5 top tips for pension late starters

If you have left your pension planning to the eleventh hour, don't panic. Follow these five tips and take control.

When you're planning for your retirement the earlier you start the better. But if you're already approaching your 50s and you still haven't got round to thinking about how you'll pay for your twilight years, don't panic. True, pensions love nothing more than oodles of time in which to grow, but even if the clock's ticking it's never too late to get started. 

Pension provider Skandia reckons many of us don't prepare for the financial side of retirement until much later in life. In fact the company's research shows that two out of three people in their 50s and 60s don't think about planning for their retirement until after their 50th birthday.

If you feel like time's running out, here are five tips to help you get your retirement planning off the starting blocks fast:

1. Work out how much you have so far

First of all you need to get a grip on the situation. If you have any old pension schemes you need to find out how much they're worth now. Get together all your old paperwork and contact each company or former employer if you had a work-based scheme. Get up-to-date valuations and a forecast of benefits for each one. 

It's easy to lose track, so you may find your pension provision isn't quite as bleak as you thought, particularly if you have a long-forgotten pension fund which has been running for decades.

Once you have done that, review all your old schemes. That means looking at where the pension is invested, how well it has performed over the years and how heavy the charges are. Ditch any that don't measure up and transfer them to better schemes elsewhere. Although check for any benefits you might lose or transfer penalties you might incur before doing so.

2. Get a State Pension forecast

Once you have a better idea of your current pension provision, if any, you need to get a clear idea of what your State Pension could be worth when you retire. Head over to the DirectGov website, which gives a full run-down on how to get both a basic State Pension estimate, or a full State Pension forecast.

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If you're entitled to the full State Pension, then at current rates you'll receive an income of £97.65 per week for a single person which is over £5,000 each year. If you're a couple you'll receive £156.15 per week. These figures are increased annually.

After you have carried out tips 1 and 2, next think realistically about how much you're going to need to live on once you have stopped working. In an ideal world you should aim towards an income of between half and two-thirds of your previous salary. In practice this may be difficult to achieve, so work out how much will give you a reasonably comfortable standard of living.  

You should now have an idea of the shortfall between the pension provision you have so far and the amount you need. Tips 3 to 5 will then help you make up the difference.

3. Start saving hard

Start saving now and save as much as you possibly can. Even if you're 50 now and you don't retire until you're 65 or later there still could be enough time to build up a reasonable pension pot. OK it's not as good as starting when you're 20, but don't forget it's never too late.

Even better, you'll benefit from tax relief on your pension savings.

If you're a basic-rate tax payer, for every £80 you contribute, you end up with £100 in your pension pot. And if you're a higher-rate tax payer, you'll only need to invest £60 out of your own pocket to get a £100 contribution into your pension fund with a generous 40% tax break.

Until recently, pension rules allowed you to invest up to 100% of your earnings into a pension fund as long as your contributions didn't exceed a cap of £225,000 in the tax year. This has been cut though to £50,000. So if you have some spare savings, you can invest a sizeable chunk into your pension which will also qualify from the tax break.

This can give a significant boost to your pension provision and get you on the road to a better standard of living once you retire.

4. Look at the alternatives

Although pensions are one of the most tax-efficient ways to save for your retirement there are alternatives. Any savings and investments you have accumulated over the years can help to support you during your retirement. You could also consider downsizing your home or unlocking its value through an equity release scheme.

5. Consider retiring later

Does the prospect fill you with dread?  Unfortunately, this is becoming a reality for many. But there are several advantages you may not have considered before. By working longer you can pay more into your pension and leave it to accumulate over a longer period. On top of that, because you'll have fewer years in retirement your pension pot won't need to stretch as far.

Better still, as you're older you'll benefit from higher annuity rates. An annuity converts your pension fund into an income and a higher annuity rate equals a larger income.

Leaving your pension planning until your 50s isn't ideal, but it's not necessarily the end of the world either. There are plenty of practical steps you can take to improve the prospects for your retirement. So take the bull by the horns and get saving today.

This is a lovemoney.com classic article, originally published in December 2007 and updated.

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