Pensions - think small for a big return

How much money do you waste every month?

Are future years of well funded, financially comfortable retirement being sacrificed so that you can live life in today's fast lane? Are you, to put it bluntly, p***ing all your current income against the wall without a thought as to what you might live on when paid work ceases to be an option?

The current economic climate, if achieving nothing else, has focused minds on the value of money; you can't live on air, money is needed to pay bills and always will be. This is not the time for a George Best moment, he who admitted that most of his accumulated wealth went on women and fast cars while the rest he just squandered. "What wealth do I have to squander?" you may cry. Fat chance of putting money aside for the sunshine years of retirement, given today's cost of living.

True, millions of Britons are in a severe financial squeeze brought about by higher mortgage rates, food and energy costs, and declining property values. Memories of carefree spending have faded for a lot of us. Now, more than ever it is time to be a canny saver. Extravagance needs to be curtailed in order to not only meet increased household expenses but also with an eye on boosting future financial well-being.

The process is called financial planning and should be undertaken in a calm, detached manner, free of panicked demands for the latest IT gizmo or property embellishment.

How much do you need?

Professional independent financial advisers often say that one of the biggest shocks people experience when they retire is the loss of a decent regular income. The Basic State Pension is a pittance and is available only after you have worked until the statutory retirement age (which, as you may be aware, is receding!). You really need a pension of two thirds your current income to ensure a reasonable level of comfort, particularly if you plan to retire early.

Consider: a pension pot of £100,000 may seem a significant sum but at today's annuity rates it will only convert into an income of some £7,000 per year. Bearing in mind the ravages of inflation on spending power and the fact that many of us (we hope) will live almost as many years in retirement as we worked, then such an annual income doesn't leave much scope for excess.

Do you need unbiased independent financial advice?

According to the Department for Work & Pensions more than 50% of people under the age of 34 have yet to save anything at all towards a retirement pension. Unlike their parents they are less likely to benefit from a company salary and service based pension scheme; even a company's money purchase scheme (now far more common) may be insufficient.

Do it sooner rather than later

The responsibility for funding older age and retired living is basically down to you, regardless of what successive governments may say or promise. And the later you leave it the harder it will be to catch up on lost time. It's been calculated that, on a current income of £50,000 pa, a 30 year-old needs to invest 21.6% of it to realise a pension that will be two thirds of his final salary at age 65; a 50 year-old would have to invest over 45% of the £50,000 to achieve the same result.

If a pension doesn't appeal (despite the upfront tax relief on contributions 20% for basic rate and 40% for higher rate tax payers) because you can't get your hands on the money until age 50 (55 from 2010), then opt for an ISA (Individual Savings Account) instead. Remember, you can save £7,600 a year under a tax-advantaged umbrella via ISAs.

Not all ISAs are the same. Moneyextra is here to help you compare ISAs and find the right one for you.

Younger savers who expect to be higher rate taxpayers later in their careers could find it beneficial to start off by saving in an ISA and then transfer their money into a pension pot when they can obtain the higher tax relief.

29 May 2008 © Moneyextra.com

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