How to build a fat-cat pension

As top company directors' pensions head into the millions, we explain how to retire well-off.

Directors at the UK’s top 100 companies have pension pots worth an average of £3.8 million, according to the TUC’s eighth PensionsWatch survey released last week.

Fat cats gobble cream

The TUC calculates that this huge sum is enough to buy a pension of almost £228,000 a year, or close to £4,380 a week. Nice work if you can get it! Incredibly, the average director's yearly pension is now 26 times the £8,736-a-year paid out by a typical occupational pension.

Despite widespread closures of pension schemes in the past decade, more than half (54%) of big-company directors remain members of final-salary schemes. What’s more, pension schemes for directors often include an earlier retirement date (usually at age 60 instead of 65) and better accrual rates.

For example, directors may be members of a 1/30th scheme, which accrues benefits twice as fast as the typical 1/60th schemes to which employees may belong. In other words, directors need to work only 20 years to get two-thirds of their salary on retirement, whereas employees must work 40 years to get two-thirds of their pay.

While workers can only dream

Alas, while directors feather their own nests with massively generous pensions, the rest of us face pension closure, longer working lives, or steep cuts to pension contributions and benefits.

Another survey - this time from Baring Asset Management - found that nearly half (47%) of women who are not retired have no pension arrangements in place. In other words, 8.7 million British women expect to rely solely on the State to support them when their working lives end. Yikes!

Seven steps to a stronger pension

Given all this uncertainty surrounding pensions, what can you do to build a bigger pension? Try these seven steps:

Join your work scheme on day one

If you’re not already in your occupational pension scheme, then join it straight away. Although you’re unlikely to join a guaranteed final-salary scheme, you should be offered a defined-contribution scheme. In many cases, your employer will contribute to this scheme, so not being a member means turning down free money.

Start saving early

When it comes to saving for retirement, the earlier you start, the better. Thanks to long-term growth, a £100 contribution at 21 is worth many times the same sum at, say, 51. So, the earlier you get the savings habit, the better off you’ll be when you quit work.

Take more risk

Over the long term, say, 20 years or more, shares usually generate higher returns than property, bonds, cash and other assets. Hence, by playing a long game and putting more into shares, you could boost the final value of your pension pot. Though do this only if you can stand the stock-market roller-coaster!

Make extra contributions

If you’re already a member of a workplace-based pension scheme, you can still make extra contributions to that scheme (known as additional voluntary contributions) or to your own personal pension. I’m a big fan of low-cost Self-Invested Personal Pensions (SIPPs), which provide investors with freedom, flexibility and personal control over their pension savings.

Try other tax-free savings

Of course, you’re not obliged to save for retirement solely by saving into pensions. One popular alternative is to save inside the UK’s most popular tax shelter: an Individual Savings Account (ISA). More than 19 million UK adults use ISAs to build a better future, but still have access to their money if they need it.

Retire later

One of the simplest ways to pump up your pension is extend your working life. For every extra year your work, you earn another year’s wage. At the same time, deferring your pension means an uplift to your income when you eventually start claiming it.

Shop around for an annuity

On retirement, most adults hand over their pensions pots to an insurance company in return for an income for life known as an annuity.

However, you should not buy an annuity from the company with which you built your pension pot. Instead, exercise your ‘open-market option’ (OMO) by shopping around for the highest annuity income you can find, with the help of an annuity broker such as Hargreaves Lansdown.

How to end pensions apartheid

Finally, can I suggest one easy way to end this unfair two-tier pension divide?

The coalition government should introduce legislation in the next Budget or Finance Bill to end pension apartheid. In other words, I want a law which forces all directors and employees of a company to belong to the same pension scheme and accrue identical benefits.

This may well be the only way to stop greedy directors from pumping up their own pensions while destroying their workers’ retirement dreams!

More: Find superior savings accounts | 17 million Brits make this mistake | How to double your pension