Brits who save for their retirement are becoming an increasingly rare thing. Currently in the UK we have 47% of people working beyond the State Pension Age, and while for the large majority it is because they enjoy working, nearly a third of people are still working beyond this milestone because they simply cannot afford to stop.

As the State Pension comes to its 80th year, it is perhaps under more pressure than ever before. In the UK we now have a very worrying combination of a population approaching retirement with much longer life expectancy and inadequate retirement savings.

There is no real excuse for not saving anything into a pension, and the earlier people start, the easier life will be in retirement. Every year you delay putting aside money for your retirement, the less pension income you’ll have when you need it most. People can no longer rely solely on the State Pension to live a comfortable retirement.

There are some negative perceptions on pensions to get over first, here to help us do that is Head of Pensions Development from AEGON, Rachel Vahey who will be able to offer some top tips on how to make the most of your income.

Rachel Vahey, Head of Pensions Development at AEGON joins Tom McPhail, head of Pensions Research at Hargreaves Lansdown live online on Monday 7th January 2008 at 14:30 – 15:00 to discuss pension planning

H: Glen Tomset, host
R: Rachel Vahey
T: Tom Mcphail, independent financial advisor

H: Hello and welcome to the Lifestyle show brought to you today by pensions provider Aegon, I’m Glen Tomset. Now of course saving for retirement is something we all think about, or most of us should be thinking about, but it’s becoming an increasingly rare thing to actually do. Now currently in the UK we have around 47% of people working beyond the state pension age, partly because they feel they have to. A couple of things leads to that – longer lifespan, and of course inadequate retirement savings are certain to prove a challenge for years to come. Now here to offer information is Rachel Vahey, whose head of pensions and development at Aegon

R: Hello

H: Welcome. And also Tom Mcphail, now Tom is an independent financial advisor. We’ll start with you Rachel if we can, they say a pension, 80 years old – is it enough these days to live on?

R: You should really start thinking about it as soon as you possibly can, when you very first start working. It’s so much easier to save for an income in retirement if you start as early as you possibly can, so you need to get into good habits and kick-start that saving. One of the best ways of doing this is through your employer, so when you start work, get your first job, check with your employer, see what sort of pension scheme they’re offering. If they are offering a pension scheme then really seriously think about taking that up and paying into it. It really depends upon your own financial situation, but a lot of the time it can make sense. Unfortunately not everyone is doing that. The National Association of Pension Funds recently did a survey and they found out that 3 million employees don’t join their employer’s pension scheme

H: 3 million?

R: 3 million, I find that staggering, it’s really free money that they’re turning down, so have a look at what your employer’s doing, that’s the easiest way to kick-start your savings and to try and save for retirement

H: Tom, pensions have had – over the last few years – bad name haven’t they, bad – you know like you’re not getting the money back that you put in. What can we do to change that?

T: I think – simple messages, really important – I mean for example whether you’re going to use a pension or anything else, the important thing is to do something to save for your retirement. Putting off saving for your retirement for 7 years roughly will halve the amount of money you’ve got to live in in retirement, so picking up on that previous question, the sooner you start saving the better. Now the tax breaks the government gives you for saving into a pension are fantastic. You will not get more money back in the form of tax breaks from any other type of saving. They’re giving you free money to encourage you to save for your retirement – it’s a fantastic deal. I think the hard bit is selling to people this idea of the discipline of choosing not to save money now and putting money aside for your retirement – it’s worth it because of the tax breaks, it’s worth it because you’ll need the money – the tough bit is you need perhaps to spend a little bit less money now in order to enjoy it later

H: State pensions Rachel, 80 years old now – is it enough to live on?

R: No I don’t think it is, and they were never designed to be enough to live on, right from the word go they were designed to give you a safety net, but they weren’t designed to give people the whole of the pension income, that was always up to people to voluntarily save to add onto that, but certainly if you look at the State pension now it’s £87 for a single person, we have pension credit on top of that which will make it up to say about £120 but even then that’s a really tough call to live on that amount of money each week, when you take into account all the utility bills and all the other factors that go into our every day life. So no, I don’t think it is enough, and if you want to have a nice income in retirement, if you want to enjoy your old age, then you need to take responsibility and you need to shift the emphasis onto each person deciding to save for themselves and to put that money away

H: People are living longer now, we’re constantly told that, the longevity of life is increasing isn’t it –

R: Yes

H: Year on year. What are the state pension doing, what are we doing for that, for those longer life of people if you like, the longer age – the longevity of life – where are you getting that money from, is it going to be enough money?

