New Year Pension Planning

But even on the earlier projections, a man reaching 65 can now reasonably expect to be retired for 80% longer than would have been the case in 1981.

This increase in life expectancy, as much as a fall in long term interest rates, has led to a massive long-term decline in the amount of annuity income that can be generated by a pension fund, at retirement, during the past two and a half decades. Conversely, there was a modest improvement during 2007, as interest rates in the UK rose – albeit probably temporarily.

The simple message is that we all need to save much more in order to pay for our 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.

If you know that the best “final salary” pensions schemes aim to offer two thirds of your average income in the run up to retirement, in addition to the state pension, then 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.

So how much should you be saving?

According to projections put together by the Association of Consulting Actuaries a few years ago, a person of 45 should be saving anything from 23% to 30% of earnings towards their pension, if they have no previous provision. And as you get older, it is even more with the target from a 55-year-old with no existing pension set at 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, for your retirement and 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.

But your 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 are hardly realistic for most people. But those with inheritances can make substantial pension contributions, using the new rules, 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 long term future?

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