Adam Bernstein hosts a monthly look at one of the legislative aspects that most affect your business, how it is run and how it can be more profitable. This month, John Davies analyses the options when it comes to pensions.

Until fairly recently, we in the UK thought that our pensions system was comparatively strong and secure. But over the last few years, we have had to confront the worrying possibility that our pension funds might not be able to pay us the pensions that we had hoped for.

So, for those of us who have not yet started to plan our pensions, or those who are thinking of investing more, what options are available?

The self-employed do not have the option of joining an occupational pension scheme, but they can set up a personal pension scheme. These schemes are offered by insurance companies, banks and building societies, and contributions paid into personal schemes qualify for tax relief, thus making them a highly tax-effective form of long-term saving.

The self-employed can also consider investing in a stakeholder pension. This is a new type of pension which was introduced by the government in order to make non-state pension saving more widely and cheaply available.

Administration costs are kept to a maximum level - one per cent of the value of your fund - and investors are able to make payments into their plan whenever it suits them.

They can also decide to take a break from making contributions if their financial circumstances change.

The stakeholder pension is also available to employees, even if they are already members of an occupational scheme.

Employers with at least five staff are also required by law to provide access to a stakeholder scheme if they do not already sponsor an occupational scheme or a group personal pensions scheme.

In reality this means, as a minimum, pointing employees in the direction of a pension company.

The core element of the UK pensions system remains the basic state pension. This is paid to anyone who has paid, or is credited with, standard rate National Insurance Contributions (NICs). In 2004/5, the basic pension is £79.60 for a single person. Entitlement to the basic state pension depends on the number of “qualifying years” during which you have paid, or been credited with, NICs. To qualify for the full basic pension, a man will usually need to have 44 qualifying years, while a woman will need 39.

Other state benefits may supplement the basic pensions. The new State Second Pension (SSP) came into effect in 2002 and replaces State Earnings Related Pension Scheme (SERPS).

Both SSP and SERPS calculate additional entitlements by reference to earnings on which NICs are paid. But SSP is more generous: all those with earnings under £11,600 are treated as having earned that figure, and those who earned between £11,600 and £26,600 (2004/5 figures) will build up a higher pension than they would have under SERPS.

Your firm may operate an occupational pensions scheme.

If you have the chance to join such a scheme, you should really take it up, since the payments which you make into the scheme will invariably be topped up by payments from the employer. Also, the administrative costs of the scheme will be borne by the employer, thus sparing members the direct responsibility of meeting those charges.

Occupational schemes can be one of two kinds - defined contribution (money purchase) and defined benefit (final salary). In a defined contribution scheme, a member’s pension entitlement is determined essentially by reference to the total amount of contribution paid into the scheme by them (or on their behalf by the employer). So the more you pay in to such a scheme, and the more profitably your fund has been invested over the years, the better your pension will be.

In a defined benefit scheme, a member’s pension is determined by reference to a combination of his or her pay at or near retirement and the length of his or her membership of the scheme.

The longer you work for a particular employer, and the higher your salary at or near retirement, the higher your pension will be.

The drawback for employers is that they are committed, in a defined benefit scheme, to pay pensions calculated by reference to a fixed formula, regardless of how successfully the scheme’s money has been invested. And if the scheme’s funds are in shortfall, it us up to the employer to make up the difference.

You can add to your likely occupational scheme pension by paying what are called Additional Voluntary Contributions (AVCs).

This is a useful means of increasing your entitlements if you think you are unlikely to build up enough, for example if you are not likely to work enough years in your scheme to qualify for the maximum two thirds retirement pension.

More information is available from www.thepensionservice.gov.uk You can also get an indication of likely state entitlements by contacting the government’s retirement pensions forecasting team on 0845-3000-168.

John Davies is Head of Business Law at the Association of Chartered Certified Accountants.