RETIREMENT planning is vital if you do not want to face poverty when you reach your sixties. The best option, if it is available, is to join your company’s occupational pension scheme because most employers will top up your contributions.

Businesses that run pensions usually offer money-purchase schemes but in some cases, mainly in the public sector, final salary schemes are also available.

The maximum lifetime pension contribution limit is £1.5 million. The maximum annual limit is £225,000.

Personal accounts

Background

• Pensions - a basic guide

• How to buy an annuity

• How to choose a pension

• How much to save?

The beginner's guide to self-invested personal pensions (Sipps)

Background

• How to choose a pension

• Annuities explained

• How to make a will

• How to pay for long-term care

From 2012, employees who are not in an employer's scheme will be enrolled automatically into their employer's scheme, as part of Government plans to save people from poverty in retirement. The only employees not affected will be those younger than 22, older than state pension age or earning less than £5,000 a year.

Employees can opt out of the personal account if they wish, but if they stay in, their employer will pay a contribution of at least 3 per cent of full salary. The employee will also have to contribute 4 per cent of salary, and an additional 1 per cent will be given through tax relief, making a total of 8 per cent contributions.

Personal accounts will have a default investment fund and a small range of alternative funds, including ethical options.

Money purchase

In money purchase schemes - sometimes known as defined contribution schemes - the employer usually tops up your contributions by between two and ten per cent of your salary, significantly boosting your pension pot. This means you will be able to buy a larger income, in the form of an annuity, when you retire.

Most money purchase schemes allow you to choose from different investment options and the size of your final pension fund will depend on the performance of these investments.

Final salary

Final salary schemes promise a pension at retirement that is a fixed proportion of an employee’s salary. Employees must contribute but employers pay the rest.

These schemes are great for employees because they provide a guaranteed level of income that is not dependent on the performance of investments. But for many companies the cost has become too great and a large number have closed down, leaving thousands of pensioners without any retirement income.

All employee contributions to company pension schemes are tax deductible.

Private pensions

If your company does not offer a pension scheme, you can set up a private stakeholder, or personal, pension. Your employer will not usually contribute to your private pension but your pension provider will claim tax relief from HM Revenue and Customs at the basic rate of 22 per cent and add it to your fund. If you are a higher rate taxpayer, you will have to claim the additional 40 per cent rebate through your annual tax return.

The basic rate level will go down to 20 per cent from April. This will result in less income for everyone, but basic-rate taxpayers will suffer more. The amount of income they receive will fall by 3 per cent, compared with a 1.2 per cent drop for higher-rate taxpayers.

Stakeholder pensions

The government introduced stakeholder pensions in 2001 to make pensions cheaper and more accessible. They can be taken out directly with a number of providers and the fees are capped at 1.5 per cent a year.

They offer good value but there are only a limited number of investment options available. Most stakeholder pensions invest in tracker funds. Some stakeholder pensions can be set up through your company.

Personal pensions

Personal pensions have higher charges than stakeholder pensions but they have a wider number of investment options – usually managed funds. Higher charges do not necessarily mean better performance.

Self-invested personal pensions

Self-invested personal pensions (Sipps) allow investors to choose from a wide variety of different asset classes rather a small selection of funds. They also allow investors to put in shareholdings in single companies and to borrow an amount equal to up to 50 per cent of the fund value.

Sipp charges are higher than stakeholder and personal pensions and are only suitable for sophisticated investors or those with large pension funds.

Sipp holders can choose to invest in insurance funds, unit trusts, investment trusts, shares and commercial property. Click here for more on Sipps

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Five websites

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Pension calculator

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