FOOL'S EYE VIEW
How To Fill The Gaps In Your Future

By Cliff D'Arcy
May 17, 2005

I've never been good with money.

In fact, I've spent almost all of my life being downright bad with money. From my childhood, I had Champagne tastes and a beer income, and struggled to budget and save almost from day one. This continued into adulthood and, unchecked, caused me huge problems in the Eighties and Nineties.

However, a few years back, I finally saw the light, and vowed to change my slapdash approach to personal finance. In other words, I started to plan ahead, which was a first for me! Of course, joining the Fool at the start of 2003 made this personal revolution a little easier. Thanks to the support of my colleagues and the Fool community, I've changed my entire relationship with money and what it means to me.

These days, having money to spare doesn't translate into frivolous spending. Indeed, most spare money left over at the end of the month is either saved or invested to provide me and my family with future financial security. And I need to invest a lot, because there are big gaps in my past which are just itching to trip me up in the future!

After dealing with my day-to-day finances, one of my biggest priorities is to save for retirement. Here's how I planned my strategy to retire in comfort:

1. I created a 'pension CV'

My first move was to find out exactly how big a problem I faced. I've been working on and off since 1987, but I knew that a lot of this employment wasn't pensionable. In other words, I knew that my pension CV had big holes in it, thanks to my 'random retirement strategy'. Here's how it looks at the moment:

My pension CV
Period	Pension status
Summer 1987 to end-1990	Temporary employee, so no pension scheme
Early 1991	No company pension scheme
Autumn 1991 to spring 1997	5½ years in contributory final-salary scheme
Early 1997 to spring 1999	Missed out on two years' pension by leaving after 23 months. D'oh!
Spring 1999 to Summer 2002	One-year wait to join contributory final-salary scheme, then 27 months' service
Spring 2003 to present	Joined Fool scheme in April 2003 - now socking money away!

So, I've been working in financial services for almost eighteen years (holy smoke, that's half of my current age!), but I've only accrued roughly nine years' pension rights. Whoops, that's a lot of time to backfill! These days, I pay about an eighth of my wage into the Fool pension, but I'll come to that later.

2. I obtained a pension forecast from the Pension Service

Although I haven't been paying into company or private pensions throughout my working life, I have paid National Insurance Contributions in every tax year since 1987/88. In other words, my entitlement to the basic State pension (BSP) is right on track. To make sure of this, I completed and returned a BR19 form to the Pension Service.

I know that a male worker must have paid NICs for 44 qualifying years to claim the full BSP, as must all female workers born after 5 April 1955. I've been paying NICs since 1987, so I've already accrued eighteen years' entitlement to the BSP, and have another 26 qualifying years to go. As it happens, I'm still 28 years away from claiming my State pension, so I have a long way to go yet!

You can learn more about the various State pensions at the Pension Service website.

3. I decided to start saving for retirement

As with most pickles we find ourselves in, my lack of retirement planning can be solved by throwing money at the problem. Last April, I joined the Fool's Stakeholder pension scheme and began paying in £200 a month of my take-home pay. Over the course of the 2004/05 tax year, I paid in a total of £2,500, which, thanks to 22% automatic tax relief from the Inland Revenue, instantly grew to £3,205. (The calculation is £2,500/78% = £3,205.)

Also, as a higher-rate (40%) taxpayer, I can claim back a further 18% of this sum via my annual tax return, or by using a PP120 form (PDF file). In other words, the taxman refunded me a further £577, being £3,205 x 18%. Hence, my contribution of £3,205 only cost me £1,923.

However, the fun doesn't stop there, because the Fool paid an employer's contribution, too. This came to about £1,519, taking my total pension pot for last year to £4,724.

Joining a company pension scheme is almost always better than arranging a personal pension yourself, especially if your employer contributes to it, matches your contributions, or meets all administration costs. And so we move on to the next step in my pension planning:

4. I'm plan to increase my contributions every year

In March, I increased my monthly contribution to the Fool scheme to £300. Hence, by the end of the year, I will have added another £4,615 in my pot. The Fool also increased its contribution this year, which will add another £2,813 to my plan. Again, thanks to extra tax relief, this £7,428 will cost me just £2,769, or about 37% of the total. In other words, every pound that I contribute turns into £2.68 on day one, which is nice!

But I haven't finished there. I took a deep breath and, last month, made a one-off extra contribution of £2,500, which boosted my pot by a further £3,205. That's as much as I personally contributed in the whole of 2004/05, but I know that I need to dig deep to make up for those pesky missing years!

If you'd have told me two years ago that I'd even consider putting over ten grand into a pension in this tax year, I'd have laughed my head off. However, I do face one slight problem: I'm paying in too much, so I'll have to ease off later in the year - and even stop contributing altogether. As I'm between 36 and 45 (but only just!), the Inland Revenue allows me to pay no more than a fifth of my wage (20%) into my pension. Thus, I may have to reduce my payments, but there are ways around this, if it comes to that.

5. I'm not putting all my eggs in one basket

Although I'm socking away more than a tenth of my wage into the Fool pension scheme, I still continue to invest elsewhere. Currently, my pension contributions go into a cheap, simple index-tracking fund that tracks the ups and downs of the FTSE 100, which measures the value of the UK's one hundred biggest companies. You can learn more about index trackers (and invest in the biggest) here.

As well as putting as much of my wage as I can spare into my company pension, I've also decided to pay the maximum £7,000 a year into a self-select shares maxi-ISA, which is a tax-free wrapper inside which one can shelter shares, bonds or investment funds. Some of this money goes into the market via wonderfully low-cost iFTSE 100 shares, but I invest much of it into individual shares. I've been building a dull but promising portfolio of 'value' shares, based around the principles applied in our Value Investor newsletter. You can join thousands of existing subscribers, by getting a free thirty-day trial here.

It sounds as though I've got money to burn, doesn't it – investing ten grand in my pension and seven grand into a maxi-ISA this tax year? Far from it! In fact, I've had to make hefty cutbacks in my personal spending in order to finance my pension, and the ISA money came from existing savings. In future years, I will use up my ISA allowance by transferring in shares that I already own outside of ISAs. This will help me to shelter as much as my portfolio from the taxman as I can.

Finally, I'm very lucky, because my wife has both a well-paid job and a stable career. Indeed, she's been with the same company for almost sixteen years and, fortunately, is still a member of its generous final-salary pension scheme, which she joined in 1989. Naturally, she's far smarter than me and, for several years now, she's also been paying maximum additional voluntary contributions into her work scheme (15% a year). So, with any luck, she will be comfortably off in retirement and should be able to subsidise me in our grey years, if I play my cards right!

More: Visit our Pensions centre | Learn more about index trackers and ISAs.

Cliff owns iFTSE 100 shares, an Exchange Traded Fund which tracks the FTSE 100 index.