Pensions: Are there better ways to save?

Sandra, from Halifax, is wary of pensions. Should she be?

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Pensions have had a bad press. With stories of rip-off fees, pension schemes going bust or being cancelled and poor investment performance, you might be forgiven for deciding to save elsewhere for retirement.

This is what one of Money's users, 37-year-old Sandra, from Halifax, asked us:

"Am I wasting time putting money into a pension? I've seen some of my parents' friends lose their pensions, or end up with much less than they thought they would at retirement, and I'm worried that they're no good... Would I be better off putting money into ISAs, say, or paying off my mortgage more quickly?"

So we put her question to our experts.

Anna Bowes, AWD Chase de Vere

Unfortunately, there is no right or wrong answer here but there are few myths that we could clear up.

The recent bad press directed towards pensions has been mainly due to the failure of many final salary schemes, which might be why some of your parents' friends have tragically lost their pensions.

There are many reasons for this to have happened but it does not follow that you will lose any pension that you take out.

A personal pension is a completely different animal - you invest into a personal pot, which will fare based on the funds choices you make. At retirement you will use your own pot of money to provide a retirement income.

Another criticism of pensions is that for the majority of people, the bulk of their pension fund will need to be used to purchase an annuity, which is effectively an income for life. However, due to lower interest rates and longer life expectancy, annuity rates are at historically low levels - once again, this is not necessarily a bad thing, it's just realistic based on today's circumstances.

Having discussed the downsides, the attraction of investing into a pension is the tax relief. For a basic rate taxpayer, for every £100 invested, an extra £28.20 will be added in tax relief.

If you also choose your funds wisely, you could build up a large pension pot to provide the bedrock to your retirement income. You would have to commit to investing a fairly substantial amount each month or year and the earlier you start the better, as the larger the pension fund at retirement, the better the income you can achieve.

Having said all this, it is never a good idea to have all your eggs in one basket. So you should make sure that you are saving in order to pay off your mortgage and making medium-term investments that you will be able to access before retirement.

Rebecca Taylor, Dunham Financial Services

Sandra, putting money into a pension is most definitely not a waste.

Pensions are a very tax-efficient method of saving for your retirement, especially if you are a higher-rate taxpayer as you will benefit from 40% tax relief.

Pensions should be considered the same as any other investment vehicle, such as ISAs, in that they are only as good as where they are invested.

Before taking out any investment you should seek appropriate advice, as pensions may not be suitable for everyone, in the same way that ISAs are not suitable for everyone and the underlying investment needs to be suitable for you.

A good balance of investments needs to be found, combining assets such as ISAs, long-term savings such as pensions, and reducing your debts.

A good adviser will help you to establish what is most important to you and where your money should be invested.

Paul White, Belgravia Insurance Consultants

Sandra should visit an independent financial adviser (IFA) to draw up an investment plan for the short, medium and long term, as the key to financial independence is to allocate funds to all three of these areas.

As a rule of thumb, Sandra should take half her age and pay that percentage of her gross salary into a pension to receive a decent income at retirement.

Once she has accumulated three months' net pay in a deposit account for emergencies (short term), she can consider funding for the medium term, which has a time horizon of five or more years. I usually recommend 10% of net monthly salary going into a stocks and shares ISA.

Finally, she should review her pension and get projections as to what level of premium is required for her desired standard of retirement and fund to that level on a monthly basis.

Sandraï's concerns boil down to confidence in the financial institutions, how much should be saved and what to prioritise at this stage in her life.

A good IFA should be able to explain the situation regarding statutory consumer safeguards for each area, how much money is needed to be invested and its relative importance to her now.

Women do have particular needs as regards financial planning, with career breaks, and also tend to have a longer retirement than men.

Therefore, Sandra should draw up a plan that is tailored to her, in which she believes and to which she is committed.

Simon Webster, Facts & Figures Financial Planners

Due to the effect of compound interest, the sooner one starts putting money into a pension the more effective it is - especially when one considers the impact of the tax relief that is still available.

There is no difference in risk between ISA and pension investment. There are low- and high-risk ISA funds and there are pension funds of similar risk levels.

The only difference is accessibility. With an ISA, 100 per cent is available within seven days. With a pension, only 25 per cent of the fund is available as tax-free cash, and then only after the age of 55.

But if the original purpose was to provide income in retirement, that's not really a problem.

Historically, there have been two problem areas in pensions: under-funded final salary schemes, which is not an issue for a personal pension plan; and with-profits funds such as Equitable Life not delivering.

The answer is to use unit-linked stakeholder funds where the charge cap is 1-1.5% and the fund manager cannot take anything else out of the plan unless he wants to go to jail. Reducing a mortgage is always a good strategy but pension planning should be part of the investment plan of anyone earning much over £12,000 per annum.

More pensions help: Setting a retirement target