MONEY COMMENT
Build Yourself A VIP Pension

By Cliff D'Arcy
March 9, 2004

The Trades Union Congress has criticised 'fat cat' bosses for stuffing their own pensions while starving their employees' schemes. According to the TUC's latest PensionsWatch report, directors of FTSE 100 companies are pumping millions into their own schemes, while closing or under-funding workers' schemes.

Two-thirds of directors of blue-chip companies are in final-salary schemes, where pensions are based on years of service and annual salary at retirement. Of these, five out of nine are in 1/30th schemes. This means that they would accrue the maximum pension allowable - two-thirds of their final salary - after twenty years' service.

On the other hand, workers fortunate enough to belong to a final-salary scheme usually belong to a 1/60th scheme, which means that they have to work forty years – twice as long – to hit the 2/3rds limit. However, fewer than three in ten directors are in 1/60th schemes.

Companies have responded to the rising cost of company pensions by cutting back or closing down guaranteed final-salary schemes, usually replacing them with inferior money-purchase schemes and reducing contributions at the same time. Some companies operate money-purchase schemes for directors and workers, where workers' and firms' contributions go into individual pots that grow over time and are used to buy retirement incomes (known as annuities).

Where directors were members of these schemes, the rate of company contributions for directors was between three and five times higher than the typical rate for workers. Average company contributions to employees' money-purchase schemes are 6% of salary, compared to an average of 19.5% for directors. Some companies are paying directors a whopping 30% on top of their salaries into their pensions.

However, simply moaning about greedy, ruthless and selfish behaviour by directors won't bring about better pensions for workers. The TUC has recommended that more information about directors' pension should be included in firms' annual reports. Another remedy would be to force directors to be members of the same pension scheme as their workers, and receive the same benefits. This would really motivate directors to make sure that all employees have decent pension arrangements, thanks to pure self-interest!

In the meantime, if you want to build yourself a fat-cat pension, here are some recommendations. If your company:

1. Has a final-salary scheme, join it if you can. Membership is worth more than an eighth of your salary, and only very rarely do things go wrong.
2. Operates and contributes to a money-purchase scheme, join it. Otherwise, you're missing out on free money.
3. Offers to match your own contributions ('you put in 4% and we'll do the same'), take maximum advantage of this offer.
4. Allows you to make additional voluntary contributions, consider saving more via AVCs if the costs are reasonable. Here's how my wife does it.
5. Has more than four staff, it must offer a stakeholder pension scheme as a minimum, although it doesn't have to contribute to it. However, stakeholder pensions have low costs and no transfer charges, so they're worth considering if you earn, say, at least £10,000 a year.

You should take note of the great tax advantages of contributing to a pension. If you're a basic-rate taxpayer, a contribution of £78 attracts tax relief of £22, which means £100 is invested for you. For higher-rate taxpayers, £60 becomes £100, which equals growth of two-thirds on day one! Also, pension pots grow free of capital gains tax and income tax (although, thanks to the abolition of the dividend tax credit, they are losing around £5 billion of their income every year).

Finally, unless you're a member of a final-salary scheme, the only way to produce a decent retirement income is to start saving hard. This means contributing as much you can, as early as you can, for as long as you can, especially if there are gaps in your pension CV. Otherwise, you'll be forced to work well into your mature years, instead of living the high life with cruises and luxury villas!

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