Start saving young – or face a poor old age

It's getting harder than ever to save enough for a comfortable later life, but it's far from impossible. Julian Knight and Chiara Cavaglieri report

Britain used to have a pension system that was the envy of much of the world. But a decade of firms closing their employee final-salary schemes, mis-selling scandals and a multi-billion pound government pensions tax grab has largely put paid to this. Now, there are vast numbers of people who are putting nothing away for their old age.

Insurer Friends Provident said last week, for instance, that over half the people it quizzes admit they are not saving enough for their old age. What's more, 58 per cent say they are "clueless" when it comes to setting up a private pension. The findings coincide with ElderCare Week, organised by Counsel & Care, a national charity for the elderly.

We're all living longer – on average many of us will live the best part of 30 years beyond state pension age. As things stand, the full basic state pension offers only £95.25 a week for a single person and £152.30 a week for a couple. With such meagre fare from the state, it's easy to see how thousands of people a year have no option but to sell their homes to pay for either a more comfortable old age, or, if they become infirm, nursing-home fees. Living longer is a double-edged sword financially, and the key is to prepare for the twin challenges of building up sufficient retirement income while protecting it from the ravages of long-term care costs. So what can you do today to lay the financial foundations for old age?

Early steps: Your 20s and 30s

At this stage, it is difficult to assess the level of income you will need in retirement, but it is still vital to start the savings habit early. "As a rough rule of thumb, to get a reasonable pension, you should save 10 per cent at age 20, 15 per cent at age 30, and so on," says Danny Cox, of independent financial adviser Hargreaves Lansdown.

There is a general misconception that retirement planning means just paying money into a pension, but having other savings vehicles is equally important, to diversify risk. A range of savings plans as part of a larger retirement portfolio is the safest way to save, and Individual Savings Accounts are particularly important, because of their tax efficiency.

Make sure to take advantage of any pensions contributions offered by your employer. "If your employer offers a pension scheme with a contribution, bite their hand off to become a member. So many younger people throw away this effectively free money by not taking an interest in their pension," says Martin Bamford, from advisers Informed Choice.

With retirement a long way off, you can consider taking on riskier investments. "Given the amount of time before you are able to retire you can afford to adopt a fairly risky approach to investment – up to 80 per cent in shares – since this will increase the returns which you can expect over time," says Christopher Wicks from IFA N-Trust. And, beyond all this, managing debts and controlling your budget should still be a major focus.

Middle age: Consolidation time

Your forties mark the need to start some serious planning. The first thing is to estimate the annual income you'll need when you retire. Consider your mortgage, marital status and whether you have, or plan to have, any dependents. Crucially, inflation and tax will have to be taken into account. The Financial Services Authority has useful annuity comparison tables which you can use to work out how much of a pot you'll need to secure the right income. Annuity rates do change, though, so it's a good idea to recalculate and amend your target every year.

With a final figure in mind, you can work out how much you need to save each month to hit that target. "Pensions should feature somewhere in your plan. Tax relief means that a £1,000 contribution costs a basic-rate or non-tax payer just £800 and a higher rate tax payer £600," says Mr Cox.

Anyone relying on their property as a substitute for a pension scheme is taking a risk. You may bank on the fact that equity can be released from your property to provide an income in retirement or pay for care fees should that be necessary, but the recent property market crash shows just how dangerous this assumption can be.

Nearing the finishing line: Your 50s and 60s

Now you need to decide how you plan to draw benefits. If you wish to take out an annuity, a relatively modest approach to risk is advisable. "In the last five years, you may want to consider reducing the risk exposure of your pension funds so that by the time you reach your retirement age none of your funds are in equities," says Mr Wicks.

Many people still make the mistake of buying their annuity from their pension provider, which will typically offer poorer rates than elsewhere in the market. Shop around. Also, you may have a medical condition which qualifies you for an impaired life annuity, guaranteeing a higher income.

As retirement nears, falling ill can undo years of hard work, so cover yourself. A waiver of premium – a policy attached to a personal pension – takes over pension payments if you fall ill. As for long-term care – which an estimated one in five of us will need – there are pre-funded insurance policies and even special annuities which will pay tax-free income to the care provider.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
News
peopleChildren leave in tears as Santa is caught smoking and drinking
Arts and Entertainment
A host of big name acts recorded 'Do They Know It's Christmas?' in London on Saturday
musicCharity single tops chart
Arts and Entertainment
Steve Backshall has become the eighth celebrity to leave Strictly Come Dancing
tv
News
people
PROMOTED VIDEO
Arts and Entertainment
tvStrictly presenter returns to screens after Halloween accident
News
peopleFormer civil rights activist who was jailed for smoking crack cocaine has died aged 78
News
i100
News
Boxing promoter Kellie Maloney, formerly known as Frank Maloney, entered the 2014 Celebrity Big Brother house
people
Sport
Dwight Gayle (left) celebrates making it 1-1 with Crystal Palace captain Mile Jedinak
premier leagueReds falter to humbling defeat
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

    Reach Volunteering: Charity Treasurer

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

    SThree: Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

    Ampersand Consulting LLP: Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

    Kenyans still waiting for justice over Mau Mau uprising

    Thousands join class action over Britain's role in the emergency
    Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

    The last Christians in Iraq

    After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
    Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Britain braced for Black Friday
    Bill Cosby's persona goes from America's dad to date-rape drugs

    From America's dad to date-rape drugs

    Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
    Clare Balding: 'Women's sport is kicking off at last'

    Clare Balding: 'Women's sport is kicking off at last'

    As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
    Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

    Oh come, all ye multi-faithful

    The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
    Dr Charles Heatley: The GP off to do battle in the war against Ebola

    The GP off to do battle in the war against Ebola

    Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
    Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

    Flogging vlogging

    First video bloggers conquered YouTube. Now they want us to buy their books
    Saturday Night Live vs The Daily Show: US channels wage comedy star wars

    Saturday Night Live vs The Daily Show

    US channels wage comedy star wars
    When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

    When is a wine made in Piedmont not a Piemonte wine?

    When EU rules make Italian vineyards invisible
    Look what's mushrooming now! Meat-free recipes and food scandals help one growing sector

    Look what's mushrooming now!

    Meat-free recipes and food scandals help one growing sector
    Neil Findlay is more a pink shrimp than a red firebrand

    More a pink shrimp than a red firebrand

    The vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
    Bill Granger recipes: Tenderstem broccoli omelette; Fried eggs with Mexican-style tomato and chilli sauce; Pan-fried cavolo nero with soft-boiled egg

    Oeuf quake

    Bill Granger's cracking egg recipes
    Terry Venables: Wayne Rooney is roaring again and the world knows that England are back

    Terry Venables column

    Wayne Rooney is roaring again and the world knows that England are back
    Michael Calvin: Abject leadership is allowing football’s age-old sores to fester

    Abject leadership is allowing football’s age-old sores to fester

    Those at the top are allowing the same issues to go unchallenged, says Michael Calvin