Do You Really Need a Pension?

A pension is designed to replace the income you would normally receive during your working life once you retire. Although the majority of people will be eligible for the government's State Pension when they retire, at current levels of less than £100 a week, many pensioners who receive it now struggle to make ends meet. However, if you have a separate pension plan, this can boost your income to ensure that your needs and lifestyle requirements are met in later life.

How much money you'll need in retirement will very much depend on your needs and wants during that time of your life. Someone who plans to spend their retirement in an armchair with a crossword will have very different financial requirements to someone who plans to travel, see the world and make the most of their non-working life. It's worth bearing in mind however, that as more people are living longer, your retirement could make up as much as a third of your life. So when you do retire, you will still need to pay bills and to have money for making the most of your increased leisure time.

How Much Pension Do You Need?

It's difficult to know exactly how much each person will require for their pension, as everyone's circumstances are different. For most people, the decision depends on how much they can afford to save each month. However, it's worth working out whether or not the amount this will give you when you retire will be enough.

When you give up work, you will have much more leisure time, and heating and other household costs (such as lighting) may also go up as you stay at home more often. However, some costs of living may be lower when you retire; you won't need to pay National Insurance contributions, there's no travel costs to work, you may have paid off your mortgage and you may no longer be supporting a family. Once you come up with a realistic figure and added in an amount as a cushion for the unforeseen, then this is the amount of pension that you should ideally be planning for. It's also worth bearing in mind that your pension will be taxable, so you will need to allow for income tax when arriving at your final pension figure.

It's Never Too Early To Start Saving For Retirement

Although it's easier to think that there's all the time in the world to start planning pensions and retirement, the truth is that the earlier you start saving for your retirement, the more money you're likely to have to pay the bills - and enjoy yourself - when you retire. Starting a pension when you're young will not only mean that you'll have more time (so will be able to pay in more contributions), it will also mean that your pension fund will have longer to attract and compound interest, and accumulate in value.

For example, if a 20-year-old woman starting a pension wanted to receive an annual payout of around £15,000 in today's prices (that is, taking in account the effect of inflation) when she retired at age 65, she would need to contribute around £240 a month (including any employer contribution). However, if she started her pension scheme when she reached 30, she'd need to pay £380 a month, and if she waited until she was 40, then her payments would rise to a massive £640 a month. If that 40 year old woman could only afford to make the £240 contributions that the 20 year made, then she would only expect an annual payout of around £5,700.

A pension plan requires action as soon as possible so start now and if you have already started, make sure that it's reviewed by an IFA regularly to ensure that it is still the best plan for you.

The sooner you start your pension plan, the more time you will have to earn interest on your savings - don't worry if you can only spare a few pounds a week at first; you can always increase your payments later on. Even leaving it a further 10 years from your current age could mean that your fund would be half the value it could have been if you had started 10 years before.