Check the details with your employer as many are not so generous. Suffice to say, you should save as much as you can afford if your employer is matching contributions (think of it as a pay rise).

Company pension basics

Company pensions are also known as occupational pension schemes. Most big companies run their own pension scheme in which money is automatically deducted from your salary and placed into a pension fund. These have two major advantages over most personal private pensions.

First, the employer usually makes their own contribution to your pension in addition to the contribution you are making. Second, the charges for running the pension are usually lower than those for personal private pensions and are entirely covered by your employer.

As a result, employer pension schemes can be very attractive – in almost all cases anyone who has access to a company scheme should join it, rather than taking out a personal pension. Not every company allows new workers to join the pension scheme from day one. Make a note of when you become eligible and apply as soon as you pass the deadline – the company itself may not remind you.

In theory, you can contribute up 100% of your earnings per year into a company pension, but this will depend on the scheme rules.

There are two types of company pension schemes: money-purchase and final-salary schemes.

Money-purchase schemes: These are also known as defined contribution schemes. With these you know what you are putting into the pot, but what you get out of it when you retire depends on how well the fund managers have invested your money over the years, and on economic conditions when you actually retire.

On retirement, the money would normally be used to purchase an annuity which pays an income until you die. You do not have to accept the annuity offered by the company running your scheme. You have the right to choose the open market option – in other words, you can shop around for the best deal.

Final salary schemes: These are also known as ‘defined benefit’ schemes. With these, the amount you receive on retirement depends on your salary when you leave the company or retire, and the length of time you have been a member of the scheme.

It is usually paid at the rate of one-sixtieth of final salary multiplied by the number of years of scheme membership (the accrual rate). So someone who is a scheme member for 40 years would retire on two-thirds of final salary.

The security you get in knowing that your pension will depend on your final earnings, not on stock market conditions over your working life, means these are seen as the very best pensions around. But unfortunately they are becoming rarer, and many companies are changing their plans from final-salary to money-purchase schemes.

Changing employers

When you leave a company you normally have the choice of leaving the money where it is to claim on retirement or transferring it to a new company’s scheme or to a personal pension plan. And if you leave a firm within two years of joining its pension you can have your own contributions, minus tax relief, returned to you, if the scheme’s rules allow.

The right decision will depend on your circumstances. Independent financial advisers can help, as can company pensions officers.

For more news and advice about pensions, sign up for our weekly newsletter…

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Anyone who has worked and paid enough National Insurance (NI) contributions for a set number of years should be eligible for the basic state pension. It is currently paid to women over the age of 60 and men over the age of 65. But be aware that from 2010 the qualifying age for women will be gradually increased, until it too reaches 65 in 2020.

State Pension entitlements

This year (2008/09), the full basic state pension is £90.70 per week for a single person and £145.05 a week for a couple.

Most people believe everyone receives the full basic State pension on retirement – but thousands do not. The amount you are entitled to depends on the number of years you have worked and the amount of National Insurance contributions you have paid.

The sums are complicated, but if you haven’t always been in work you may get less than you expect. Fortunately, it is possible to make up some lost ground if you are likely to lose out.

State Pension contributions

Men usually have to have been credited with contributions for 44 years and women for 39 years to qualify for the full basic State pension.

However, if you reach State retirement age after 5 April 2010, you will only need 30 years of “qualifying years” to be entitled to a full basic state pension.

Contribution shortfalls

You could be in for a shock if you have missed contributions – the fewer credits you have, the smaller your slice of the State pension will be. If you have 10 or 11 qualifying years you will get only 25% of the basic pension – if you have less than that you may get nothing.

Qualifying years

These are years in which you have received qualifying earnings and paid National Insurance contributions. In some circumstances you may be credited with earnings even if you were not working. This is likely if you are, or were, incapable of working due to illness, caring for someone or in receipt of certain benefits.

Making up shortfalls

You can make voluntary contributions to make up an incomplete contributions record. But you must do this within certain time limits. You must pay by the end of the sixth tax year after the one you missed. So you can make up only a maximum of six years of contributions.

If you reach State Pension age after 5 April 2010…

If you don’t qualify for the full basic State Pension, but have some qualifying years, you will get one thirtieth of the full amount for each qualifying year. You can get more information from your local pension centre.

Checking your entitlement

If you are coming up to retirement in the next few years, the best way to check is to get a State pension forecast using form BR19 from your local benefits agency or write to Retirement Pension Forecast and Advice Unit, Pensions and Overseas Directorate, Tyneview Park, Newcastle Upon Tyne, NE98 1BA. You can also fill in an application form online at the Department for Work and Pension’s website. The forecast will tell you the amount of basic pension you have already earned, and what you can expect at retirement taking into account what you might earn before you retire. It will also tell you if there is anything you can do to improve your pension, but you will have to follow this up yourself. If you are already retired and discover that you could qualify for a fuller pension by paying extra contributions, you can still do so – for up to six years.

Pension credits

The Government recently introduced pension credits, designed to help people who have a small private pension or savings (previously people with savings were exempt from extra State benefits which meant there was no incentive to save).

The credit is based on the amount of savings you have. For every £500 – or part of £500 – you have in savings over £6,000, you are entitled to £1 a week income. (This figure is over £10,000 if you live permanently in a care home).

It is essentially a top-up to your pension, which guarantees a minimum weekly income at a level the government deems is enough to live on.

