Recipe for a richer retirement

Retirement planning means putting money away now so that we can live in comfort when we stop working. We expect these investments to grow into a decent-sized nest egg which we can then use to provide our retirement income.

Retirement planning means putting money away now so that we can live in comfort when we stop working. We expect these investments to grow into a decent-sized nest egg which we can then use to provide our retirement income.

There are already tax efficient ways we can do this, including company pension schemes for those in permanent employment, personal pension plans for the self-employed or those who work for firms that do not have pension schemes, andindividual savings accounts.

With a pension scheme, because of the generous tax benefits, you cannot touch your nest egg until you are aged 50 or more, and then 75 per cent must be used to provide your retirement income. With other types of saving, where the tax advantages are not as great, you can use the money when and how you want.

But whatever choice you make, don't delay. We all know that the basic state pension that we contribute to through National Insurance will not be enough to keep us in comfort after retirement. The introduction of stakeholder pensions, due next year, does not mean that savers can afford to put off retirement planning until the final details are unveiled.

Delaying your retirement planning can be very costly. According to Virgin Direct, a 35-year-old basic rate taxpayer wanting to retire at 60 and saving £200 per month, effectively £159.74p after basic rate tax relief and charges, will build up a pension pot worth £177,000 assuming the underlying investment grows at 7 per cent a year. Delay two years in taking out the pension and the size of the fund shrinks to £152,000. The saving of £2,400 in contributions over the two years results in a £25,000 drop in the cash pile available at retirement.

Most leading pension providers, including Friends Provident, Legal & General, Scottish Equitable and Standard Life, have brought out stakeholder friendly plans in the past year. These will mesh with the new schemes. They guarantee that if you take one out and the stakeholder plan offers a better deal, when details are finally revealed, you will be no worse off for buying it.

If you work for a company that offers a pension scheme, then join it, especially if it guarantees an income that is based on final salary at retirement. You'll find that this is usually the cheapest way of saving for retirement - especially as many employers pay contributions, usually at least matching what you pay in. Up to 15 per cent of your relevant earnings, capped at £91,100 this financial year, can be invested in the scheme.

If there's no company pension where you work, or you have income from a second job, are self-employed or a contract worker then you have to make use of personal pensions. The better personal pension providers have smartened up their act, removing their high charges and inflexible plans. When looking at their schemes: "The determining factor you should be looking for is maximum choice, complete flexibility and consistently good performance," says Roddy Kohn, of Kohn Cougar, an independent financial adviser.

The new stakeholder friendly schemes have low charges and allow lump sum top ups and contribution holidays. You can also stop payments altogether with no penalty. "But watch what they offer if you want to transfer to another provider," says Jo Smith of Pretty Financial. "Some may allow you to move the full value of your fund while others may only allow the transfer of the contributions you have paid in, which could be much less."

Assuming charges and flexibility are reasonable, the deciding factors in making your choice should be performance and range of investment funds. Irrespective of your age, a pension plan is a long-term commitment. You are looking to maximise your retirement income. So decide what sort of risk you are prepared to take. "Most people don't know what the choices are and how to decide on the risks they are happy to take, so an independent adviser can help them," says Jon Briggs, of Chartwell Investments. "Twenty-five-year-olds should not be looking at investing in a cash fund. With years of savings ahead they can well afford higher risks. Similarly, poor performing with-profits funds won't help them meet their goal."

So the younger you are the higher the risks you can afford to take. If you have 10 or more years to go before retirement, you can afford to put some of your money in emerging market or technology funds. While in the short term they can be more of a gamble, they may well produce superb returns over the very long term.

Some investment trust management companies, including Edinburgh Fund Managers, Foreign & Colonial and Flemings, offer low-cost pension plans that offer a wide choice of fund. While investment trusts can be higher risk than unit trusts, with them, you can sometimes buy equity asset at half price or less. This is because most investment trusts are trading on discounts of 10 per cent or more. In addition, they borrow money to invest, called gearing. Pension contributions attract tax relief at your highest rate of tax. If a higher rate taxpayer, your premiums will receive 40 per cent relief. So add up all this up, and you could find that you are paying less than 50 per cent for their underlying portfolio.

As you near retirement, look at low-risk funds to conserve the profits you have made. "In your 50s, you cannot afford to take high risks with your core pension savings," says Mr Kohn. "You should take a more conservative approach, reducing the problems if there are market downturns. That way you can have your cake and eat in retirement."

So look for a wide choice of good performing funds, whether they be insurance funds, run like unit trusts, unit trusts or investment trusts. And then save as much as you can.