Understanding how much you need to contribute towards a pension in order to produce the income you need or desire in retirement should be a key part of your financial plan. To arrive at this figure, the calculation needs to take into account any other assets you have earmarked for the long term, inflation, potential future fund growth and any state pension you are entitled to.

Maximise your tax relief Pensions remain especially attractive to higher rate taxpayers. Although recent Budgets have been preceded by talk of ending higher rate relief, it’s still currently the case that up to 50 per cent of the cost of pension contributions can be picked up by HM Revenue & Customs but, if applicable to you, time is running out as this will reduce to 45 per cent from 6 April 2013.

Every pound counts
Many employers operate a scheme that promises to match your contributions on a one-for-one basis. In other words, if you commit to paying, say, 5 per cent into your pension, your employer will do likewise. If you only pay 3 per cent, your employer may only pay 3 per cent. Such incentives provided by the employer are extremely attractive, especially when combined with tax relief.

Pension investment focus 
There will typically be a wide range of investment funds in which to invest your pension contributions. If you are ten years or more away from retirement, investing the bulk of the fund in equities could enable you to produce a bigger pension than a more cautious approach.
Although many investors are cautious of the stock market during this economic climate, it is important to focus on the long term. In reality, in the short term it matters little what your pension fund is worth in a year or two if you have 20 years or more before you retire.

Consolidating your pot
With today’s mobile workforce, most people may accumulate several pension plans. Understand what these are worth, whether they are performing well and what you are being charged. In some cases, making the most of these assets can bring the financial choice of retirement closer by several years. It could make sense to consolidate your various pots by moving old money-purchase pensions to your current employer’s scheme if the charges are lower.

Reducing your exposure
As retirement approaches, gradually reduce your exposure to shares by switching to lower-risk funds during the six or seven years before retirement. Many defined contribution schemes offer ‘lifestyle’ funds that do this automatically, thereby largely mitigating the effect of any last-minute stock market downturns.

An income for life
It is vital to understand your options at retirement. You will have the choice of taking the pension offered by your own scheme or shopping around for a better annuity rate.

If you are not in perfect health, you might qualify for an enhanced annuity from one of a number of specialist providers. Irrespective of your state of health, if you have a larger pension fund, consider income drawdown. This allows you to draw an income, while staying in control by maintaining the pension pot in your own name. ν

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Pension drawdown can leave your funds open to investment risk and is not suitable for everyone.