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.
Independent Partners: Get your free guide on the Top 10 tips for retirement
Debt in Britain: Numbers seeking help on how to cope with mounting bills goes up by more than half in three years
General election 2015: David Cameron's promise brings uncertainty to investors
Bargain Hunter: BT improves its mobile reception with 'incredibly competitive' deals
Have a happy new financial year
Simon Read: 'It went below the radar but you could be eligible for a tax break on your savings'
- 1 Replica Back to the Future Hoverboard released
- 2 Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
- 3 Tidal: Jay Z's Spotify rival streaming service criticised for making wealthy artists even richer
- 4 Brixton squat flats now costing up to £3k per month show how out of control rent is in London
- 5 A new (old) cure for MRSA? Revolting recipe from the Dark Ages may be key to defeat infection
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
Street preacher quoting from the Bible fined for calling homosexuality an 'abomination'
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
The West has it totally wrong on Lee Kuan Yew
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
iJobs Money & Business
£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...
£45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...
Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...
Day In a Page
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000