The Importance Of Providing For Your Retirement

23Sep11

With over one third of UK adults having made no provision for their retirement, here we examine the importance of making pension provision, from how little the state provides, to examples of the contributions you might have to make, to an outline of the various options open to you.

 Around 38 per cent of the UK adult population has no private pension provision. (Source: Barings Asset Management). Many do not realise how little the basic state pension provides – £102.15 per week as of 2011 – and more still do not realise the importance of starting pension provision early. Based on UK average earnings of £25,000 p.a., an employee commencing personal pension contributions at age 20 would need to contribute around £250 per month to achieve a retirement income of two thirds of current salary, based on a retirement age of 65. If the employee waited until age 30 to commence pension provision, the required contribution would increase to £420 per month. (Source: Pension Calculator on moneyadviceservice.org.uk) These figures also do not account for the fact that your salary is likely to increase over your working life. As a 20 year old, your retirement may seem a long way off, but the benefits of starting pension provision as soon as you are in employment are clear.

Two thirds of your salary immediately prior to retirement is generally regarded as the income required to have a good standard of living in your older years. Many look forward to retirement as ‘the longest holiday of their life’ where they can indulge in hobbies and leisure pursuits much more frequently than previously. This can only be achieved though if you have your own private pension arrangements to supplement the state’s provision. Consider also that your household expenses, such as utility bills, are likely to increase in retirement as you may be at home during the day more often than you were when in employment.

The Government is currently planning to raise the state retirement age, currently 65, to 66 in 2020, to 67 between 2034 and 2036 and to 68 between 2044 and 2046, although many predict this timetable will be shortened in future years.

Personal pensions do not offer any access to the funds saved until at least age 55, but they have one huge advantage over other savings vehicles in that contributions are made net of basic rate tax. This tax rate is currently 20%, meaning that for every 80p contributed to a pension plan, the Government adds a further 20p. Higher rate taxpayers are entitled to claim additional tax relief via their tax return, but it has been suggested that as many as 300,000 people are not doing this.

Your first port of call should be to explore the pension options provided by your employer. If you are very fortunate, your employer will offer a final salary scheme, also known as a defined benefit scheme, but it is more likely that they will offer a money purchase scheme, also known as a defined contribution scheme; or a group personal pension plan; or a stakeholder pension. If your employer contributes in any way to one of these arrangements, you should strongly consider joining, although it will never be compulsory and you are always free to make your own arrangements.

It may be that you have reservations about he terms and conditions of any pension available to you. It also may be that, though you are in employment, the temporary nature of your contract means that you are not eligible for a scheme until you are made permanent. In this type of scenario it may make sense to look into the options around  regular savings accounts in order to make sure you are not missing the opportunity to make a little hay while the sun is shining.

As of late 2011, if you work for a company with less than five employees, the company is not obliged to provide a pension scheme, and no employer is obliged to contribute to the scheme it offers. In these circumstances, you will have to make your own arrangements via a personal pension or stakeholder pension plan or other arrangement.

From 2012, all employers will be obliged to contribute to a pension arrangement on behalf of their employees, and the Government will introduce the National Employment Savings Trust (NEST) in 2012 as an additional method for employers to meet this obligation.

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