Putting aside a little something

Whether you have a private or a state pension, you still need to top it up to ensure a comfortable retirement.

From next month, the basic state retirement pension goes up to pounds 66.75 a week for a single person. As the benefit increases in line with prices, while working people's income generally goes up in line with average earnings, the extra pounds 2.05 a week that single pensioners will be enjoying will not go very far. The basic state pension is fast falling behind general incomes.

In fact, anyone who has only the state pension for income will also get an extra payment to bring their income up to the new Minimum Income Guarantee level. Even so, an extra pounds 7 a week is hardly a fortune.

For the current working generation there are two key lessons. One is never to rely on the state for your retirement income. The other is that it is never too early or too late to start planning.

For many people, the dream position is to be able to afford to retire at 50, the lowest age generally allowed. The reality is likely to be very different. Unless you already have a pension fund, you and your employer need to be saving at least 10 per cent of your income through a pension, more if you are over 25.

Since annuity rates have fallen sharply since the table was drawn up, the figures represent a minimum rather than an ideal level of funding.

Getting enough income in retirement is very much an exercise in building, and the starting point is your employer. The general rule is that if you have the opportunity to join your employer's pension scheme, do so. Many will pay 1/80 or 1/60 of your final income as pension for each year of service. That means that if you join at 40 and plan to retire at 60, even a good scheme is likely to pay only 20/60 of your final salary as pension, less if you take part of it as a tax-free lump sum.

The good news is that many employer schemes allow you to pay more through what is known as an additional voluntary contribution or AVC. The Revenue's rules allow you to count taxable extras such as company cars and medical insurance as salary too, so the amount you may be able to invest this way can be quite appreciable. You will benefit too, from getting tax relief on every pound you save, regardless of what type of pension scheme you have, and at your highest rate of tax.

An alternative to an AVC is a FSAVC or free standing AVC. This is a separate scheme set up by you, paying money to an insurance company. Watch out, though, as such plans can have high costs.

If you are not in a company scheme or are self-employed, you can have a personal pension. This enables you to invest up to 17.5 per cent of your income if you are under 35, rising to up to 40 per cent of your income if you are between 61 and 74.

If you run a company or your company wants to set up a small scheme for you, perhaps with other employees, an executive pension allows much more to be invested, but restricts how much you can take out at retirement.

Pension planning can be extremely complex, especially if you are looking to exploit every loophole to invest as much as possible. For most people, though, it is more a question of how much you can afford to save each month.

One tip is to save as much as you can comfortably afford, then top your fund up from any annual bonus, overtime or windfall. Ask yourself too, what your likely spending will be during retirement.

If your spending will be low, your mortgage paid off and you travel little, you might be better off spending more today, comfortable in the knowledge that your pension will still provide enough for you to live on. If your spending will be high then, unless you sell off assets, you should look to save as much as you can afford.

As retirement is increasingly viewed as an opportunity to do the things you did not have time to do while at work, saving for retirement can mean more than just a good pension. For example, money built up in your PEPs, Tessas and other savings can all be used to boost your retirement income.

Until recently it made sense to buy an annuity on retirement to generate a guaranteed income, but recent falls in annuity rates, reflecting falling long-term interest rates generally, mean that you may be better off continuing to build up capital for as long as possible.

Your pension is likely to be one of the biggest investments you will make in your lifetime. Getting it right means taking advantage of all the tax loopholes you can, planning early and keeping your investment under review at least every year. Even if you have left it late, it still makes sense to start saving now.

Only if you have actually retired will it really be too late. The longer you wait to start, however, the less your pension will be or the more you will have to save. The Revenue allows someone aged 59 to save more than 10 times their salary if they plan to retire at 60. That would require a generous employer, but it shows too that it is never too late to start thinking about retirement planning.

Unless you have the necessary detailed knowledge required, use an independent financial adviser to advise you. You may have to pay for the service, but that is likely to be cheaper in the long run than them being paid by commission from your policy provider. Expect to pay around pounds 120 an hour or more and make sure that the basis of payment is agreed in writing up-front. Their help can be valuable, too, when it comes to evaluating all the options when it comes to retiring.

Andy Couchman is publishing editor of `HealthCare Insurance Report'

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