Regular saving: How to retire in greater comfort

Saving regularly as part of pension planning is one of the most sensible things any of us can do. There are many ways to do this, but as Tony Lyons warns, the earlier you start, the better.

Relying on the state for a reasonable pension is foolhardy at best. The basic state pension in the future will not go very far and probably won't keep anyone off the poverty line.

When the Government unveils its ideas about the new "stakeholder pension", which will provide a second-tier pension, later this year, it may go some way to filling the gap between being poor and being comfortable in retirement.

But to ensure an adequate income after you retire, you should start saving now.

"Lots of people put off starting a pension plan because they think they have left it too late," says Tony Woods, marketing director of Virgin Direct. "But it's never too late. Obviously, the younger you start the better, but people should start as soon as they can."

If you work for an employer with a company pension scheme, then joining it will usually provide the best means of ensuring a comfortable retirement. Up to 15 per cent of your income can be saved in the scheme and you will receive relief at your top rate of tax on the money you plough in. You may find your company will contribute a reasonable amount, or even guarantee certain benefits to you at retirement, depending on length of service.

If there is no such scheme where you work, you are self- employed or you have other earnings, then you could look at personal pension plans. Don't be put off because they can be difficult to understand, have complex rules and have received bad publicity over the past few years because of bad mis-selling in the 1980s.

The earlier you start, the better. To provide pounds 1,000 a year of pension at today's prices at age 60, a 25-year-old man needs to save pounds 35 a month in a personal pension, while a woman would have to contribute pounds 39. For a 30-year-old, the contributions go up to pounds 40 and pounds 45 a month respectively. But if you do nothing about your pension until you are 50, you will have to pay in pounds 101 or pounds 113. Women pay more because they live longer, so they receive pensions for a longer period.

"We find that the biggest barrier to people starting a pension is that they don't believe how generous the tax breaks are," says Mr Woods. "A personal pension is the savings vehicle with the most mind-blowing tax breaks."

This is because you get full tax relief on your premiums. If you are a basic-rate taxpayer, this means pounds 1 of investment for every 77p you pay in. If you pay tax at the higher rate, it will cost you 60p. To put it another way, the Government tops up your contributions so that a pounds 250 investment will only cost a basic-rate taxpayer pounds 192.50 and a higher- rate person pounds 150.

Because of the generous tax relief, the rules on contributions are strict. Only earnings up to pounds 84,000 can be taken into account for most people, and the percentage of this that can be invested is determined by your age, as in the table.

Most pensions sold today are equity linked. This means that your savings are invested in stocks and shares. While these go up and down in value, over the long term they have outperformed all other conventional types of investment. While performance of the underlying investments is of the greatest concern, so is the charging structure imposed by the pension plan provider.

In the past, personal pension plans attracted very high charges with significant penalties if payments were changed or stopped. Nowadays, with the rise of providers who sell direct, the charges are more reasonable while the newer plans have become more flexible.

So always look for a company with low charges and flexible rules. Independent financial advisers can help but may charge a fee if you want to compare traditional companies with the newer breed of direct providers.

According to a number of recent surveys which looked at the projected values of various personal pension plans, companies that seem to offer the best returns include Equitable Life, Scottish Widows, Legal & General Direct, Eagle Star Direct and Virgin. The key to the ability of these companies to project higher than average returns "all boils down to our low running costs", says Nigel Webb, senior manager at Equitable Life. "If you have low expenses you can offer savers a good deal. We employ just 400 salespeople, who are paid salaries not commission, and they generate a lot of business."

Anyone taking out a pension plan has to stipulate their retirement date at the outset. The minimum age you can take the proceeds is 50. If you stop working earlier than the date you specified, you could be penalised, although many newer schemes do now allow for this.

You should, therefore, choose a variety of ways of saving. Picking a number of different plans, with different retirement dates, is one solution so long as you stay within the overall contribution limits. You can also use personal equity plans, and individual savings accounts when they become available in 15 months time, as an additional way to invest for retirement.

Whatever you do, make sure you that you regularly invest now so that you will be able to enjoy a comfortable retirement later. Most pension experts recommend that you save at least 10 per cent of your income. The older you are, or the later you start, the higher this should be.

Pension contributions

Age on Maximum %

6 April of earnings

Under 35 17.5

36-45 20

46-50 25

51-55 30

56-60 35

61-74 40