With so much at stake, your money could be better spent

People aged 40 or more with little in the way of savings could be better off spending their spare cash rather than investing it in a stakeholder pension, according to draft advice issued by the pensions and investment watchdog, the Financial Services Authority.

The FSA has drawn up draft 'decision trees', to help people decide whether they should invest in a stakeholder scheme or not. A decision tree entitled 'How much should I save for when I retire?' indicates that people aged 40 or more, who can only afford to save £20 a month, could receive a monthly pension of less than £47. This, combined with the basic state pension, is not enough to exceed the minimum income guarantee, a means-tested benefit which currently ensures that a single person receives at least £339.95 a month.

In guidance notes accompanying the decision trees, the FSA says: 'Particularly if you are over 40, have little pension or other savings and cannot afford to save much, the little you are able to put into a stakeholder may not be enough to bring your total retirement income above the MIG. It would then be wasted.'

Some pension providers and independent financial advisers fear this information will discourage the over-40s from saving. But Martin Campbell of Virgin Direct does not think the FSA has gone far enough in clarifying the situation: 'We would like the Government to state a minimum funding level for people of different ages - a clear benchmark showing whether it's in their interests to save in a stakeholder, or whether they should be considering an alternative form of saving.'

Someone saving a small amount in an Isa, for example, could use their savings to pay off part of their mortgage and thus prevent the money counting against their means-tested benefits after retirement.

In contrast, the low charges and flexibility of stakeholder schemes should prove advantageous to investors on average or higher earnings. The 1 per cent cap on annual charges is expected to become the industry norm for personal pensions, and the lower profit margins and increased competition between pension providers is likely to result in a flood of mergers and takeovers, making the choice of a specific stakeholder scheme easier.

However, Nick Bamford, of independent pensions adviser Cranleigh Informed Choice, says that even wealthier investors would benefit by keeping part of their savings outside of a pension scheme. He said: 'While the tax advantages of pensions are undoubtedly attractive, you cannot access any of your money until you reach retirement age. As you never know when you might need some capital, it's a good idea to put some of your money into an Isa or some other accessible investment scheme.'

A new Trades Union Congress webpage (www.tuc.org.uk/stakeholder ) contains information and can answer questions about stakeholder pensions.

For the FSA's draft decision trees, visit www.fsa.gov.uk, click on publications, followed by discussion papers and download PDF 1.23MM.