If you would like a relatively comfortable retirement, you need to ask yourself have you saved enough and what can you do to increase your savings for retirement.
Recent research shows that 45 per cent of us are saving less than required for retirement, 20 per cent of people are not saving anything and 14 per cent of people due to retire in 2013 are relying solely on the state pension to fund their retirement.
Despite encouragement from the government and warnings from pension experts about the need for people to save more, Britons are reluctant to make changes and increase their take up of pension schemes or increase the amount they save, despite the benefits that saving for a pension from an early age can bring.
What is there to be concerned about?
Life expectancy is going up and this means we need to fund our retirement for longer or work until an older age.
In 1960, life expectancy in the UK was 71 years, by 2010 this had increased to 80.75 and it is likely that this rate of increase will mean that by 2060, people who are just entering the jobs market will have a life expectancy of 90.
This is why the government has raised the state pension age. It means people born on or after March 6th 1961 will now need to work until they are 67. The government has announced that the state pension age will increase to 68 between 2044 and 2046 and this will be kept under review.
How much will you need?
Opinions on this vary. Some say you need to be aiming for a net retirement income of two-thirds of your final salary, other pension analysts suggest that around half your final salary is sufficient.
Much will depend on your outgoings when you retire. Most assumptions are based on having paid off your mortgage by the time you retire and that your children have left home. If this is not the case it will increase the amount of money you need.
How can you get it?
There are different ways of investing for retirement and we will look at these in detail.
The most obvious source of retirement income is the state pension. As noted above, the age at which you can claim this is going up from 65 to 67 and for women it has already gone up from 60 to 65 and will rise again to 67. A new single-tier state pension is being introduced to try and make the state pension system easier to understand.
To qualify for the full amount of the new single-tier state pension, you need to have 35 years of national insurance contributions. If you have not made this level of contributions the amount you will receive will be a pro-rata payment based on the number of years of contributions you have made.
The new single tier pension is being introduced in 2016 and will be worth £144 a week or £7,488 a year.
Up until 2016, 30 years qualifying contributions are required to receive the current basic state pension of £110 a week.
Carry on working
Many people will have to carry on working, at least part-time to get the income they need for later years. This can be a positive move for many people who want to maintain an active life, meet new people or branch out into becoming self-employed and using the skills they have learnt over a lifetime of working.
The National Employment Savings Trust has been introduced alongside auto-enrolment. The scheme has been criticised for its complex charging structure, low contribution limits and not allowing small pension pots to be transferred into an auto-enrolment scheme.
However, in July 2013, the government published its response over the issue of whether restrictions to the NEST scheme were discouraging take up of the scheme.
In particular contribution limits and transfer restrictions were thought to be stopping the new pension system from serving its target market.
The government has decided to lift the annual contribution limit of £4,500 from 2017 when the minimum contributions will be raised to eight per cent of an employees’ salary.
Steve Webb Minister for Pensions said: “I am not making any changes until 2017, when automatic enrolment is fully rolled-out. At this point I will lift the contribution limit so that NEST remains a force for good in the marketplace, driving up standards and best practice.
“The position on bulk transfers is much the same. As huge numbers of employers gear-up to start to enrol their workers, we need NEST to focus on getting these people in to pension saving. Once this is achieved and the market is established, the restrictions on bulk transfers will be lifted.”
Company pension and auto enrolment
The days of final salary pension schemes are coming to an end as employers realise that with employees living much longer, these are unsustainable.
The same reason is behind the move to force public sector employees to contribute more to their pensions.
This is one of the main reasons for the introduction of auto-enrolment, which will be gradually phased in over the next four years.
It obligates all but the smallest firms to provide a company pension. It is not mandatory for employees to join one but does give incentives.
At the start of the scheme the minimum contribution from employees is two per cent of their salary and employers must contribute a minimum of one per cent. This rises gradually over the next few years to a total minimum contribution of eight per cent, of which three per cent must come from an employer.
Employees and employers can pay more than the minimum level but these limits are designed to set a foundation for building the savings habit.
However, there are still generous company pension schemes around but most of them are defined contribution schemes. These invest funds in stocks and shares and other assets and provide less of a certain level of income for your retirement.
They can be beneficial, especially if you invest in one from early in your working life because you benefit from compound interest and the fact that your money has longer to make a decent return.
If you are lucky enough to work for a company that will match your pension contributions up to a certain level, then it is a really good idea to take advantage of it. Some employers will pay up to five per cent of your salary as long as you match that contribution. You will also benefit by a further 20 per cent due to the tax-free status of pension contributions.
Many company and private pension schemes invest in stocks, shares, bonds and other assets. In your 20’s and 30’s you could construct a slightly riskier portfolio because the assets you invest in have time to grow and if they suffer from poor performance it does not immediately affect your retirement income.
As you approach your retirement it is important to choose a lower risk investment portfolio so that weak performance does not reduce your retirement savings when there is little time to get back any losses before you decide to liquidate your pension to support you in your retirement by purchasing an annuity or other form of income.
If you are self-employed then a private pension can work in a similar way to a company pension, except you lack the employer contribution. You still benefit from tax relief though and it can be a tax efficient way to minimise the tax burden on your business legally and save for your retirement.
Purchasing an annuity
An annuity is the most common form of funding retirement. It involves buying an income for life with your pension fund.
However, for a number of reasons including increased life expectancy and the impact of quantitative easing on gilt yields, annuity rates have fallen.
If you do choose to buy an annuity, it is vital to scour the overall market using the Open Market Option (OMO) rather than accepting the default annuity choice from your company or private pension provider.
There are other alternative ways to save for retirement. You could use a cash ISA or an investment ISA, again the proceeds of which are tax-free, or you could set up a stocks and shares portfolio and invest your money in the markets. However, this can be a risky strategy, especially as you near retirement age.
Property is another possible investment type, though once again you need to be able to get access to your funds and still have somewhere to live. This is why buy-to-let investments are increasingly popular.
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