A leisurely retirement?

Published: Monday, 21 September 2009, 12:58PM

Planning on a leisurely retirement? Have you ever thought through how much money you’ll need to save into a pension to make it a reality?

If you haven’t – this could be the most important programme you will ever watch.

As you will no doubt have noticed there’s a crisis. Not only do nine million of us have no pension provision apart from the state, but those that do have personal pensions that are linked to the stock market have seen 25% of their value wiped off the scheme since the start of the credit crunch.

To examine what you could do next, we’ve brought three families together who are concerned about their pension plans.

Pension experts Ros Altmann and Tom McPhail find out what their future holds for them financially and offer advice.

Frequently Asked Questions: Answered by Tom McPhail of Hargreaves Lansdown

I know I need to save for retirement but I don’t know where to start?

Be methodical. Break the task down and then deal with it one stage at a time. Firstly contact the Department for Work and Pensions (DWP) to obtain a forecast of your state pension benefits. You can do this at www.thepensionservice.gov.uk.
If your employer offers a pension then it almost certainly makes sense to join it. Any contributions that they make to the scheme are in effect free money, so take it.

How much do I need to pay into a pension?

Most people aren’t putting enough aside to provide them with the kind of income they are likely to want in later life. As a brief illustration of the costs, suppose you wanted to buy yourself an income of £10,000 a year in retirement, payable from age 65. If you started saving when you were 20, then you would have to pay around £200 per month. If you left it until you were 30, then the cost would rise to around £300 per month; leave it until you are 40 and the cost rises to £500 per month and if you don’t get started until you are 50 then the cost will be around £1,000 per month. You can work out how much you should be saving by using an online calculator such as this one at http://www.h-l.co.uk/calculator

How should I invest my pension savings?

The simple answer is to invest to a level at which you feel comfortable. You can make very straightforward choices if you want, for example by investing in a broad-based managed fund or into a lifestyle fund (one which becomes progressively less risky as you approach retirement) through a Stakeholder pension. These solutions are unlikely ever to be the best answer but they are also unlikely to end in disaster. If you want to be more engaged with your savings, then you could use a low cost Sipp as a way of making more active investment decisions.

Should I worry about my pension going bust?

Probably not. Most final salary pension schemes will pay out the promised benefits to their members. As long as the employer is still solvent and trading then even if the pension scheme is in deficit (as many are at present), you don’t need to worry. The only time you may have a problem is if the employer goes bust and the pension scheme is in deficit. If this happens then there would no longer be any source of new contributions and so the scheme could then have a problem paying out all the pensions promised to the members. At this point the Pension Protection Fund would step in. This is a safety net scheme designed to help out people in exactly this kind of situation. You can find out more information about the PPF here www.pensionprotectionfund.org.uk

What happens to my pension fund at retirement?

If you are in a final salary pension scheme then your income will be paid out automatically. If you have a money purchase pension such as a Personal Pension or a Sipp, then you will have to decide how to take your income. You have a range of choices including buying a lifetime annuity, or a temporary annuity (allowing you to revisit your decision in a few years), or to keep your fund invested and draw an income from it. You’ll need to decide whether you want to provide for your spouse in the event that you die before them and whether you want to build in any inflation proofing. This shopping around process is absolutely vital as it can increase your retirement income by as much as 20%. Remember, you don’t have to take your income from the company with whom you have built up your savings; you have a legal right to transfer to another pension company if it means you can get a better income.

• The above advice is general guidance and that people should always seek independent financial advice

Useful Links

The Pensions Advisory Service (Tpas)
http://www.pensionsadvisoryservice.org.uk/

The Pensions Ombudsman
http://www.pensions-ombudsman.org.uk/

Department for Work and Pensions
http://www.dwp.gov.uk/

Age Concern
http://www.ageconcern.org.uk/

National Pensioners Convention (NPC)
http://www.npcuk.org/

Pension Action Group
http://www.pensionstheft.org/

National Association of Pension Funds (NAPF)
http://www.napf.co.uk/

Hargreaves Lansdown
http://www.h-l.co.uk/