Retire happy by starting to save early

Details of Government-backed stakeholder pensions, still due for introduction next year, are slowly being announced. But this does not mean that we should delay or halt our pension planing even if more of the fine points are unveiled over the coming months. This could result in a sizeable hole in the cash pile we will use to provide our income when we stop working.

Details of Government-backed stakeholder pensions, still due for introduction next year, are slowly being announced. But this does not mean that we should delay or halt our pension planing even if more of the fine points are unveiled over the coming months. This could result in a sizeable hole in the cash pile we will use to provide our income when we stop working.

The earlier we begin saving for retirement, the better. According to Virgin Direct, a 35-year-old wanting to retire at 60 and saving £200 per month, effectively £159.74p after basic rate tax relief and charges, will build a pension pot worth £177,000, assuming 7 per cent a year growth in the underlying investments. Put off contributions for two years and the fund shrinks to £152,000. The £2,400 saved in premiums results in a £25,000 drop in size of the cash pile.

Or put another way, to get £1,000 a year at age 60 at today's prices, a 25-year-old man needs to start saving £35 a month now in a pension scheme, £39 for a woman - women have to pay more as they live longer on average. For 30-year-olds the contributions are £40 and £45 respectively and at 50 £101 or £113.

Truth is, most of us are not saving enough. And some five million people, mainly low-income earners, are thought to be doing nothing apart from their National Insurance contributions into the existing state pension scheme. By 2015, this is expected to be worth less than 20 per cent of average earnings.

There are plenty of tax-efficient ways of retirement planning. As well as ISAs, there are company pension schemes and personal pension plans. Memories of the pensions mis-selling scandal, as well as the planned introduction of the stakeholder, has put a lot of us off making the necessary provisions. But don't worry, leading pension providers now offer stakeholder friendly pension plans.

Jon Briggs, of Chartwell Investments, says. " It's tough for anyone paying into an existing pension. If they want to contribute more, they should check about topping up their premiums. If this is costly, they should put the extra cash into one of the new schemes, such as the Friends Provident one we have just started to sell."

It is still not known which providers will offer fully approved schemes but plans introduced in the past year show that excessive charging is becoming a thing of the past.

Manyschemes have some way to go to meet full Government approval. Most have minimum contribution levels starting well above the £20 that the Government wants to see. As well as annual management charges of 1 per cent or less, many have additional costs, such as policy administration charges, hidden in the small print. And it is unclear with most what the transfer value will be if investors want to move from one of the new plans to a full stakeholder policy of a rival - whether they will get full fund value or just the return of contributions.

As with older pension plans, all contributions attract tax relief at your top rate of tax. For a basic rate taxpayer, this means that for every £50 you contribute, you can get almost £65 worth of investment. Higher rate taxpayers get additional relief by claiming the excess back via increased earnings allowances. So if you pay 40 per cent tax, a £5,000 investment will cost just £3,000 net.

Because of these generous tax allowances, there is a limit on how much of your income can be invested - £91,100 or 15 per cent for occupational pension schemes. Personal pension contributions are based on age with 17.5 per cent for those under 36 and 40 per cent for the over 60s.

In the past, with-profit funds were the main investment route for contributions. But nowadays, with bonus rates falling as the rates of return from fixed-interest stock diminishes, investment is usually in equities via unitised funds. There is a wide choice available, with unit prices published in newspapers and magazines. Most providers allow easy switching between funds, usually at minimal or no cost.

Jo Smith of Pretty Financial says going direct is a cheap way of doing things for those who know what they are doing. "The problem is that most direct providers only offer a limited choice of funds, often little more than index trackers."

Independent financial advisers suggest looking for thoseproviders who offer a wide choice of well-performing funds. Roddy Kohn, of Kohn Cougar, has this advice: "Fund choice matters. If you are young, you can afford a more cavalier attitude, maybe putting some of your money into high-risk areas such as technology or emerging market funds, where the long-term returns could be substantial. As you get closer to retirement, look for a more conservative home for your investments." So when it comes to choosing the right fund, the younger you start the higher the risks you can afford to take. But not everyone can accept the same risk. Finding out what sort of risk-taker you are can be complex.

Even with stakeholder-friendly schemes, many advisers receive substantial commission from the providers. Always check how much they will be getting and see if they are prepared to split the amount.

Or use one who charges a fee - expect to pay £500 or less. This may seem like a lot of money but on a £100-a-month regular premium plan, most of your first year's payments will go to the adviser, so you'll end up saving money.