T: There are two problems there, one is that yes we are all living longer so the government’s already started pushing back the state retirement age, and it will creep up towards 68 by the middle of this century, so the government says you’re going to have to work a little bit longer, and the other problem is that even with that extra working, the chances are you’re going to live for perhaps a couple of decades after that in retirement and the government has said we cannot afford to pay for you, we want you to take a little bit of responsibility for your own retirement because we simply won’t be able to generate enough tax revenue to pay out all these state pensions, what we need everybody to do now is to put a little bit of their own money aside to make sure they have got enough money to live on. 20 years is a long time to not be working, and that’s the average – some people will live longer than that, some people – the number of centenarians, people over the age of 100 is going to rocket over the next 30 or 40 years. People are going to be a long time retired, they’re going to need money for that

H: It’s an incredible thing to think isn’t it, we’re all living longer now – amazing to think that. But you know if you’ve got a number of different pensions, I bring my own experience in here, about 5 years ago I had 3 or 4 separate pensions, each paying about £30 / £35 a month – my independent financial advisor came along and said why don’t you consolidate all of these pensions, put them into one, find a good deal – which he did for me – I’m now paying about £250 a month – is that reasonable?

T: What the consolidation or –

H: Yes

T: or the amount of money you’re paying?

H: Well the consolidation and the amount of money

T: That’s a great idea, I mean I think – people can find pensions a little bit complicated, a little bit daunting, make it as simple as you can for yourself and certainly having one pension to deal with rather than 5 pensions to deal with certainly makes life simpler, it’s much easier to keep track of how much you’re paying in, where your money’s invested, how it’s progressing – I went through a similar process myself a few years ago because through changing jobs I’d accumulated several pensions, and it’s great, it just simplifies the problem back down again, so yes I think it’s a good idea

H: Rachel how can you convince young people you know around the 20 / 21 years of age mark to put money aside for the pension – you don’t think old when you’re young. When you’re young and you’re going out virtually every night of the week and you’re off on holiday to wherever, you don’t think about putting a lump sum aside monthly do you? How can you change people’s attitudes?

R: I think it’s a really tough ask actually, I think it’s a big thing to ask of young people when they’ve got so many other debts as well, it’s so difficult to get on the housing ladder, they’ve got student debt – it’s a lot for them to face. However I’m going back to this don’t delay saving, start as early as you can because it will take the pain out of the process by a long margin, so it’s easier to start as early as you possibly can. I think as time goes on and more young people begin to see how their grandparents are maybe struggling a little bit in retirement, I think that will send a message home to them and I think that in a few years time people will be more prepared to save earlier once they see exactly how tough it is to make ends meet when you don’t have the pension savings behind you

H: Do you think people are doing that, you know the younger folk are looking at the older folk and saying well there’s not a lot in this pension thing, I’ll tie my money up in bricks and mortar. Do you think that’s the way to go now?

R: I think they are at the moment, we’ve just enjoyed such a fantastic boom in property purchase prices over the last few years that it’s natural that people think well this is a fantastic investment, and – but we’ll see what the future holds for us in that respect. Obviously the message has to be to spread your risk, there’s no point just wrapping everything up in one particular investment or asset, that’s far too risky – so think about how to spread your risk across all of these different things and how you can use everything. Property is a very important way of people saving for their retirement, but it’s not the only method and it shouldn’t be the only method when you consider as Tom was saying the fantastic tax relief that the government’s prepared to offer you for pensions

H: Ok. Some interesting facts and figures here, Tom I’ll quote some of these if I can – defined benefit members have fallen by 60% since 1995, that’s a lot of people, and 50% since the year 2000. Is it continuing to spiral?

