saving for retirement

First of all work out a realistic amount you think you will need in retirement. If you currently earn, say, £30,000, you might want a retirement income of around £20,000.

If you have group personal pensions, personal pensions or stakeholder pensions, tot up the total worth of these pensions so that you have a rough idea of the total value of your pension funds to date.

To work out how much your money purchase pensions will buy you in retirement, as a very rough rule of thumb, each £100,000 of pension fund will buy you roughly £5,000 a year in income via an annuity.

It could be slightly more or less than £5,000, depending on your gender, age and state of health and whether you buy inflation proofing, escalation or guarantees.

So roughly speaking, if you amass a pension fund of £500,000 from money purchase pensions, this will buy you approximately £25,000 a year in annuity income. Not exactly a prince’s ransom, but that’s the price you pay for buying an annuity – an income for life which is guaranteed to pay out, however long you live.

And there’s the rub. We are all living longer, which is great until you consider the effect that this has on annuity rates. The longer you are expected to live, the lower the annuity rate that the insurance company is willing to pay you.

 All of this means that you can’t afford to delay savings for retirement. The younger you start the better. Your contributions will attract tax relief at the highest rate you pay income tax (20 per cent or 40 per cent in 2008-09) and your contributrions will roll up in a largely tax-free pension fund until you retire.

Basic state pension

If you have been working and paying National Insurance Contributions for most of your working life until age 65, you should be eligible for a full basic state pension which currently pays a single pensioner around £85 a week, or around £4,500 a year. This can be augmented if you chose to defer taking it until age 70.

From 2012, women will only need to have made NICs for 30 working years to be eligible for a full basic state pension.

Other pensions

You may have built up pension benefits from previous employments. If these were final salary schemes, you can write to the scheme administrators to ask for an estimate of the pension you can expect to receive in retirement, based on current projections.

It is also essential that you inform the scheme administrators/trustees of any change of address so that you receive annual communications from the company about your pension scheme.

If you have previously paid into a group personal pension, group stakeholder or any other form of personal pension, you should contact the insurance company for a current valuation.