Scots behind rest of UK in readiness for retirement

Steven Cameron, Pensions Director at Aegon UK, says: “More than 90% of the Scottish population are falling short of their retirement targets. The Scottish Government needs to ensure it doesn’t create confusion around pensions tax relief if exercising its new powers to set income tax bands and rates. We must also avoid complex changes to encourage the UK population to continue to thrive in their planning for later life.”

The average Scot pays £147.50 a month into a pension against the UK average of £209.60 and is likely to retire with a fund worth £40,200. If we assume they will receive the full new state pension of £8093, they will need a private pension income of £25,507 to reach their target of £33,600.

If we also assume that most people buy an annuity with the bulk of their pension fund when they retire, a 65-year-old in good health would need a fund

of £482,000 to secure the desired level of income, according to annuity rates published by the Money Advice Service. If they wanted to protect their income from inflation, the annuity would cost £804,637.

The figures make for alarming reading, but the Herald’s top ten tips to plug the pension savings gap could get you back on track for a comfortable retirement.

1. Work out how much income you need in retirement

You can probably manage on a relatively small income when you retire, particularly if you have paid off the mortgage and the children are financially independent. But it’s a good idea to draw up a list of your likely outgoings so that you can set a realistic retirement budget. There’s little point in saving to achieve an annual income of £35,000 when you can live quite comfortably on £25,000.

2. Get a state pension statement

The full new state pension is worth up to £155.65 a week, or just over £8000 a year. But you only get a full pension if you have 35 years of National Insurance contributions or credits. To find out if you qualify for the full amount, get a pension statement from The Future Pension Centre on 0345 3000 168, or you can visit the website www.gov.uk. You can also top up your National Insurance Contributions to make good any shortfall.

3. Start saving early

The earlier you start saving the better - and even a few years can make a big difference. For example, if you invest £100 and it grows at 6% each year, it would be worth £179 after 10 years, £321 after 20 years, £574 after 30 years and £1029 after 40 years. You don’t need to put aside much, either. If you saved £50 a month into your pension from the age of 18 through to 65, you could potentially accumulate a fund of £150,000 by the time you retire.

4. Join your company pension scheme

Many employers already offer - and contribute to - a workplace pension for their employees and from 2018 it will be compulsory for all employers to enrol every eligible worker in a company pension. Employers will also have to pay into the scheme on behalf of their employees. Workers can opt out of auto enrolment, but it makes sense to stick with a company scheme if you can. After all, you wouldn’t turn down a pay rise, would you?

5. Increase your contributions

You might only be able to put a small amount into your pension at the start, but you should increase your contributions as time goes by. Otherwise, you will be saving less in real terms because of the effects of inflation. Patrick Connolly, a certified financial planner at Chase de Vere, an independent financial adviser, suggests boosting your pension contribution every time you get a pay rise, particularly if the rise is above inflation.

6. Trace pensions from previous employers

You will change jobs on average 11 times during your working life, which can make it difficult to keep track of past pensions. In fact, about £400 million is

sitting in unclaimed private pension savings, according to the Department for Work and Pensions. The Pension Tracing Service is a free online facility that helps you hunt down any lost pensions by searching a database of more than 300,000 pension scheme administrators. All you have to do is put in the details of previous employers.Visit www.gov.uk for further details.

7. Consider salary sacrifice

Many employers run salary sacrifice schemes, where you give up part of your salary in return for other benefits such as childcare vouchers or higher pension contributions. Salary sacrifice can be a good way to boost your pension. Plus you pay less tax and National Insurance because your earnings are lower. Your employer also pays less National Insurance and might even pass on the savings to you.

8. Monitor performance

Most pension funds invest in a mix of assets, including shares, bonds and property. You can afford to take a bigger risk with your investments when you are younger, but should move into safer assets as you approach retirement. Some pensions automatically adopt a more conservative strategy in the run up to retirement - a facility known as lifestyling. But you should make sure you understand how and where your fund invests. Connolly says: “Investing in shares is likely to give you the best long-term returns, although as your pension fund gets bigger and as you get closer to retirement you should hold more money in other assets such as cash, fixed interest and property, as capital protection should become as important as capital growth.” Nearly half (45%) of Scotland’s non-retired over-60s population don’t know how much money is in their pension pot, according to a report by financial group Sanlam. But you should regularly monitor your fund’s performance to confirm that you are on track to achieve your target return.

9. Keep an eye on charges

Charges can take a big bite out of your pension savings. Let’s say you pay £100 a month into a pension and it grows at 7% a year. If the charge is 0.5% a year, the fund will be worth £49,308 after 20 years. But if the annual charge is 1%, the fund value drops to £46,435, or £43,762 with an annual charge of 1.5%.

10. Seek independent advice

Pensions are complicated. They are also one of the biggest financial decisions of your life - and could make the difference between a comfortable and impoverished retirement. It therefore pays to seek independent financial advice.