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How to plan for your retirement

How to pay for your retirement

Search: More on planning for retirement
- Advice from the Pension Service
- The pensions crisis
- A guide to stakeholder pensions

Retirement may seem a long way off, but the sooner you start saving for it, the less it will cost you.

An ageing population, poor stock market performance and the collapse of most final salary pension schemes means that many of us will have to work longer and perhaps get by on a smaller pension than our predecessors enjoyed.

To get an idea of how expensive it is to build up a pension, compare how much it costs when you start at a range of ages.

To build up a modest pension fund of £200,000 by age 60 assuming your money grows at 7 per cent a year, you would need to save:

Around £80 a month if you start at age 20, at a total cost of £38,400.

£175 a month if you leave it to age 30, costing £63,000.

£400 a month if you put off saving to age 40, costing £96,000.

Sobering stuff. But with the right advice, you can at least make sure you make the very most of your pension fund and claim all mthe benefits you are entitled to on retirement. To start you off, here's a rundown of some of the types of scheme available to you.

Retirement options

Personal pension

These are the main way of saving for retirement. They offer the benefit of tax relief on your contributions, cutting the cost of each £1 that goes in to 78p - or 60p for higher-rate taxpayers. You can also take part of your pension (typically 25 per cent) as a tax-free lump sum.

You have to pay tax on your pension income, so unless you drop to a lower rate of tax on retirement, you gain little benefit from tax relief on the way in.

Company pension

These are almost always worth joining, as your employer makes a contribution to your pension. Don't worry about how long you might stay with the company - those employer contributions are too valuable to turn down, especially in the early years of your pension saving.

Additional voluntary contributions

AVCs are a way of topping up your company pension. You can usually only pay 5 or 6 per cent of your salary into the main scheme, out of the total 15per cent that the taxman allows you to put into company pensions.

The balance can go into the AVC scheme your employer offers. The drawback with AVCs is that there is no tax-free lump sum entitlement - you have to convert the whole pot to income.

Stakeholder pension

This is a low-cost pension introduced by the government in 2001. If your employer doesn't offer any other type of pension, they have to offer a stakeholder (unless they employ fewer than five people), but they don't have to contribute.

You can also take out a stakeholder pension directly with a provider. Check our Stakeholder comparison tool.

This may be a better bet than joining your employer's stakeholder scheme if the investment choice is very limited and there is no employer's contribution. If your employer is paying something then generally you should stick with that scheme.

You can use a stakeholder pension instead of AVCs as a top-up to your company pension if you earn less than £30,000 a year, the advantage being that you can take 25 per cent as a tax-free lump sum.

Click here to read out more about about stakeholder pensions.

Individual Savings Accounts (Isas)

These provide tax-free income and capital gains and are almost as tax effective as pensions in many cases. Stick mainly to low-cost funds, such as index trackers and big international investment trusts, and they can be as cost-effective as pensions too.

Click here to find out more about Isas.

Other savings

You can use regular savings plans to invest in unit trusts or investment trusts. Click here to find out more.

Property

Buying to let has been a popular form of investment, but steer clear unless you have plenty of other investments. The US (and increasingly, UK) sub-prime mortgage crisis has hammered returns on property investments.

If you already pay into a mortgage, you could remortgage to fund buy-to-let. But you shuold be aware that this method of investing will leave you vulnerable to a downturn in the market.

To find out more about all aspects of pensions, go back to the Tiscali Pension section.

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