Published in Scotland on Sunday, 11 May 2008

It takes a working lifetime to build up enough savings to be able to enjoy retirement the way we want to.  You may already have started saving for your retirement, but it’s always a good idea to give your plan an occasional ‘health check’, to see if it’s on target.  If you haven’t started saving yet, an initial health check may help to stir you into action.

Here are the basic ‘10 Commandments’ to follow when making your retirement savings health check:

1.  Don’t put it off.

Your pension may well be the second most valuable asset you have after your house.  If you don’t have a pension, you may find the amount you need to save will ultimately need to be similar to the value of your house.  Pensions planning may look complicated, but burying your head in the sand isn’t going to help.  Seize the day!  

2.  Get an estimate of the amount of state pension you can expect to get when you retire.

Everyone working is entitled to the Basic State Pension and many people also build up the State Second Pension top-up.  The full Basic State Pension is currently £4,700 p.a,; the State Second Pension depends very much on your past earnings levels and when you will be retiring.  You can get a free estimate of your likely state pension from http://www.thepensionservice.gov.uk/atoz/atozdetailed/rpforecast.asp.  You should also check if you can pay extra National Insurance contributions to top up your state pension, especially if you are self employed or had a career break to raise a family.

3.  Read the pension booklet you were given when you started your job.

There are two main types of pension scheme and you need to know which one you have.  Defined benefit schemes such as ‘final salary schemes’ pay a pension that is determined by your pay and how long you’ve been a member of the scheme.  Defined contribution schemes (sometimes called money purchase schemes) work like an investment account, where your contributions are invested in a fund and the pension you get at retirement depends on how well your investments do and the cost of buying a monthly income when you retire. 
If you have a defined contribution pension scheme, then you will need to make decisions about how much to save and how to invest your money.

4.  Get an estimate of the amount of company pension or private pension you can expect to get when you retire.

You can’t plan any directions unless you know where you are starting from.  Ask your pension scheme or pension provider to give you a quote of how much income you might get when you retire.  You’ll need to let them know what age you expect to retire at and how much you intend to save from now until retirement.  It is also really useful to check how the amount of income you could get might change if you paid in more or less, or if you retired earlier or later. 

5.  Check if you have any old pensions from previous jobs.

You might have some old pensions that you’ve forgotten about.  You can check by asking your old company if they had a scheme, if you were a member and what you are entitled to.  If you find any old benefits you should ask what they might provide for you when you retire and if you have any options about when and how you can take it.  There is a tracing service at http://www.thepensionservice.gov.uk/atoz/atozdetailed/pensiontracing.asp  (0845 6002 537)

6.  List out all of your savings, pensions, mortgages and debts on a single sheet of paper and decide what is the best way of using your money.

Pensions are important, but they are only one piece of your financial jigsaw.  Spreading your investments around can give you more flexibility with your money.  For example, other tax efficient ways of saving, like ISAs, could be useful for you.  Just because it’s for your retirement it doesn’t need to be called a ‘pension’.  You should also think about what you owe; like credit card debts and mortgage repayments.  Finally, think about how you might use your other savings or might have paid off your mortgage when you retire, and check how it fits in with the amount of monthly income you need from your pension.

7.  Be realistic about the level of income you will need as a pensioner and how much you can afford to save.

Your retirement quotes might look like your savings won’t buy you much of an income each year.  It’s not because pensions are bad value for money, it’s because paying a pension for 25 years is expensive.  If you retire at 65 you might expect to receive your pension for 20 to 25 years or more and you need to build up a lot of pension savings to provide an income for that length of time.  If your projected retirement income looks too low, you have three tough options to choose between:  work for longer and retire later; save more money now; or get by on less money when you’ve retired.  A sensible balance between these options may be best, for example saving a bit more now and retiring slightly later could boost your income in retirement by the extra you need.  When you are making these decisions, don’t forget that your private retirement income will be in addition to your state pension and when you have retired you won’t have the same living costs as you do now.

8.  Look into how your pension money is invested and see if you are making the most of your options.

If you have a defined benefit pension then the scheme’s trustees will make these decisions for you.  But if you have a defined contribution scheme then you need to decide how your money is invested.  While you are younger it is actually more dangerous to invest too cautiously.  You’re investing for the long term and should invest in funds that aim to grow at higher rates even though they might have good and bad times between now and when you retire.  When you get within a decade of retiring you should think about less risky investments.  You only get one opportunity to retire and if markets slump just as you want to retire, you don’t want your pension to slump with it.  Many schemes offer something called ‘lifestyling’ to protect against this risk by gradually switching from risky funds to funds that match the cost of buying an income at retirement.
 
9.  Always check your options when you retire.

There can be lots of options with pensions and you should decide which ones suit you.  You will have to decide whether to give up some of your pension and take it as a cash lump sum.  Cash is always tempting and it is paid tax free, but you must be honest with yourself about whether the remaining pension will be enough for you to live on.

If you have a defined contribution pension, you will need to decide about the type of annuity you buy when you retire (an annuity is the financial product that pays you a monthly income until you die).  The key issues are:

• Who you buy an annuity from.  There is a competitive market for annuities and you should always check the terms different insurance companies are offering.
• You can choose the amount of pension that would be paid to your dependants if you die and how your pension increases in future.   If you buy a pension that increases with inflation it will start at a lower level; alternatively you could have a higher starting pension that won’t increase in future (although this income will buy less as you get older and the prices of things increase with inflation).

10.  Get help from a financial advisor.

Pensions can be complicated and there can be lots of jargon.  As I said at the start, don’t be put off.  If you find pensions confusing then you can speak to an independent financial advisor, who will explain your pension options and help you make the important decisions.  To find an independent financial advisor in your area you can contact http://www.unbiased.co.uk/