Why should you save for your retirement?

Retirement might still seem like a lifetime away and combined with the pinch of the credit crunch, starting a pension may be the last thing on your mind. But as you could end up spending more than 30 years in retirement, it is more important than ever to make plans to save into a pension, and keep a close eye on how much you’re saving, what investments you are choosing and what level of income in retirement you will get.

Before looking at providing for yourself you should check what your entitlement is for the State Pension and what you may get from any employer schemes you belong to now or have belonged to in the past.

What can you expect from the State

The basic state pension from the government will give you a start, but you can’t rely on it! The current full weekly allowance for a single person is £90.70 and £145.05 for a couple (up until April 2009). This adds up to around £393 a month if you’re on your own. Think about how much you’re earning now. The state pension isn’t much is it?

However, not everyone actually qualifies for a full state pension. It depends on how much National Insurance (NI) you’ve paid during your working life. A woman with a working life of 44 years will need 39 qualifying years of making NI contributions for a full state pension, and a man with a working life of 49 years will need 44 qualifying years.

The good news is that from 2010 the number of years of NI contributions that need to be paid to gain a full state pension will be cut to just 30, for both men and women.

The government has also taken note of how much longer people are living nowadays and will be increasing the state pension age so people will have to work longer before they get their state pension.

Employer pensions are becoming less generous

One more thing to think about on top of the lowly state pension is that pension schemes provided by employers are on the whole becoming less generous. While your parents and grandparents probably benefitted from a final salary pension scheme (also known as a defined benefit scheme) at the companies where they worked, changes in regulation, volatility in investment markets and longevity increases have made it difficult and expensive for employers to continue offering them.

The pension income paid by a final salary scheme is calculated as being a percentage of your salary multiplied by your years of qualifying service. But these pension schemes are now few and far between and the final salary schemes that do exist are rapidly closing to new members.

The type of employers pension scheme that is replacing final salary schemes is called a defined contribution pension scheme (also known as a money purchase scheme).

A defined contribution pension scheme places the responsibility on you, and if applicable, your employer, to pay contributions into the scheme. You can’t rely on the guarantee of knowing what the value of your pension benefits will be as provided by a final salary scheme. You have to choose the funds or assets your pension fund is investing in and you need to ensure that you are paying enough into the scheme to be fairly sure that a sufficient pension will be paid to you when you retire.

17% of people don’t know what pension their employer provides, according to Towers Perrin research, so make sure you’re not one of them!

Ask your employer what pension schemes they offer. If you can join a final salary scheme you may be best served doing so. If you are able to join your employer’s defined contribution pension scheme you need to decide where contributions into the scheme are invested and find out if your employer will pay money into your pension.

It can be daunting if you’re in a pension scheme where the onus falls on you to make the decisions about how to invest the contributions, therefore you should talk to an independent financial adviser to help guide you through your choices.

Remember, turning down employer’s contributions which would be paid into an employer’s occupational pension scheme is akin to turning down a pay rise, so think carefully before you make a rash decision and decide there’s no point in joining.

To find out where you stand in terms of making pension provision, your first step should be obtaining a state pension forecast from the Department of Work and Pensions’ Pension Service by calling 0845 3000 168, and then read on for details of different pension and savings vehicles available to help you plan for your retirement. A visit to an experienced and qualified IFA will help you with your pension choices and will explain what you need to do with your financial plans to have a comfortable retirement.