T: Well I think the interesting thing about that is the reason that that has happened is because employers have realised just how expensive those pension schemes are becoming, and they’re having to pay 30% of people’s salaries into a pension scheme just to guarantee the promises made with those pensions, and employers are saying look this is crazy, we can’t afford this business expense, we’re happy to support pensions and as Rachel said employers are still putting money into pensions for people, but employers are turning round saying look this is just a bit rich, we want you, the individuals, the employees to pay a bit more for us, so we’re going to move away from these guaranteed file salary pension schemes, we’re going to get you to pay a little bit more into that pension, you take on a bit more of that responsibility. So the employer’s still there, they’re still putting money into the pensions, but they too – like the government – are just trying to shift a little bit across to you and see look this is a little bit more your problem now.

H: Ok we’ve got some questions coming in, thanks for those questions, keep them coming in by the way, just fill in that little box at the bottom of the screen, hit submit button and your questions will come through to both our guests today in the studio. Mr Dennis Sharmer wants to know “I have some money in various pension plans at the moment – I think I could convert this to a lump sum and annuity when I reach 50, I believe that if I wait until 2010 I’ll lose this opportunity and will need to wait until 55 years of age. Do you think I should take the money at 50 – take the money and run – and perhaps put the money into another pension plan to save on tax, or wait until 55 years of age?” One for you I think Tom

T: Ok two things there – first of all as a general rule of thumb draw your pension when you need it, and if you try and second guess the rules, you could just as likely get it wrong as get it right, though he’s right about the rules changing. Once we get to 2010 the minimum retirement age goes up to 55, so it may be that if he waits too long he’ll miss the opportunity and then he’ll have to wait a few more years until he gets to 55. As to whether he should do it now, I – as a rule of thumb I’d say take the money if you need it but not otherwise. That age is very young to be drawing on a pension and certainly if you buy annuity at that age you’ll get a very low rate of return on it, so probably better to wait. Final point on that is if you take money out of a pension and then you put it back into a pension to get some more tax relief from the government you do risk falling foul of one rather odd little rule that the government’s created specifically to stop you doing that, so you just need to be a little bit careful how you do that

H: What about products, there are so many products out there on the marketplace now, you go on the internet and do all the comparison websites and things, they find you the best deal going – where do you look for the best product, I mean how many are there out there, there are hundreds surely? Pension products

R: Yes as I said before the easiest way to do it first of all is to have a look at what your employer’s offering you and if that’s free money on offer –

H: Take that

R: Take that free money. If your employer doesn’t offer a pension scheme then it’s up to you to find an individual pension plan. Really there’s quite a few on offer but they’re all very much the same sort of basis now. We’ve had a change in the pension rules and - almost two years ago now – so a lot of pension schemes all work in the same way, you put in the money and then at a retirement age you’re allowed to take a cash lump sum and you’re allowed to buy annuity or instead you can draw an income from the fund. So it’s all roughly working the same way. The biggest difference between these pension plans is the investment, some of the investment can be quite adventurous and a lot of self-investment, you could buy commercial properties with your pension, you can buy hedge funds, you can buy all these sort of things, and some of the investment can be quite mainstream, and a little bit more average – it really depends what you need and what’s right for your personal circumstances, and the best way of finding that out is to get in touch with a financial advisor. There’s a very good website called unbiased.co.uk, if you go onto that website then that gives you loads of really good information about the pension plans out there, how to kick-start your retirement saving, and it will also find out who the nearest financial advisors are in your area, so that’s the best way of taking that one forward

H: Tom McPhail, how much of a percentage should you put aside for your pension from your salary, if your employer isn’t putting up some money and you’re maybe self-employed – what percentage of your income should you put aside?

T: Ok first point is that I’ve never yet met someone who complains – a pensioner – who complains about having saved too much for their retirement. It just doesn’t happen, so the more you can save the better. For most people I think you could draw a line and say at least 10% of what you’re earning should be going into a pension, a tenth of what you’re earning should be going into a pension. Ideally though probably more than that – useful rule of thumb is however old you are, take half of that and that’s the percentage you should be paying into your pension, that’s when you start a pension, so if you start a pension when you’re 30 you should be putting 15% of your income into a pension. Now that sounds like an awful lot of money and it’s more than most people are paying in, but come back to the point earlier on, you’re going to be a long time retired, that’s what a decent pension costs and if you can’t afford to do it all on day one, start lower and build it up

H: Ok, another question here from Stuart G Macfarlane, he wants to know – thanks for getting in touch by the way Stuart, how much would indeed I have to have in a pension portfolio to reasonably guarantee a lifetime pension from the age of 65, equivalent to 25,000 per annum? That’s the question

T: Half a million or so, 600,000 –

R: I would say so, yes

T: About 5 or £600,000

H: Really?

