10 commandments for pension saving

IT TAKES a working lifetime to build up enough savings to be able to enjoy retirement the way we want to. You may already have started saving for your retirement, but it’s always a good idea to give your plan an occasional health check to see if it’s on target.

If you haven’t started saving yet, an initial health check may help to stir you into action.

Here are the 10 commandments to follow when making your retirement savings health check:

1) Don’t put it off
Your pension may well be the second most valuable asset you have after your house. If you don’t have a pension, you may find the amount you need to save will ultimately need to be similar to the value of your house. Pensions planning may look complicated, but burying your head in the sand isn’t going to help. Seize the day!

2) Estimate your state pension
Everyone working is entitled to the Basic State Pension, and many people also build up the State Second Pension top-up.

The full Basic State Pension is currently £4,700 annually. The State Second Pension depends on your past earnings levels and when you will be retiring.

You can get an estimate of your likely state pension from www.thepensionservice.gov.uk.

You should also check if you can pay extra National Insurance contributions to top up your state pension, especially if you are self-employed or had a career break to raise a family.

3) Read your pension booklet
There are two main types of pension scheme and you need to know which one you have.

Defined benefit schemes such as final salary schemes pay a pension that is determined by your pay and how long you’ve been a member of the scheme. Defined contribution schemes (sometimes called money purchase schemes) work like an investment account, where your contributions are invested in a fund and the pension you get at retirement depends on how well your investments do and the cost of buying a monthly income when you retire.

4) Estimate private pension
Ask your pension scheme or pension provider to give you a quote of how much income you might get when you retire. You’ll need to let them know at what age you expect to retire and how much you intend to save from now until retirement.

5) Check on old pensions
You might have old pensions that you’ve forgotten about. You can check by asking your old company if they had a scheme, if you were a member and what you are entitled to.

There is a tracing service at www.thepensionservice.gov.uk (0845 6002 537)

6) List all savings and debts
Pensions are important, but they are only one piece of your financial jigsaw. Spreading your investments around can give you more flexibility with your money.

For example, other tax-efficient ways of saving, such as Isas, could be useful. Just because it’s for your retirement it doesn’t need to be called a “pension”.

You should also think about what you owe, such as credit card debts and remaining mortgage repayments.

Finally, think about how you might use your other savings or might have paid off your mortgage when you retire, and check how it fits in with the amount of monthly income you need from your pension.

7) Be realistic
Your retirement quotes might make it look like your savings won’t buy you much of an income. It’s not because pensions are bad value for money, it’s because paying a pension for 25 years is expensive.

If your projected retirement income looks too low, you have three tough options: work for longer and retire later, save more money now, or get by on less money when you’ve retired.

A sensible balance between these options may be best. For example, saving a bit more now and retiring slightly later could boost your income in retirement by the extra you need.

8) Check pension investments
If you have a defined benefit pension then the scheme’s trustees will make these decisions for you. But if you have a defined contribution scheme then you need to decide how your money is invested.

When you are younger it is actually more dangerous to invest too cautiously. You’re investing for the long term and should invest in funds that aim to grow at higher rates, even though they might have good and bad times between now and when you retire.

When you get within a decade of retiring you should think about less risky investments. If markets slump just as you want to retire, you don’t want your pension to slump with it.

9) Check retirement options
You will have to decide whether to give up some of your pension and take it as a cash lump sum when you retire. Cash is always tempting and it is paid tax-free, but you must be honest with yourself about whether the remaining pension will be enough for you to live on.

If you have a defined contribution pension, you will need to decide about the type of annuity you buy when you retire (an annuity is the financial product that pays you a monthly income until you die).

There is a competitive market for annuities and you should always check the terms that different insurance companies are offering. You can choose the amount of pension that would be paid to your dependants if you die and how your pension increases in future. If you buy a pension that increases with inflation it will start at a lower level.

Alternatively, you could have a higher starting pension that won’t increase in future (although this income will buy less as you get older and the prices of things increase with inflation).

10) See a financial adviser
Pensions can be complicated and there can be lots of jargon. If you find pensions confusing, you can speak to an independent financial adviser who will explain your pension options and help you make the important decisions.

To find an independent financial adviser in your area, visit www.unbiased.co.uk

• Ronnie Bowie is senior partner at Hymans Robertson