Save, save, save if you're dreaming of an early retirement

You could still be a middle-aged pensioner - if you're prudent well in advance, says Jenne Mannion

Two-thirds of people aged 20-34 expect to retire early, Adair Turner's report Pensions: Challenges and Choices revealed this week. But most financial experts believe that unless they stumble across some miracle of riches, this ambition is unlikely to be fulfilled. Perhaps the persistence of this pipe dream is a legacy of the 1980s and early 1990s, when it was commonplace for employers to effectively dip into the firm's pension pot to offer an early retirement to some employees. At the time, pension funds enjoyed a healthy surplus; and, indeed, offered employers an easy way to restructure workforces and offer an enhanced early retirement to staff, often in their fifties.

Two-thirds of people aged 20-34 expect to retire early, Adair Turner's report Pensions: Challenges and Choices revealed this week. But most financial experts believe that unless they stumble across some miracle of riches, this ambition is unlikely to be fulfilled. Perhaps the persistence of this pipe dream is a legacy of the 1980s and early 1990s, when it was commonplace for employers to effectively dip into the firm's pension pot to offer an early retirement to some employees. At the time, pension funds enjoyed a healthy surplus; and, indeed, offered employers an easy way to restructure workforces and offer an enhanced early retirement to staff, often in their fifties.

Tom McPhail, a pensions specialist at Hargreaves Lansdownin Bristol, says: "To believe you can retire early nowadays is a fool's paradise.If you finish university and get a job at the age of 25, you would have worked for 30 years by the time you reach 55 and you will quite possibly live a further 30 years. Retiring at 55 means you need to fund one year of retirement with every one year worked, which is quite unrealistic amid current conditions. Some people may be able to retire early, having made a lot of money on property, or due to an inheritance, but this is the exception rather than the rule."

Adrian Shandley, an independent financial adviser at Premier Wealth Management, based in Southport, is more confident that an early retirement is within reach. While he agrees there are not enough people saving for their retirement, he says the alarming figures often quoted are skewed.

"The figures relate to saving into dedicated pension plans. Many people save for their old age via Isas, collective investment vehicles, bank accounts and property. These people may not be saving through a pension plan, but they are certainly making provisions and, for them, an early retirement is not necessarily a delusion," he says.

Some experts also express caution about relying on property investment to fund a retirement income. Mitch Hopkinson, an independent financial adviser at M2 Financial, based in Nottingham, points to the slowdown in property price inflation. "Some people have recently bought buy-to-let properties in the expectation that this will provide them with an income in retirement. If interest rates rise to the point where it is difficult to meet mortgage payments, or there is a setback in property prices, or tenants are difficult to find, then that income may not come to fruition" he warns.

The Turner report highlighted a lack of savings as one of the key reasons for the pensions time bomb, revealing a £57bn gap between how much people are saving and how much they need to save to ensure a comfortable retirement. However, there are several other reasons why the prospect of an early retirement has become more difficult.

Certainly the fall in annuity rates has been a key contributor. In 1990, a £100,000 pension pot would have bought a retiree an annual income of £15,000 for the rest of their life. At current rates, the same £100,000 fund would buy an annual income of just £7,000. The carnage in equity markets since early 2000 has also damaged the pension pots of defined contribution or money purchase schemes.

Richard Meek, of Punter Southall Financial Management, says it is vital to make the most of all the long-term saving opportunities available from the earliest age possible. "Accept that there are no magic tricks - the more you save, the more likely you are to be able to retire early," he says.

He recommends that if there is an employer's pension scheme, you should join it to get the company contribution as soon as possible. And if there isn't, consider starting your own personal pension, he says. But also look at using other tax advantages and savings allowances such as Isas.

'Discipline and regular savings mean I can retire in five years'

Paul Graham-Clarke, 48, is one of the lucky few who can see his dream of an early retirement coming to fruition in the next five years.

A well paid job in the City for the past 24 years meant he was able to save regularly, plus he was disciplined enough to use every bonus for the past 12 years to top up his Self Invested Personal Pension, held through James Hay. Paul made his first contribution to his pension in 1978.

Even redundancy in 2003 did not derail his plans. Rather, he seized the opportunity to change his lifestyle and worked on a building site for nine months unpaid to gain experience, as well as completing a Corgi gas/ plumbing qualification.

Paul has since returned to the City consulting part-time for Currency Insight Ltd, a hedge fund. His Sipp Funds include Fidelity Special Situations and Artemis UK Smaller Companies, to name just a few. Most recently he added a derivatives-linked structured product by Premier Fund Managers.

Paul, who lives in Godalming, Surrey with his wife, has a 20-year-old son at university and 16-year-old daughter doing her A levels. He expects to retire happily and comfortably when this financial commitment draws to a close over the next five years.