Relief stirs the pension pot

EVERYONE needs to save up for retirement, and there is generous tax relief on offer to encourgage us to stick as much as possible into a pension fund. The relief on pension contributions means that for every pounds 100 you invest, your tax bill is reduced by pounds 23, or pounds 40 if you're a higher- rate taxpayer.

And the earlier you invest, the more you should get back. Scottish Widows says that to get a pension of pounds 10,000 a year at the age of 65, assuming it grew by 6 per cent a year, a 30-year-old would have to start paying pounds 70 a month, while a 40-year-old would have to pay pounds 140.

You first need to work out how much you need to retire on and how much you can put into a pension. If you are offered a company scheme, you should usually join it, because your employer contributes to your pension. You and your employer can contribute up to 15 per cent of your before-tax salary.

The best type of occupational pension is a final salary scheme. Your pension is based on a maximum of two-thirds of your final salary at retirement age. An average scheme builds up a fund of 1/60th of your salary each year. So if you worked at the company for 15 years, you would receive 15/60ths of your final salary, rising in line with inflation.

Many firms have stopped final salary schemes and run money-purchase plans where there is no guaranteed pension when you retire. You and your employer both contribute to the fund, and the amount you retire on will depend on how long you have contributed and how well the fund has been invested. When you retire, you use the proceeds to buy an annuity that provides a regular income.

You need to review contributions regularly. If you're not putting enough into your pension, you could boost your fund with additional voluntary contributions (AVCs) - separate funds run through your employer's scheme. You could also set up a free-standing AVC plan run through an insurance or investment company. But these plans can be very expensive to set up and an AVC is usually preferable.

Mark Hattersley, a Bristol-based retirement planning adviser, says: "If you're young, investing the maximum into AVCs is not such a good idea because the money's gone for good; if you hit a crisis you won't be able to get at it. Older people can look at AVCs depending on their cash flows. Or if you're a higher-rate taxpayer, it can be worth paying in up to your tax liability. Perhaps a better bet for everyone is to look at PEPs or ISAs; they represent better value for money."

If you can't join a company scheme, get a personal pension. Independent financial advisers (IFAs) can help you, but make sure they are independent and not tied to a company. Kent-based IFA Brian Dennehy warns about basing your choice only on charges: "In the long term, investment performance is more important in dictating the final pension fund. It's also important to consider the financial strength of the firm.

"Other important features include flexibility. Can you stop contributions? Can you change funds or fund manager if the pension fails to perform to your expectations? Can you review your pension and raise contributions if necessary?"

If you're employed, personal pension contributions are made from your taxed salary and your provider claims back basic-rate tax relief for you and adds it to your pension fund. If you're a higher-rate taxpayer, you claim back the extra on your tax return. If you are self-employed, you make the contributions out of what you earn and list them on your tax return. Relief is then deducted from your tax bill.

If you're already putting all you can into a pension, you can take advantage of any unused relief for the past six years.