PENSION PLANNING

Everybody knows they need to save money during their working lives to pay their way once they retire.

For many young people retirement will seem a long way off - and there are many other financial pressures on them at this point in their lives.

But the simple truth is the earlier you start the easier it is to build up a retirement nest egg.

Pension scheme savings qualify for tax relief and are a very cost efficient way of investing. But there are other ways of saving to consider as well - and don't forget the state pension which you will probably automatically be paying into if you are in work and earning over a minimum amount.

You need to take all this into account and try to think ahead. How much will I need to live on? How much am I likely to get?

One of the major problems you will face is understanding the system and how it all fits together. Pensions ought to be simple. In reality they are anything but. In fact, they are a maze in which it is easy to get totally disorientated and lost.

So always seek advice from a financial adviser or other expert before stepping in. And don't be afraid to ask. Remember there really is no such thing as a silly question when it comes to pensions.

State Pensions

This should be the bedrock of your pension planning. Effectively, there are two parts to the state provision - the basic pension and the state second pension (previously known as SERPS).

To qualify for a full basic pension (currently �75.50 for a single person, �120.70 for a couple) you have to have paid or had credited to you National Insurance Contributions covering most but not all of your working life.

A lower rate can be paid if you do not have enough contributions to get the full amount. Credits are allowed for periods when you are registered unemployed or sick.

A concession on the number of years required can also be given for periods when you are at home bringing up children or looking after a sick or disabled person.

The state second pension is designed to provide an additional pension for those in employment (not self-employed), certain carers and people with a long term illness or disability.

It is possible to "contract out" of this scheme through a personal pension or company scheme.

To obtain a forecast of your state pension at any time you should ask for a form BR19 from your local social security office or ring the state pensions forecast unit on 0191 218 7585.

Private Pensions

There are essentially two types:

• Company schemes

  If your employer runs a company scheme you would normally be well advised to join it - particularly if it is a final salary arrangement where the employer is guaranteeing you a fixed amount of pension as a percentage of your earnings taking account of your years of service.

  However, whether it is a final salary or a money purchase scheme (where the amount of pension is dependent on the amount put in over the years and the investment returns along the way) the employer has to contribute. You and he will also receive valuable tax concessions on your contributions.

• Personal Plans

  If you do not have access to a company scheme, you will need to make your own pension arrangements (usually with an insurance company).

  These can either be in the form of an old-style personal pension or one of the new stakeholder pensions now available.

  You can pay up to �2,808 a year into such a plan if you are not working with a higher amount, dependent on your age, if you are in work and have relevant earnings. In either situation, again your contributions will also attract tax concessions.

  The stakeholder will generally be a better bet than a personal pension. It will usually be cheaper and more flexible. You can stop and start contributions as you wish and pay in as little as �20 a time.

  For more details of the type of pension speak to your financial adviser or contact the Occupational Pensions Regulatory Authority (www.opra.gov.uk) for a list of approved suppliers.

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  How much should I pay into a private pension plan?

  This depends on what age you start and how much you hope to get back by way of a pension.

  As a general rule of thumb, to get a good pension the combined contribution from yourself and your employer (where appropriate) should very roughly be the percentage equivalent of about half your age.

  So for a 25 year old starting a pension the amount should be 121/2%. For a thirty year old, 15% and so on.

  A final word

  Remember pensions are important. Don't be put off by the complexity. Get advice if you are in any doubt. Always bear in mind it is never too early to start. Have a happy life but plan for a secure old age. You will not regret it.

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  This guide was written by Malcolm McLean, the chief executive of OPAS - the Pensions Advisory Service