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How long is your pension string?

By Derek Baty, financial planning consultant at Armstrong Watson

Last updated at 08:40, Monday, 07 June 2010

When discussing retirement planning the question I get asked the most is “how much should I put into my pension?”

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That’s a little bit like asking “how long is a piece of string?”

The cost of living will not suddenly disappear at 60 or 65. You may have repaid your mortgage but the council won’t stop asking for its tax, supermarkets won’t reduce their prices and the gas and electricity companies won’t turn into charities overnight.

Planning for you retirement is not just about “how much should I put into my pension?”, it’s about striking the right balance from all the options available to you.

Of course making full use of pensions is still very important.

The Basic State Pension (BSP) is a flat-rate pension paid to everyone with an adequate National Insurance (NI) record. From April 2010, the BSP is £97.65 a week for a single person and £156.15 a week for married couples. The State Second Pension may boost that income for some.

Those lucky enough to be in a good occupational final salary pension scheme should be looking forward to a comfortable retirement, as their pension income is linked to a proportion of their final salary, based on the number of years service with that employer. However, if the number of years’ service isn’t enough to guarantee a good income, consider making additional contributions, either through the employer’s scheme or independently to make up the shortfall.

Due to the costs involved for employers in maintaining final salary schemes, these schemes are becoming increasingly thin on the ground. Many employers are switching to money purchase arrangements which are basically savings plans with valuable tax advantages, into which the employer adds their contributions to yours (which qualify for tax relief). The ‘pot’ of cash at your chosen retirement date is then used to fund your retirement income for the rest of your life – so the more that goes in the more you potentially get out, although factors such as investment returns and annuity rates have a large bearing on this.

For the self-employed, or those not fortunate enough to be a member of an occupational scheme, it is up to you to make your own provisions. In 2006 the Government “simplified” pension legislation, which means that you can now contribute up to 100 per cent of your earnings to a personal pension and receive tax relief at your highest marginal rate, although legislation introduced by the outgoing Labour government has reduced the tax advantages for some high earners.

Making full use of your ISA allowance each year is another effective method of saving for retirement. Property has also been a very popular investment over the past few years and people often say that they can rely on the value of their house in retirement – that may be the case to some extent, but if you need to sell your home to fund your retirement dreams where will you live?

So the answer to the question “how much should I put into my pension?” is to sit down with a good independent financial adviser.

Decide what lifestyle you want in retirement, how much that is likely to cost and together, using a combination of pensions, ISAs, regular savings and property, formulate an affordable plan.

The sooner you start, the better.