Time to think personal

THE scandal of widespread mis-selling of personal pensions has helped to kill sales. But this trend is worrying, because many people ought to be using personal pension plans.

There is no doubt that employers' pension schemes tend to be better, with better benefits for lower contributions. But many people do not have that choice.

The big advantage of saving for retirement using a pension arrangement, whether an employer's scheme or a personal plan, is tax efficiency, though benefits from personal plans are unpredictable. They depend on how much you pay in, how well the money is invested and how much is deducted in charges. Even if you can guess the likely final value of your personal pension pot, there is another uncertainty: annuity rates at the time you retire. Annuity rates change over time. Your pension income will depend on what annuity income your accumulated fund can buy.

Millions of employees have a personal plan because they have opted out of the Serps part of the state pension scheme. The government pays a contribution directly into the plan. It is possible to have this sort of plan and belong to an employer's scheme, so long as the scheme is not one contracted out of Serps.

But disappointment is almost certainly in store for employees who have only a Serps replacement plan, and who neither belong to a company scheme nor pay any money into a personal pension plan. The redirected Serps National Insurance contributions, even with any bonuses offered for contracting out, are unlikely to produce a sufficient retirement income.

While undoubtedly personal plans are the best option for some, others should be wary of the claimed advantages. First, the contribution limits on which you can get tax breaks are limited to 15 per cent of pay, if you belong to a company scheme. But for personal pensions, they start at 17.5 per cent of pay and rise in various stages to 40 per cent by the time you reach 61 (on up to pounds 78,600 of pay).

This is an advantage over employer schemes only for people who are perhaps late in making provision and/or who want to make substantial contributions over a relatively short time. In practice, few people can afford to make use of the maximum contribution limits. Secondly, that personal pensions are "portable". No matter how many job changes you have, you can carry on paying into the same pension plan. In practice, although a single personal pension plan may be administratively easier, it is not always the best option.

Even short to medium-term membership of an employer's scheme may offer better retirement benefits. The collection of smallish pensions from different employers may turn out to be only a minor administrative inconvenience. It will be bearable if the total of several small pensions is greater than you would have achieved from paying only into a personal pension plan.

Perhaps the greatest allure of the personal plan over the employer's scheme is that you can retire at 50 rather than wait until 60 or 65 with an employer's scheme. But at the age of 50, your accumulated pension pot will be lower than if you wait another 10 or 15 years.

q Next week, what to look for in a personal plan.