Pension Planning for a Secure Retirement

• Author: Stephen Phillips
• Published: 02/01/2008

Financial planning experts at Alan Boswell & Company stress the importance of adequate pension planning to provide financial security in retirement.

After a restful Christmas break, the prospect of another year of hard work faces many of us. But planning ahead is a simple way to make life easier. Retirement income problems can only be solved if you provide yourself with a pension which will allow you to enjoy life when you retire and for many Christmases thereafter.

Increased Life Expectancy

According to data produced by the Government a few years ago, life expectancy in 1981 was 70.9 years. By 2001 it was 75.7 years - an increase of 4.8 years. For women, the increase was smaller at an additional 3.6 years.

More recent research by Heriot-Watt and Nottingham Universities (Daily Telegraph 25th November 2007) suggests that by 2050 men might reasonably expect to reach the age of 97. But even on the earlier projections, a man of 65 can now reasonably expect to be retired for 80% longer than would have been the case in 1981.

It is this increase in life expectancy, as well as a fall in long-term interest rates, which has led to a massive decline in the amount of annuity income that can be generated by a pension fund at retirement.

The simple message is that we all need to save much more in our pensions in order to pay for our longer retirement. The basic state pension is totally inadequate, representing less than a fifth of National Average Earnings for a single person and less than a third for a married couple.

The best final salary pension schemes aim to offer two thirds of your average income in the run up to retirement and this is in addition to the state pension. It is clear that unless you are prepared to put aside a substantial amount for your retirement, you simply will not be able to look forward to any degree of comfort when you give up work.

How much should you save for your pension?

According to projections put together by the Association of Consulting Actuaries a few years ago, a person of 45 with no prevous pension provision should be saving anything from 23% to 30% of earnings towards their personal pension. And a 55 year old with no existing pension should save anything from 50% to 70% of income.

Thanks to a change in the law in April 2006, it is now possible legally to put away as much as your entire earnings from trade profession or employment. You will receive full tax relief at your highest marginal rate (although you cannot exceed the annual allowance which is £225,000 for 2007/8 and will rise to £235,000 for 2008/9). Your employer can also top up your pension to the annual allowance, provided your total package is a justified business expense.

However, your pension fund must not exceed the lifetime allowance (set at £1.6 million for 2007/8 and rising to £1.65 million next year) or you will be taxed at anything from 40% to 55% on the surplus.

In practice, of course, such levels of saving for retirement are hardly realistic for most people. But under the new rules, those with inheritances can make substantial pension contributions in order to boost their retirement fund.

So why not take a few moments this New Year to consider how you could secure your own financial future with appropriate pension planning?