Help - I haven't got a pension!

by Alison Hunt on 27 October 2011  |  10 comments
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So you haven't even thought about saving for retirement? Don't panic - here are some easy ways to start.

According to a recent survey carried out by Prudential, 35% of working age British adults have stopped making pension contributions.

Indeed, with the cost of living increasing rapidly and unemployment on the rise, most of us are finding it harder to get by, let alone find enough money to stash away for the future.

But planning to have an income when we have retired is vital. And when you take into account the miracle of compound interest, you realise saving even a little each month over a long period of time can reap a healthy retirement income.

So what should you do if you haven’t started saving for retirement at all?

Rule of thumb

Well it’s often said that you should be stashing away the same percentage of income as half your age. So a 36-year-old would be saving 18% of their salary.

Back in the real world, work out your budget and decide how much you can realistically stash away after covering bills and outgoings – £25 per month, £100, £300 or more?

Now, where should you save it? Here are just a few ideas for your retirement plan – in this article we will look at good old pensions.

1. Basic State Pension

The good news is most of us will be entitled to the Basic State Pension (and possibly additional State pension) – hurrah! The bad news is, it won’t be much (the full pension is currently just over £100 a week).

You’ll also need to fulfil a few requirements to claim the full pension. Men born before 6 April 1945 will need 44 so-called qualifying years of National Insurance contributions – and 30 if born after. Women born before 6 April 1950 require 39 years, and 30 years if born after. You can find out more here.

And how much will you receive? Plug your details into this State Pension forecaster and find out.

 2.Your employer

Assuming you’ve discovered your Basic State Pension will just about cover the cost of tea bags and baked beans, it’s time to look at boosting your retirement income.

And while you could take out a personal pension, your employer could offer a far more lucrative option.

Most companies offer some sort of pension scheme, be it a lesser-spotted final salary pension or a defined contribution scheme. And many will match, or even better what you put in – that’s free money!

And the benefit of a pension, of course is that you can’t fritter away the cash until you’ve retired.

Tax

But as Mr Franklin once said, “Nothing can be said to be certain, except death and taxes”.

Pensions certainly give us tax relief as we save, but be aware that come retirement we can usually take just 25% of that pension pot, tax-free.

The rest may be handed over to an insurance company to buy an annuity, or used for income drawdown in order to provide us with an income for life, which will be taxed according to our total income.

3. NEST

But what if your employer doesn’t offer a pension scheme? Well, you may just find things are about to change.

From October 2012, employers will be obliged to auto-enrol eligible staff onto a qualifying pension scheme. If they don’t have one, they can use the new, National Employment Savings Trust (NEST). And the best bit is, your employer will have to contribute, too.

So if you earn, say, £1k per month and pay 3% (£30) each month into your pension, your employer will have to match it (up to a certain point). And of course, you’ll get tax relief, too.

4. Existing pensions

Finally, it’s not unusual these days to move job every few years. But how many of us in doing so, have inadvertently left behind our contributions in a company pension scheme or two?

Fortunately, the Pension Tracing Service has access to the information for 20k company and personal pensions schemes – making it a great resource to help you search for the new contact details for any old schemes you’ve lost track of.

So there you have it, how you could use pensions to save for your retirement.

Positives: You can’t fritter your savings away, there are some tax advantages and your employer may give you extra money to add to your pot.

Negatives: Pensions can be very inflexible, your money is tied up until you retire and you may not get much say in where your cash is invested.

Next week, we will look at using ISAs and property to save for retirement.

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