Government pronouncements on saving for old age always include advice to save via a pension fund, the logic presumably being that these will be regular savings enabling individuals to build a pot of money that will see them through their years of retirement.

But if you’re in the private sector, where the only schemes available to you are money purchase schemes, is this advice sound?  Ignore for a moment how funds have performed over the past  5 to 10 years, focus instead on the constraints that pensions themselves impose.

First, you must save via a Pension Fund – but there are literally thousands to choose from and even the wisest sage cannot guarantee you’ll pick a good one.  Past achievements by a fund manager may make good copy, but tell you nothing about future performance.  You’re buying the proverbial pig in a poke.

Second, when you take your pension, you’ve got to get the timing right.  If you’d reached pension age last March and taken out an annuity at that time, the chances are your monthly income would be a good 30% less than if you’d waited a year.  And of course you need to review the offer from all annuity providers, because they’ll all differ, so what your pension pot will buy isn’t just subject to market conditions at the time of taking it, it’s also subject to how thorough you are in reviewing the annuities available.

Third, there’s tax relief.  Yes, you get it on the way in (Direct.gov.uk announces that “The government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief reduces your tax bill or increases your pension fund.”) but you’ll suffer tax on the way out.  And at present, that means 20% going in – who knows what it’ll be on the way out?  Just bear in mind that the standard rate of tax has historically been considerably higher than 20% - what you gain today could be less than you’ll lose tomorrow.

Obviously for higher rate tax payers (but not highest rate taxpayers), you may be swapping a 40% tax rate today for a standard-rate that’s likely to be between 20% and 33% in the future.

And under current regulations, you will be able to withdraw 25% of the pot as a tax-free lumpsum.  But a word of caution – current regulations have a habit of changing.  There are no guarantees that future Chancellors will feel duty-bound to permit this rather strange tax break to continue.  After all, both the present and former Chancellors have played ducks and drakes with pensions tax reliefs, why shouldn’t a future one?

Fourth, there’s pension fund charges.  The government is planning a new “opt-out” scheme for all employees, with a compulsory contribution from the employer.  It’s due to start in time for the Olympics, but as with the Olympics there are several hurdles to be overcome – not least of which is finding administrators prepared to run the scheme on a 1% annual fee. As the majority are charging between 2% and 3% of fund value p.a., that’s a hurdle the government may well fail to clear.

And then there’s the issue of pension fund performance.  Analysing data from Trustnet, of the 150 pension funds beginning with the letter A, 98 have been in existence for at least 5 years. Comparing the performance of those 98 with movements in the Retail Prices Index over the past 5 years, and allowing for administration fees of 2.5%, only 40 generated a return better than RPI.  58 were worse.  So it seems you’ve less than a 50:50 chance of preserving the purchasing power of your savings.

Pensions are great for those on final, or even average, salary schemes – you’ve a quantifiable assured sum in your retirement.  But if you’re in the private sector, think twice before you commit.