Buck the trend and plan carefully for retirement
Once the envy of the world, the UK's pension system is a shambles, with the average Briton saving only enough for seven years of retirement. How can you redress the balance, asks Esther Shaw
Sunday 24 February 2013
The UK may once have had one of the best-funded pension systems in Europe, but now Britons lag far behind much of the rest of the world when preparing for later life.
Worrying new findings from HSBC show that while the average retirement in the UK is expected to last 19 years, savings will be used up after just seven years. This 12-year shortfall is the worst identified by the study of 15 countries; the UK falls below the US, Australia, Canada, France, China, Brazil and India.
HSBC predicts the situation is likely to worsen as life expectancy rises and people fail to make up the shortfall while they can.
"We know people aren't prepared for retirement – and now we know by just how much," says Christine Foyster from HSBC. "People are living longer, through tougher economic times, but putting off the inevitable, which is the reality of significant cuts to their living standards in their twilight years."
Further findings show a fifth of the UK working population are saving nothing at all for later life, while more than half of those not yet retired would prioritise saving for a holiday over saving for retirement.
So how exactly have we got into such dire straits – and how can we get out of them?
"The best-funded private pension system in Europe became one of the world's worst within a generation largely because of government tinkering," says David Crozier from adviser Navigator Financial Planning. "There have been so many changes to contribution limits, death benefits and how benefits can be taken, it's hard to keep up."
Simon Webster from adviser Fact & Figures says a series of pension scandals, such as Equitable Life, also rocked public confidence. "Relatively poor equity markets, low annuity rates and a multitude of negative headlines have all combined to put people off," he says.
Jason Witcombe from adviser Evolve Financial Planning adds that the demise of final salary and other defined benefit schemes is an "absolute disaster". "These schemes allowed people to get on with their job knowing that at least some of their retirement was taken care of."
One of the stark truths is that workers are very much on their own when it comes to pension saving. "Gone are the days when most people could rely on the state or their employer to provide them with a comfortable retirement," says Patrick Connolly from adviser AWD Chase de Vere. "The biggest challenge is getting people to understand they need to do something."
The key message is the sooner you start saving, the easier it will be to fund the retirement you want. "Invest as much in a pension as you can and make retirement planning part of your budget from the day you start work," says Mr Webster.
As a starting point you should see if your employer provides any pension schemes. Many will make additional contributions to your company pension and allow you to pay into it out of your gross salary, meaning you will pay less tax.
In addition, millions of workers are starting to be joining a workplace pension scheme under auto-enrolment. "But this alone is unlikely to build a substantial enough pot to retire securely," warns Gareth Reynolds from adviser MGS Financial.
For most people, the best approach is combination of pensions and individual savings accounts (ISAs). Pensions provide initial tax relief which give your savings an immediate uplift but are inflexible; ISAs are tax-efficient and allow you access to your money whenever you like.
Whatever age you are there are steps to help prepare for retirement:
In your twenties and thirties
You are likely to be focused on buying a house, getting married, and having children, but you should also give thought to longer-term savings. "You may not be able to afford large contributions but the key is to get started," says Helen Howcroft from adviser Equanimity. "You should save into a variety of places, such as ISAs and pensions."
If you are happy to accept the risks, you can take a fairly aggressive approach to investments, as you will be able to ride out any market volatility.
Forties and fifties
Higher earnings now give scope for increased contributions to longer-term planning. "This is an important time to review how much you are saving – and what you are likely to get in return," says Mr Connolly.
While there will also be short-term priorities such as mortgages and supporting children, these costs should start to reduce.
"At this stage there should be more of a focus on pension investments, but the investment approach should be less aggressive as you can't afford for your holdings to fall significantly in value," adds Mr Connolly.
It is also a good time to seek advice to ensure any existing pension pots are working for you.
You should ensure everything is on track to give the required standard of living post work.
"Investments are likely to be more conservative, to protect what has been accumulated," says Mr Connolly. "There is likely to be a balanced split between pensions and ISAs."
That said, many people will live for decades beyond their retirement date and "should still aim to take some risk to help preserve the real value of their capital and income over time," adds Mr Connolly.
Most people will buy an annuity – a guaranteed income for life. However, annuity rates are at historically low levels, so those with larger pension funds, may want to consider income drawdown, which provides an income while the pot remains invested.
For those buying an annuity, it's vital to shop around for the best rates. From March, a new code of conduct overseen by the Association of British Insurers, will force pension providers to make it clear consumers don't have to accept the annuity they offer.
"Shopping around for an annuity can have the single biggest impact on your pension income," says Karen Barrett from Unbiased.co.uk. "Taking advice is highly advisable."
Also, if you are a smoker or have a condition that could affect your life expectancy you may benefit from an enhanced annuity's better rates.
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