PERSONAL FINANCE – Future pensioners in for a rough ride.

Most of us dream of a leisurely retirement, of messing around on a boat or relaxing on a golf course.

But with state pension dwindling on the vine as the demographic timebomb nears, is this idyllic image realistic for most of us?

Recent figures compiled by Barclays indicated that a third of adults have no pension provision whatsoever outside the state scheme.

And most of those who do put something aside every month have little to feel smug about.

As John Briggs, associate director of independent financial adviser Chartwell, says: ‘Eight out of 10 people are not paying enough in. Many of them have got unrealistic expectations of what they will retire on – you can’t put #50 a month away and expect to get a decent income.

‘Others are lethargic. They think a pension is something they can sort out in the last 10 to 15 years of their working life.’

Mr Briggs says that anyone planning to retire at 55 could only expect to receive an annuity equivalent to five per cent of their pension pot, if they want an index-linked income with benefits for their surviving partner. So if you want a retirement income of £20,000 a year, you will need to have accumulated £400,000

Steven Cameron, pension development manager at life office Scottish Equitable, adds: ‘It depends on when you start your pensions. But you need to pay around 10 to 15% of your gross salary in to a pension if you want to retire on something approaching half to two-thirds of your salary.’

Of course, saving for a pension is far from straightforward. Around nine million people are staking their future on defined benefit (DB) occupational schemes arranged by their employer.

These schemes, where the individual is paid a proportion of their final salary in retirement, are widely believed to be the most generous.

Alas, there are pitfalls. Many employers are scrapping their DB schemes as too expensive in an age of rising life expectancy.

And even if the employee pays in religiously throughout their career, they cannot guarantee the money will be sitting there waiting for them.

The unfortunate Mirror pensioners discovered that when Robert Maxwell went overboard.

In the wake of that episode, the government introduced the Minimum Funding Requirement in an attempt to ensure that pension funds could meet their liabilities.

But this has failed, with the Faculty & Institute of Actuaries reporting earlier this month that one-in-seven schemes still cannot meet their existing liabilities. Ministers have gone back to the drawing board.

These DB schemes are of little use to the growing number of us who switch jobs regularly.

A further four million people are in defined contribution (DC) occupational schemes. Here a fixed monthly contribution is made, which is usually topped-up by the employer.

But with most employees having to hang around for at least two years in order to retain the employer contributions, they are again not for everyone.

Personal pensions are more flexible, although a costly option. This is where the government’s much-heralded stakeholder pensions come in.

These schemes, to be introduced from April 2001, are based on the personal pension concept. But they will be cheaper, with a maximum annual charge of one per cent.

They will be more flexible, with most occupational scheme members allowed to pay into a stakeholder concurrently.

And they promise to open up a new range of tax loopholes for the wealthy.

For the first time, non-earners will be able to pay into a pension scheme.

Non-working wives can use savings, or money from their partners, to contribute up to £3,600 a year – with full tax relief. Parents will even be able to start pensions for their children, again claiming to tax relief.

Some lucky teenagers could reach the age of 18 with a pension pot of around £100,000, thanks to compound interest.

However, most of us will not be so lucky, and Andy Agar, pensions manager at Legal & General, fears the worst.

‘If the target market doesn’t take stakeholder up, the government has the ability to turn around in three to five years time and make pensions compulsory,’ he says.

Just when you thought you had understood all that, two further changes are around the corner. Next April will also see the scrapping of the ‘carry forward’ rules, which currently allow an individual to exceed the annual limit on pension contributions if they have ‘unused’ contributions from the six previous years.

So if you want to make up for lost time, act quickly.

April will also see the introduction of individual pension accounts (IPAs), which Treasury minister Melanie Johnson has claimed will boost pension nest eggs by up to 30%.

IPAs are not pension schemes themselves, rather a way of saving in a personal or stakeholder pension.

They can contain units and shares in pooled investment funds and gilts.

IPA holders can buy and sell the underlying investments with no upfront costs for greater flexibility.

Opinions are divided on the usefulness of IPAs. Cameron says: ‘This 30% figure is completely unsubstantiated and, quite frankly, misleading.

‘IPAs are merely a technical means to allow unit trusts to play in the pensions market. They are an irrelevance for the vast majority.’

But Briggs is more hopeful. ‘People need to start seeing a pension as a future wealth account, not something that gathers dust in the corner.

‘When they can get more involved there will be an upturn of interest in pensions.’

Related reading