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.