Is it safe to save in a pension?

With the recent financial turmoil, is saving in a pension still a good idea?

Mention the word "pension" in the pub and you'll get a barrage of opinion.

Pensions are great...

There are some that love them. After all, save in one and you'll benefit from tax relief on your contributions straight away. Although, pensions are taxed when you take an income once you have retired.

Your employer may also contribute to your pension for nothing (which is a salary boost). And all going well you'll end up with a healthy pot when you come to retire, from which you'll usually be able to take a 25%, tax-free lump sum.

What's more, if you're lucky enough to have joined a defined benefits scheme (final salary pension) you'll be able to look forward to receiving up to two thirds of your final salary, guaranteed, when you retire.

Oh no they're not...

On the other hand there are those that consider pensions the scourge of the devil. Not only do you have to save in specific schemes, your money is out of your hands until you're forced to hand it to an annuity company in order to buy yourself an income.

What's more, if you don't do this carefully (and you die early) your income will cease and the rest of the pot will be owned by said annuity company - so your dependents won't receive a bean!

Indeed, with all of the financial turmoil in the markets many of us are seriously worried about putting any money into a pension. After all, what would happen if the provider collapsed? Would you lose the lot?

How protected are our pensions?

Well, there are a couple of schemes in place to safeguard our retirement cash.

Pension Protection Fund (PPF)

If you're a member of a defined benefits (final salary) scheme and your employer goes bust, the Pension Protection Fund (PPF) is the place to turn (it will also cover the defined benefits element of a "hybrid" pension scheme).

In general, the amount of pension compensation you'll be entitled to will depend upon your age - if you're already at retirement age you'll be entitled to 100% of the pension you'd built up; any younger and you'll be entitled to 90%. And this is up to a current cap of £29,386 per year.

But there are worries that the PPF has stretched itself too far, and that the compensation limits will have to be reduced, should more company collapses put pressure on the fund.

Financial Services Compensation Scheme (FSCS)

There can't be many who watched the recent collapse/near collapse of various financial institutions who aren't aware of the FSCS.

Yes, this is the scheme that helped thousands of us get our savings back when providers such as Icesave started collapsing. It currently protects up to £50k of our money (per financial institution) should our bank fail, provided we've saved it in an account authorised by the FSA which is not protected by a foreign compensation scheme.

But that's not all - it also offers protection for pensions, annuities, insurance policies and investments, too. If your pension provider should go bust, it will try to arrange for your pension to continue, either by trying to transfer it to another provider, or substituting it for one offered by an alternative provider.

But the compensation does get slightly complicated.

If your pension is insurance based, or held with an insurance company, it's classed as "long term insurance" for which the FSCS offers 100% protection on the first £2k, and 90% on the rest, with no upper limit.

So if you had £50k stashed away you'd be compensated by £45,200. And £100k you'd get £90,200.

But if it's a stakeholder pension it's classed as an "investment", in which case the FSCS offers 100% compensation for the first £30k, and 90% of the next £20k. And that's it.

So if you had £50k in your pension the maximum compensation you could receive is £48k. And if you had £100k squirreled away you'd still only be entitled to £48k. Yikes. (You can find out more in this article).

So essentially, for the majority of us there's a pretty good level of protection, should things go wrong. But if you're the sort with hundreds of thousands stashed away for retirement it may be worth spreading your risk if you're at all nervous.

And we mustn't forget that pensions aren't the only way to save.

Alternatives

One popular alternative to pensions is property. In fact, a recent poll of lovemoney.com readers found that 99% still think property is a good way to save for retirement. But property prices can fall as well as rise, which may be a sore point for many at the moment.

One easy and popular alternative is an ISA. You can currently save up to £3,600 in a Cash ISA each year (rising to £5,100 for the over 50s on 6 October, and on 6 April 2010 for the rest of us).

If you also use the investment portion you can currently stash away up to £7,200 (rising to £10,200). It's not as much as you can save in a pension but probably a more than adequate limit for most of us.

Although tax isn't rebated straight away on ISA contributions as it is with pensions, interest earned isn't taxed. And as you don't have to buy an annuity with your "savings pot", it's up to you to use as and when you wish.

But of course, easy access means huge temptation - and who wants to spend their retirement eating cold baked beans, while flicking through photographs of the "timeshare we used to own in Barbados"?

Personally, I still think pensions have their place. Particularly if you're a member of a final salary scheme, or your employer contributes to your pension pot -after all, free money is free money!

But as with everything I also reckon it doesn't hurt to spread your risk and not have all of your eggs in one basket.

More: Why it's vital to protect your pension income |99% still think property's a good investment