Become a pensions expert in five days - don't panic!
Even if you're 50 years old, it's not too late to save for your retirement. My top tip? Don't have a pensions panic!
So now we've run through the main types of pension, you're in a better position to decide whether you need to have a 'pensions panic.'
In summary, if you're a member of a final salary scheme, you've no real need to worry. But you may want to do some extra saving in case the terms of your final salary scheme change before you retire.
If you've made no provision for your retirement and you're just going to rely on the state, I believe you should think about doing something to boost your retirement income. Even if you're relatively old, it's best to adopt a 'better late than never' approach and try to salt some money away for your twilight years.
The only justification for doing nothing is that a small amount of saving may damage your eligibility for means-tested benefits. So the net gain of building a small pension pot - say, £30,000 - might be quite small. That said, means-tested pension benefits are supposedly going to be abolished for new retirees in 2015, so there will be an incentive to save.
Rely on yourself
Of course, future governments might reintroduce means-tested pension benefits, but I think that actually strengthens the argument for saving yourself. The point is, we just don’t know what future governments will or will not do. The only person you can 100% trust is yourself, so it makes sense to save as much as you can for your retirement yourself.
If you have a defined contribution scheme, the question is: 'is your pot big enough?' Or: 'will it be big enough when you retire?'
The thing is, you can actually build a surprisingly large pension pot if you save consistently.
Let's imagine you start saving for a pension aged 30. You save £2,000 a year every year until you turn 60. We'll assume that the stock market grows at 5% a year on average after inflation. That's lower than the historical average (7%.)
On that basis, you'd have a pension pot of £139,000 by the time you were 60. That could give you a pension income of around £8,000 a year on top of your state payments. Not big, but not bad considering you had only saved £2,000 a year. And, don't forget, your annuity would carry on paying out even if you lived to 100!
Here's one more example. Let's imagine you don't start saving for a pension until you're 50. If you save £4,000 a year and retire at 65, you could build a pot of £82,000. As you're retiring at a later age, then you could get an annuity of around £5,400 a year. Again, not great, but better than nothing.
So yes, it's best to start saving for a pension when you're young. But if you wait till middle age, don't despair. It's not too late to make a difference.
One more day
This series is coming to an end. There's one more day to go. In the final article, I'll look at changes that are planned for 2012, and also at alternatives to conventional pensions. See you then!
More: Become a pensions expert in five days - day three | Help! In my forties and still no pension
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Hello DC1957, I'm also sorry to hear that your final salary scheme has been shut. I can also understand why you're reluctant to recommend pension saving to your children. You're right, you can't trust politicians or company bosses to keep their promises on pensions. That said, I still think that your children should sign up for a company pension if their employer is willing to contribute to their pension fund. It's just too attractive a proposition to turn down. Is your employer setting up a defined contribution pension scheme to replace the final salary one? If that's the case, I'd still recommend saving into that if your employer is willing to make contributions. Whatever you decide to do, I hope that you still have a decent pension when you come to retirement. Ed
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Sorry, dc1957, to hear your DB scheme is closing, but you will at least have the benefits you have already accrued. The problem with pensions is that everybody wants jam today. When I joined BP many years ago, the salaries weren't quite as good as Shell's, but BP had a non-contributory pension scheme whereas for the same benefits in Shell's pension scheme you had to pay in 5% of salary. Now, of course, both companies pay greater salaries (especially to their executives) but the pensions rights are far worse. Nobody seems to realise there is no such thing as a free lunch. Our kids may be enjoying gourmet lunches now but at 75, when they finally retire, it will be the soup kitchen at best.....
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My Company just announced the closure of the Final salary scheme today. When I joined many years ago I calculated that if I stayed until I retired I would receive half of my salary as a pension. I figured that would have been sufficient for my wife and I. Forward 23 years and many thanks to Labour for changing the rules on Companies, taxes & pensions a few years ago. Many thanks to ConDems for changing my scheme rules to increase by CPI and not RPI. Pensions may well be a timebomb but aged 53 I cannot do too much about it and lets be honest, it cannot come as a complete shock in the last few years that we are all living longer! I paid my pensions all my life, did everything that I was asked to do to provide a pension for myself and my wife only to find that a successionof different people try to prevent you from doing it. With three children ages 25, 24 & 21 who ask my advice on what to do with their pensions, what am I to say? I can say they will receive free money from company pension contributions and Government tax breaks, but they have to put trust and faith in future Company bosses and Governments that they will do the right thing and honour promises that they make now. I cannot do that, I have seen first hand the lies and deceit by others that have messed my retirement plans up and screwed the younger generation entirely. How can I, hand on heart, tell them to save for their future? But equally, how can I as a father, tell them not to worry about the future because it will all be alright? Sometimes it is good to be getting old and out of the rat race!
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28 April 2011