Pension planning: Save up: it's later than you think

WITHOUT your own pension pot, either through a personal or company scheme, you'll have to rely on the state pension. Currently that is pounds 64.70 a week. For many of us this won't even cover the Tesco shopping bill.

Despite this, more than 15 million people in the UK have chosen not to save for retirement even though they can afford to do so, according to research by IFA Promotion. "It seems that some of Britain's young people are spending their way to an unhappy retirement," says Ann-Marie Martyn, chief executive officer of IFAP. "Apathy and a fear of finance are putting off many of those who should be planning ahead."

"A survey of our clients 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 Siobhan Mackey of Clark Conway, independent financial advisers. She says 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. It's crazy not to have contributed to a pension by the age of 30."

Think about it this way. With many people retiring early and living longer, it's probable that your retirement could last for a number of decades. The answer is to save now. "It pays to make a start early," says Ms Martyn. "Saving for retirement doesn't have to cost an arm and a leg. Doing something is better than nothing." Tesco has launched a personal pension plan hoping to attract contributions from as little as pounds 1 a day.

So what are your options? If your company has a pension scheme you shouldn't make the mistake of turning down the opportunity of joining it. If your company doesn't have an occupational scheme, or you can't join it because you're employed on a contract basis and so not eligible, you should be starting a personal pension. The same is true of the self-employed.

There are limits on what you can contribute each year to a personal pension, although the limits become more generous as you get older. Up to the age of 35, you can put in up to 17.5 per cent of your net income, up to an earnings cap of pounds 87,600. At 36 this rises to 20 per cent and then rises a further 5 per cent each five years until by the time you've reached the age of 61, you'll be allowed to put up to 40 per cent of your earnings into a personal pension. All contributions qualify for full tax relief.

The means that, in effect, the government contributes to your own pension pot. So for every pounds 77 you put in, the state adds pounds 23 if you're a basic- rate taxpayer.

Even if you've already made your maximum contributions in the current tax year, you can use a lump sum to catch up on previous years' pensions contributions if they haven't already been used. The Inland Revenue allows you to put in the maximum allowable amounts up to six years later.

Flexibility is the key to a good personal pension. Many schemes allow you to take payment holidays. So if you're self-employed and have a particularly bad year, you can hold off on your pension contributions and put money back into the business.

By the same token you can monitor your pension to make sure you're on track to fund a happy retirement.

"Keeping regular checks on your pension fund performance as you approach retirement is sensible," says Ms Mackey. "You'll get annual statements from your pension provider that will help give you an idea whether you need to increase your contributions, within the limits, to reach your pension target. It's also possible, of course, that you could be ahead of schedule and so may be able to reduce them."