It's never too early to start a private pension

The mis-selling of pensions from the 1980s sapped public confidence, culminating in the scandal at Equitable Life, which the last government refused to sort out despite the clear reports from the Pensions Ombudsman. It is now a priority for the new administration.

When Chancellor, Gordon Brown raided pensions in 1997. The tax he imposed is still undermining the pensions industry. Regulators have also not helped with unrealistic demands that good equities should be sold in place of low yielding income stocks.

Pensions still attract financial myths, notably:

n you have to be working to contribute to a pension: no, a non-working spouse can start or continue a pension;

n you have to be a minimum age: no, even a baby can start a pension;

n once retired, pensions stop: no, you can continue to pay in and build up your pension;

n only the named individual can contribute: no, any third party can pay in (such as a grandparent for a baby);

n pensions can only be effected through an insurer: no, you can have a provider like an investment trust or plan your own through a self-invested plan.

Timing is important. The earlier you start, the larger the pot that should be built up. NatWest calculate that every year you do not save for your pension could cost the final fund as much as 13,000.

If a pension is started at age 25 with 100 contributed monthly, after basic tax relief, expect that final fund to reach 202,000. Yet starting with the same sum but a year later could cut the pot to 189,000.

'The early bird catches the worm' is a well-used proverb in investment circles – the idea being that the sooner you invest, the more time the money has to grow.

This is very apt under a new government, aware that it is taking on debt equal to 35,000 for every working adult.

Higher rate relief on pension contributions has already been cut twice in the last year.

"Following the election, it is not unfeasible that it will be reduced further or removed completely", warns pensions specialists Hargreaves Lansdown.

Their message is clear: if you wish to invest on the most favourable terms, act sooner rather than later.

Even a newly-born child – as well as none-working spouses – can start a pension. Up to 2,880 a year can be invested to which the government adds 720 in tax relief.

Since pensions grow free of both capital gains tax and personal income tax, they are a very popular savings vehicle.

It is estimated that 30,000 pensions are taken out on behalf of

children each year.

Few realise that pensions are offered by investment trusts. Such bodies have independent directors (unlike unit trusts) and the facility to borrow to take advantage of investment opportunities, known as 'gearing'. This can mean some stellar performances.

Alliance Trust, F&C Management, Graphite Capital and JP Morgan are among investment trusts offering pension schemes, often from just 50 a month with nil or low initial charges and – in Alliance Trust's case – no annual charges either. However, few advisers (unless paid on a fee basis) will mention such a facility as usually no commission is paid.

Far too many rely on the state pension for their retirement.

Recent research from Prudential found that almost a fifth (18 per cent) of those planning to retire this year will depend on the state pension plus their own savings with the former contributing 34 per cent of their income.

Some investors have clearly been dissuaded to start or continue a pension by the dismal performance of the underlying funds. According to KPMG, a pension scheme which followed a typical investment strategy from 2000-2009 would have seen growth of only 2.25 per cent a year before taking costs into account.

By contrast, simply leaving money in the average bank account would have returned over twice as much as 4.7 per cent.

With-profits actually out-perform unit-linked personal pensions. According to Investment Life & Pensions Moneyfacts, the average maturity after investing 100 gross per month over 20 years is 43,142 for with-profits but 39,799 for unit-linked.

The top performers for with-profits are:

n LV= (formerly Liverpool Victoria) 55,478

n Prudential 49,456

n Wesleyan Assurance 48,449.

Yet only 35,973 would be obtained with Scottish Widows and 38,330 with Phoenix Life (Britannia Assurance with a product no longer available).

If you opted for unit-linked over the same period, the stars are:

n Wesleyan Assurance 46,473

n Zurich Assurance (formerly Eagle Star) 46,237

n NFU Mutual 45,002 (now only stakeholder funds offered).

Again, there were some lacklustre performers, notably MGM Advantage with only 28,459, AXA with 36,592 and Aegon Scottish Equitable with 36,599.

Looking at performance over 10 years on the same basis, unit-trust pensions performed better: on average 14,208 (with a top and bottom of 15,791 and 11,457) by comparison for with-profits of 13,960 (ranging from 13,351 to 15,287).

Last year resulted in a far better performance. The average pension fund jumped 22.4 per cent in 2009, according to Lipper research – the highest annual return for unit-linked since 1999.

Such a rise was for those pension managers or self-invested planners who opted for such sectors as global emerging markets (up 64.6 per cent), commodity/energy (up 62.3 per cent) and Asia Pacific excluding Japan (51 per cent).

Those in with-profit funds need to ask their providers where their money is invested. If performance continues to disappoint, look into transferring out.

Last year, for example, Aviva (formerly Norwich Union) returned eight per cent which is pitiful when the average 'cautious managed' pension fund achieved 17 per cent.

Another problem for with-profits holders is that some of the returns may not be passed on because of the 'smoothing' process.

Instead of adding to policies annually, some providers are year on year denying such bonuses, relying instead totally on a terminal bonus which depends on the whim of the actuary at that moment.