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When to start a pension

The simple answer is: as soon as possible. The earlier you start, the more you will probably have at the end. However, it is important to maintain a sense of balance. If you are in your early twenties, earning a small wage and trying to scrape by, it might not make sense to put a huge slice of your earnings into a pension. But if you can afford to start saving, you should.

With personal pensions, the minimum contribution levels can be as low as £25 a month – making plans accessible for most people. Most company schemes and personal pensions now allow you to stop contributing, or to take payment breaks whenever you need without any penalties. So you are not tying yourself in to a contract forever.

Don’t put off starting a pension. If you arrange to pay a modest amount by direct debit from your current account shortly after payday it can be a painless way to prepare for the future. But remember to increase your contributions whenever you can afford to – for example, if you get a pay rise.

Letting the taxman help

You get tax relief on most of the contributions you make to company and private pensions. This means that any contributions you make will effectively be topped up with extra money from the Inland Revenue – a valuable concession. The higher your tax rate, the more valuable this tax relief will be. A basic rate taxpayer has to find just £80 to see £100 go into their pension, after the Revenue’s top-up. A higher rate taxpayer would only need to find £60 of their own money to see £100 go into their pension.

As a basic rate taxpayer you get the relief automatically – your personal pension firm or company pensions office will take care of it. It is more complex for higher rate taxpayers, however. The basic rate tax relief is added automatically, but you have to reclaim the difference between basic and higher rate tax when you fill in a self-assessment tax return.

Take advantage of the taxman’s help while it’s still on offer. Pensions are one of the very few ways to save where the Inland Revenue adds a contribution to help your fund grow faster. There are often rumours that tax relief on pensions may one day be removed, especially for higher rate payers.

How much to pay into a pension

There are limits to how much money you can put into a pension because the Government doesn’t want to give away too much in tax relief on contributions.

The maximum amount you can contribute to a personal or stakeholder pension is equal to 100% of your earnings, assuming they do not exceed the annual allowance. This has been set at £235,000 for the tax year 2008-2009. Above this amount, you will not qualify for tax relief.

If you do not have any earnings, you can still pay up to £2,808 a year into a pension plan. With tax relief added by the Revenue, this becomes £3,600.

The annual allowance will rise by £10,000 a year, reaching £255,000 in the tax year 2010-2011. Contributions in excess of the annual allowance will be subject to a special tax charge of 40%.

Prior to 6 April 2006, occupational scheme members were permitted to make contributions of up to 15% of earnings, subject to certain exclusions such as ‘golden handshakes’. This limit was lifted on A-Day (6 April 2006) and company scheme members can now can obtain tax relief on contributions of up to 100% of earnings, subject to the annual allowance described above.

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Please choose between: Level or RPI

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There is a huge range of Sipps on the market. There are some very sophisticated plans that may be suitable for large pension plans that allow spicier investments, such as direct holdings in commercial property. This guide focuses on no-frills plans where the provider gives no advice.

These are the questions you need to ask…

1. What is the set-up fee? It’s typically anything from nothing to £500.

2. What is the Sipp annual management fee? This is a small percentage applied every year that will eat away at your returns. More commonly, it is a flat fee. You should aim to find a fee-free plan.

3. How much are annual fees on the funds? These are the ongoing charges applied to funds that you put into your Sipp, typically 1.5% a year. A decent provider should be able to slice off some of this charge.

4. How much are initial charges on funds – Oeics and unit trusts? These fees are typically 5% but a decent provider should be able to discount these to virtually nothing. 

5. How much are dealing charges on shares and investment trusts?

6. How much are the transfer fees? These are charges applied for moving money, funds or shares into a Sipp from another provider. Also, check if there any exit fees on moving to another pension provider.

7. What rate of interest will I get? Interest rates on cash left in a Sipp vary from 0.1% up to 4.5%. If you expect to keep some of your pension in cash, check what the rate is. For example, Fidelity currently pays one basis point below the UK bank rate – so it pays 4.5%.

8. What are the other charges? Look out for the costs for buying an annuity, costs for paying out on death, etc. Remember that these one-off fees are less important than finding Sipps with cheap annual fees.

Cheapest Sipp providers

There are at least five providers that do not charge a set-up fee for a Sipp:

- Hargreaves Lansdown Vantage Sipp
Minimum transfer: £5,000; Minimum investment: £50 a month or £1,000 lump sum

- Fidelity FundsNetwork (on accounts opened before April 2007)
Minimum transfer: £10,000; Minimum investment on staring a plan: £300 a month or £3,000 a year; Doesn’t accept company pension transfers

- Alliance Trust Select Sipp
Minimum investment: £50

NOTE: Alliance will introduce a £75 annual fee from September but it will now also rebate annual commissions on unit trusts, potentially offsetting the cost.

- Sippdeal.co.uk
No minimum investment, £1,000 minimum for transfers.

- Killik & Co
No minimum transfer or investment but there is a £35 or 1.65% charge each time you invest up to a maximum of £15,000 after which the fee drops to 0.5%

Best buy: Between what’s on offer to savers the Hargreaves Lansdown Vantage Sipp offers the best deal. While, like others it carries no set-up fee, it also has no annual management charge on a number of investments – what investors could end up paying is an annual cost of just under 0.6%, on other investments, but this is capped at a maximum of £235. Its sharedealing fees for trading in individual shares online ranges from £9.95 to £29.95.

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