Don't panic, just step up your savings

The Turner report painted a bleak picture for pensions, writes Sam Dunn, but the shock may jolt us into putting more aside
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It seemed the end of the world was nigh last week as Britons faced up to the news of a grave threat to their retirement plans.

The torrent of doom-laden statistics that flowed from Adair Turner's report, Pensions: Challenges and Choices, on Tuesday will have prompted many workers to ask themselves, possibly for the first time, if they are saving enough for their old age.

"Anybody who didn't know there was a crisis on its way does now," says Tom McPhail of independent financial adviser Hargreaves Lansdown.

But the angst is nothing new to the financial services industry, says Steve Bee, the head of pensions at insurer Scottish Life. "The real shock will be for consumers: people will be depressed, disappointed and confused."

The figures produced by Mr Turner, the chairman of the Government-backed Pensions Commission and a former director-general of the Confederation of British Industry, were breathtaking - notably, the finding that 12 million people aged over 25, half the working population, are not saving enough for their retirement.

At the heart of the problem, the report says, are greater life expectancy and lower birth rates: by 2050, the proportion of British people over the age of 65 will increase from 28 per cent now to 48 per cent. At this point, fewer taxpayers will be supporting a huge retired population.

Faced with this problem, we will be forced to make one of three hard choices: either we save more, work longer or pay more tax for greater state pension support. The fourth alternative, the report points out is that, as pensioners, we simply become poorer.

Mr Turner's report was just the first part of a review by the Pensions Commission, which has the brief of finding a solution to the pensions crisis. Unfortunately, the cloud of uncertainty will linger for at least another nine or 10 months until he reports back with a set of recommendations next autumn.

Many in the industry believe that, rather than a single clarion- call, his conclusion will be that we need a mix of a higher statutory retirement age, better incentives to save and greater taxation.

Compulsion, a radical alternative forcing workers to save for their old age, is mooted in the report. But this system is already up and running in Australia, and Mr Turner points out that household savings actually fell after its introduction.

Once Mr Turner has made his recommendations, it will probably take at least another three years - it could even be as late as 2010 - before any course of action is shaped into law, says Mr Bee. This makes a mockery of the current Pensions Bill heading for Royal Assent on 18 November, he adds.

"Nothing that Mr Turner talks about is included in the [current] legislation - and it's too late now to change anything."

That may be the case but it is the long term that really counts, says Mr McPhail - and this was given a huge boost by the thoroughness of the report.

"People's expectations have changed and that means some will start to address the problem. So when Turner comes back in a year, people will be better prepared for him."

So what to do in the meantime?

While the report will have jolted many out of their financial stupor, they might also think that with the financial services industry in a state of flux, this is no time to be giving pension firms their money. But as Mr Bee points out, it's better to put money aside than not to. "Don't stop saving because you're waiting for the next stage next summer."

He suggests you review your current pension savings using the following benchmark.

If you're in a money purchase scheme, where you amass a pot of cash to buy an annuity - an income for life - during your working lifetime, you'll need to target a significant sum.

"As a rule of thumb, you'll need to save £15,000 for every £1,000 [a year] you get in retirement, although it used to be the case that for every £1,000 a year you would get in retirement, you had to save £10,000."

This means that, for an annual £10,000 in retirement (which is still taxed for income), you'll need to save £150,000 in a pot.

"Any saving now will be a better option than to sit still and wait until the recommendations next year," says Mr Bee.

Although Mr Turner's report underlines how effective a pension income is, don't forget to consider other sources of retirement income, adds Mr McPhail. "Equity release [freeing up some cash from the rising value of your property] is going to become popular, and there are also individual savings accounts and venture capital trusts to consider."

Each has a different risk and so it's worth assessing each before you go ahead and save.

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