The best ways to save for retirement

The challenge to build up a decent pension is formidable. Here are some of the best ways to go about it.

For maximum flexibility, before worrying about a pension, it's worth using up your annual individual savings account (Isa) allowance. This rises to £10,200 on 6 April 2010, or 1 October 2009 if you are over 50. All income (above the first 10% of dividend payments) and capital gains on investments within an Isa are tax-free. Better still, there are no time constraints on when you can withdraw your funds should you suddenly need them back.

Beyond that a personal pension offers tax relief on every £1 invested at your personal income-tax rate. What's more, up to 25% of your pension pot can be taken as a tax-free lump sum on retirement. However, the flexibility is poor compared to an Isa you can't access your cash until you reach at least 50, and (for the vast majority of us) 75% of your pot must be used to buy an annuity by the time you are 75. These are currently not great value, so be sure to shop around the best annual income in return for £100,000 for a man aged 60 is £6,340 from Prudential.

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