Bridging the great pensions gap

No state income until the age of 66? It's time to take a personal interest in retirement planning, say Chiara Cavaglieri and Julian Knight

If the Conservatives win the election, we're all going to have to wait longer for our state pensions. Under Tory plans, from 2016, men will have to wait an extra year for their state pension, with the pensionable age rising from 65 to 66.

As things stand, the state pension age for women is already scheduled to rise in stages from 60 to 65 by 2020, and the present government plans to increase the pensionable age for both sexes to 68 by 2046.

These changes only emphasise the fact that for many people there will be an ever-increasing gap to fill between actual retirement and state pension age. With the state seemingly unable to provide for Briton's retirees, a problem set to become more severe with increased life expectancy, what tactics can be used to fill the void?

Delaying retirement and working longer is the obvious answer, but this isn't always viable or popular, so the solution for most of us will be to take retirement provisions firmly into our own hands. "The gap between the age at which we want to stop work, and the date from which the state will turn on the pension tap will need to be bridged somehow, and it is in everyone's interests to sort out how they will do it," says Joss Harwood, from independent financial adviser (IFA) Eldon Financial Planning.

If your employer offers a money-purchase, or final-salary scheme, make sure you opt in, particularly if it has a matched-contribution element in which the employer matches, up to a set level, every pound you pay in. Above all, it's important to take a more active interest in your retirement planning. If you have personal or company pensions keep an eye on them and review the investment performance regularly. It may be prudent to include a "lifestyle" option, which automatically switches your money out of risky shares and into safer investments such as cash and bonds as you near retirement.

If your employer does not offer a pension scheme, or you're self-employed, arrange one yourself. You receive tax relief on your contributions, increasing the money you put in by an amount equivalent to basic-rate tax, or 40 per cent if you're a higher-rate taxpayer. Stakeholder pensions are also an option because they must meet a number of minimum standards, including a limit on annual management charges of 1.5 per cent of your pension fund for the first 10 years, then up to 1 per cent thereafter. You can also switch to a different pension provider without charge, and contributions can start from £20, with no penalty fees for stopping or changing your payments.

Or, you can take a more hands-on approach with a self-invested personal pension (Sipp), but these aren't for everyone. Sipps are essentially flexible, do-it-yourself pensions with a wide range of investment choices, including the more straightforward options such as cash and government bonds, or more complicated investments such as individual shares, funds and commodities. "Contrary to popular belief," says Danny Cox of IFA Hargreaves Lansdown, "Sipps are not just for the mega rich." With a standard personal pension scheme, the provider chooses which funds to invest your contributions in, whereas a Sipp allows you to choose. However, with this flexibility come higher charges.

When you get into your sixties, if you have lots of little pension pots from previous employers, consolidating them is usually a good idea as many insurance firms won't offer competitive annuities to people with a pot of less than £10,000. However, another option is to take the pensions as individual lump sums. If those pots total less than 1 per cent of the standard lifetime allowance, currently £1.75m, it can all be taken as cash. So if you end up retiring with a pension pot worth less than £17,500, 25 per cent can be withdrawn tax-free, with 75 per cent liable for income tax.

Pensions aside, Individual Savings Accounts (ISAs) will play an important role for retirees. Like pensions, ISAs offer generous tax breaks and after changes came into play on 6 October, the over 50s can now shield up to £10,200 from the tax man. For the rest of us that allowance kicks in from the start of the next tax year. Of this, up to half (£5,100) can go into a cash ISA, with the balance available to invest in a stocks and shares ISA.

One of the biggest benefits to an ISA is that you can withdraw money from them more easily than from a pension. From next April, the minimum age at which you can get pension benefits will rise to 55 and you must use your pension pot to take out an annuity before you reach 75. With an ISA, you choose how and when to use the money.

Although pensions and ISAs should make up the bulk of your investment portfolio, having a mix of asset classes is crucial. "In an ideal world," says Mr Cox, "people should build income in their retirement from a number of sources: State pensions, employer or private pensions, and investments such as an ISA or even property."