted through your wage packet, although it is envisaged that this will be organised on an industry- wide basis by trade unions and other bodies.

You save a regular amount each month to build a sufficient nest egg on retirement to buy an annuity contract which, in turn, pays you regular monthly amounts to provide your income until you die.

The size of your final pension will depend on three things: how much you save during your working life, how well it is invested and on annuity rates when you come to retire.

How much should you save?

AS A ROUGH rule of thumb you need to set aside 10 per cent of your pre- taxed earnings through your working life into a pension, if no one else, such as an employer, is contributing for you. That proportion rises with age. If you only start saving in your early thirties you need to invest 15 per cent of gross salary annually.

If you don't use up all your entitlement one year, can you invest extra amounts later?

NO. YOU used to be able to boost retirement savings by basing it on previous year's earnings, but the Government now plans to abolish the carry back/carry forward rules.

What if you are not earning?

THE UNWAGED, especially women, have faced great hardship because lack of earnings has precluded them from opening a pension. Under Stakeholder you can continue investing up to your maximum annual limits for five years after you stop work. But even after that you can still put in pounds 3,600 annually.

This could prove very useful for early retirees, those who give up work because of a break-down in health, the newly divorced with a lump-sum settlement, mature students, mothers and carers.

Who needs a stakeholder?

ANYONE WITHOUT current pension arrangements who has no access to a company scheme. Although you can't open a stakeholder plan until April 2001, a few schemes are currently trading along Stakeholder lines, including plans from Legal & General, Virgin and Tesco.

These plans are roughly charging 1 per cent annual management. But a word of warning: when Stakeholder gets under way it is possible some plans will charge even less. But you have nothing to lose by buying the best today and starting a successor plan at some later stage.

If you open a plan are you stuck with it?

NO. YOU can switch pension manager without penalty, so if you started one with a company mentioned above, you can transfer to another firm when Stakeholder finally gets off the ground.

I already have a personal pension, wouldn't I be better sticking with this?

NOT NECESSARILY. Most personal pensions will eat up considerably more of your savings than a Stakeholder. They have set-up fees for the first two years, an annual fee and, sometimes, monthly policy and early exit fees. If the policy has been running for a few years, you have already paid the set-up charges. You then need to calculate how much it is costing you each year. If the annual charge plus any monthly policy fee amounts to more than 1 per cent of what you intend to save, you might still be better off switching.

But remember, your insurer may fine you through early surrender terms which would wipe out any savings. With-profits policyholders may find themselves trapped. If they move they could miss most of the final bonus paid on maturity and lose a large chunk of their nest egg.

Is my final salary pension scheme affected?

NOT DIRECTLY. Those headed for a pension of two-thirds their final salary and guaranteed by an employer are the pensions elite with no need to consider Stakeholder. But even those in good schemes may have employment gaps which they need to make up through additional voluntary contributions (AVCs).

Most company schemes have attractive AVC arrangements with the fees paid for the employer, but AVCs can sometimes be a weak link. Alternatively, some employees do not wish to save with the company if, for example, they want to build funds so that they can retire early.

Would employees in investment-based money-purchase company pensions be better off with a stakeholder?

IN MOST cases no. Members of so-called money purchase schemes or group personal pensions do not enjoy the guarantees of a final salary scheme because their pensions, like Stakeholders, will be based on the amount contributed, investment performance and annuity rates.

In most cases they are not saving alone because the employer will contribute to their pensions and pay for the management charges. This cuts costs considerably. If they opt out, not only must they make up all the contributions themselves but they are effectively handing back to the company some of their salary.

Could the Government's plans for Stakeholder change over the next two years?

IT'S POSSIBLE, as the final regulations have yet to be published. But Stakeholder has been a long time coming and the Government has been quite clear where it was coming from.