Seven simple steps to the perfect pension

This quick, simple guide reveals the best places to save for retirement.

Hardly a week goes by without more bad news appearing about pensions and retirement.

This week, the coalition government is arguing with trade unions about increasing the normal retirement age for public-sector workers. Ministers want to increase this to 66, bringing it in line with planned changes to the state pension.

Predictably, union members have threatened to strike over these proposals to align public-sector pensions with private-sector schemes. Alas, the state pension and public-sector pensions are being battered by two colossal crises.

Pension tensions

If you've left your pension planning to the eleventh hour, find out how to catch up quick.

First, we are living longer. Since the Second World War, life expectancy has risen by roughly a decade. Today, average life expectancy is 77 for men and 82 for women. Thus, allowing folk to retire at 60 means providing pensions for perhaps 22 years or more. Frankly, this is no longer financially viable.

Second, our government's finances are in a horrible state. At the end of May, government debt (excluding bank bail-outs) was £921bn, which exceeds £34,000 per household. What's more, this debt is increasing by more than £10bn a month and is sure to keep growing until at least 2016.

In short, our nation's finances are wrecked and generous government pensions are no longer an option!

Take control of your future

With the government set to prune pensions, what can you do to secure a comfortable retirement? These seven steps will help you to pump up your pension:

1. Don't rely on the state

Currently, the basic state pension, when topped up by Pension Credit, guarantees the following minimum weekly income for women aged 60 and over and men aged 65 and over:

£137.35 for a single person
£209.70 for a couple

In other words, the basic government income paid to a pensioner couple is roughly £10,900 a year, which is barely enough to get by, as I warned in Pensions battered by basic bills. Thus, don't rely on the state to look after you when you give up work.

2. Start saving as soon as you can

Given that you may live for decades after your career ends, you need to start planning for retirement as early as you can.

Thanks to the power of compound interest, the longer you save, the larger your final pot will become (all else being equal). In other words, the earliest contributions are the most valuable, with £10 paid in at 21 worth lots more than another tenner at 61.

Thus, start your retirement planning as soon as you start work and, ideally, on day one.

3. Grab the free money

If your employer invites you to join its occupational (workplace-based) pension plan, don't turn down this offer. In almost every case, joining your work scheme is the best thing to do.

4. Build your own pot

Even as a member of an occupational pension scheme, you can still pay in extra personal contributions. When doing this via your work scheme, these extra payments are known as Additional Voluntary Contributions, or AVCs.

If you can't join a workplace-based pension scheme, or work for yourself, then you alone are responsible for funding your pension. If you can afford it, monthly contributions of 10% to 20% of your gross (pre-tax) salary over decades should build a decent pot to retire on.

My favourite type of private/personal pension is a SIPP, or Self-Invested Personal Pension. Low-cost SIPPs from the likes of Hargreaves Lansdown offer investors the freedom, flexibility and personal control to create customised 'DIY pensions'. For more on SIPPs, read The best Sipp for your retirement.

5. Try other tax-free savings

Tax relief is the main incentive to invest in pensions. Thanks to this tax refund, a £100 contribution into a pension costs a basic-rate (20%) taxpayer only £80. Higher-rate (40%) taxpayers can turn £60 into £100 inside pensions; additional-rate (50%) taxpayers can double their money overnight.

6. Choose your annuity wisely

What happens to your pension pot when you decide to retire? You can withdraw up to a quarter (25%) of your pot as tax-free cash, which you can then use to enhance your income. You could choose to draw an income from the remaining 75% of your fund, an option known as 'income drawdown'. However, this is best left to well-off and experienced investors.

Most pensioners choose to turn their pension pots into guaranteed incomes for life known as annuities. In effect, you permanently surrender your pot to an insurance company in return for monthly, quarterly or yearly payments until you die.

Related how-to guide

Start a pension

We all need to consider how we’re going to pay for our lifestyle in retirement. Follow these simple tips for how to get started.

See the guide

However, don't blindly buy an annuity from your pension company. Instead, exercise your legal right to shop around for the highest payout, using your ‘open-market option’ (OMO). This is best done via specialist annuity brokers such as Hargreaves Lansdown, Just Annuities and the Annuity Bureau.

Be sure to check out How to buy the right annuity.

7. Work longer

If you're approaching retirement age and don't have enough to retire on, then you have other options. If you're in good health, then you could choose to work for a few more years, either in your same role or by taking a part-time job. By lengthening your working life and shortening your retirement, you'll need less to get by in your remaining years.

Personally, I enjoy my job so much that I've decided to scrap all plans for retirement. Indeed, I plan to keep writing until the day I die!

More: Try tax-free saving in an ISA | Public-sector pension age to rise to 66 | Fight back against rising food prices