When I'm 64 …

Let's get one thing straight: I'm not into pensions. Like most people I know, I don't have a clue about them – any mention and I glaze over. Nor do I much like the idea of getting older and being a pensioner one day. And anyway, I love my work and never want to retire.

But at the age of 40 and after 20-odd years of salaried employment, I left a safe job to start out on my own. While employed I was always told that the company pensions were good so I'd never worried. Also, retirement seemed an awful long way off. But now that no one's looking after me I thought it was time to find out more about my pension.

Apparently, there are two main types of pension (there are, in fact, quite a few more, but they all seem to slot into one or the other):

• Final salary schemes, where you and your employer pay into a fund that provides an income for life based on a stated proportion of final salary
  
• Money purchase schemes where you pay money into a fund and on retirement buy an annuity (a pension) from a financial services company that will pay you an income for the rest of your life

There is also, of course, the state pension – about £70 a week, but only if you have paid full National Insurance contributions.

When I left my first employer about 10 years ago, I acted on advice and transferred my company pension into a private fund. It turns out that 10 years on this fund has not performed particularly well; in fact, it has lost 7% in that time. Last December it lost a massive £800! It was probably a good scheme when I took it out but things have changed. I am told it's all to do with the steep decline in annuity rates and changes to taxation rules.

Not so long ago when annuity rates were at about 16% (giving you 16% of the value of your fund every year for life), these schemes seemed a sure bet. Now, however, with the annuity rate at about 4% (the lowest it's been for over 40 years), pension income is dramatically reduced.

I transferred my company pension to a private fund 10 years ago. Far from growing, it has managed to shrink in that time by 7%

In final salary schemes the employee doesn't have to worry about falling annuity rates as the employer pays a set pension, although this is becoming prohibitively expensive for companies, which are increasingly asking employees to move over to money purchase schemes and locking new starters out of the final salary scheme. So more of us will be in money purchase schemes whether we like it or not. Accordingly, we need to know how to manage them.

There are three aspects to manage:

• The size of your fund. You need to build up as much money in it as possible, a process that clearly depends on how much you can afford as well as tax rules and growth rates
  
• The performance of your fund. You need to have it regularly checked out by someone who is independent and knows what they're talking about. You should keep track of your fund and spread it about to get the best growth rates
  
• The timing of your annuity purchase. Essentially, you should aim to buy an annuity when rates are high and not necessarily at your chosen retirement date

So what does all this mean in money terms? Well, let's say I managed to save as much as I could on a monthly basis for the next 20 years. If my fund is well managed and growth is good, I may have built up £200,000. Buying an annuity at 8% would give me an annual income for life of £16,000, although at 4% it would only be £8,000 – a big difference!

Pensions are becoming a huge issue for us all. Currently, there are 9.5 million pensioners in the UK, a figure that will rise to 12 million over the next 20 years. Clearly, this situation is not going to go away. Whatever your age and circumstances, now is the time to check out your own personal situation.