T: Yes

H: Ok

R: You’ve got to remember these figures always sound startling but you’ve got to remember that he’s going to be at least 20 years in retirement so even if you, if you do the maths that way then you can see how these figures – get these figures

T: And the important thing is that he might – we’ve seen the statistics, we know the numbers from the government, they look at this all the time about how much longer people are living, he might be 30 years in retirement, he could be 40 years in retirement – the – by around 2030 there’ll be around 40,000 people over the age of 100 in this country. The number of people reaching those kinds of ages is going up very very fast, so it sounds like a lot of money but you need that much money if you want to guarantee yourself an income for the rest of your life, because that could be quite a long time

H: Ok Rachel for anybody watching us today and suddenly the penny has just dropped – they’re 35, 40 years of age, they’re suddenly thinking – pension, haven’t got one. What should I do? How much should I put away? Suddenly panic – you must get confronted with this panic and people suddenly think they’ve got no pension?

R: At least – first thing is they’re acknowledging it and they understand the risks and the challenges that they face going forward. As I said before, check with your employer, find out what they do, if your employer doesn’t offer a pension scheme or you don’t think it’s the right one for you, get in touch with a financial advisor, they can really – they are such experts at knowing exactly how to take this forward and what options you have, and then just try and get in the savings habit. January is the time of salary increases – hopefully for lots of us

H: For lots –

R: Salary increases, but if you have a salary increase coming through in January then that’s a nice, easy way of starting your pension saving. This is money that you’ve never had before, this is money that you’re not going to miss, so take that increase in your salary, put it to one side, save in a pension

H Ok. Jonathan Moss has been in touch with us, Jonathan thanks very much for getting in touch with us, one for you here Tom – he wants to know “why are annuity rates so low? If they were higher would this not make pensions more attractive?” Good point

T: I think if you want a level pension then from the age of 65 at the moment you can get a return of about 7 ½%. If you want inflation-linked annuity you’re looking at around 5% maybe a little bit less, it’s around those kind of numbers. The reason really comes back to the point I made earlier on, it’s about the life expectancy. A pension does something that almost no other financial product does which is to guarantee you an income for the rest of your life, however long that is. Now the insurance companies know that everybody is living longer and longer and longer. Three years more life expectancy every 10 years for the last couple of decades. Huge increases in life expectancy, they have to build that into their calculations, so you might only life for 10 years, you might live for 20 years but they have to take account of the fact that you could still be alive in 30 or 40 years time – and clearly you should as well. So those are the kinds of rates of return you get for annuity and that’s why – and interestingly we’ve had number of independent academic studies who have looked at this – annuity is fair value for money, it just doesn’t look like it because you don’t appreciate the guarantee that they’re offering at that level of life expectancy

H: Ok and it is that guarantee isn’t it?

T: Absolutely

H: Ok. Students having a word here. Maria says “I’ve got thousands of pounds worth of student debts, I’ve got no hope of buying my own place, so how on earth can I realistically think about saving for a pension?” Rachel?

R: I think it’s really tough, I think it’s – and I do sympathise, I think it’s a really tough position to be in. you have to think about whether it’s best to pay off that student debt, have a look at the interest rates for that student debt, see how much money you’ve actually got, what sort of career Maria’s in now, all those sort of elements, but saving earlier and getting into the savings habit as soon as you possibly can, it will reap its own rewards for doing that

H: Of course a lot of it is also state-of-mind if you like, folks living longer now, they’re retiring and then they’re going back into maybe part-time work, so if you’re younger you’re thinking oh when I get to retirement I’ll just find myself another little job and that’ll help me out surely? You must be faced with that as well?

R: I think there’s a growing number of people who are doing that, and I think a growing number of people – I’m certainly looking forward to doing that as well, you get to retirement age and you have a second or even a third career coming round the corner. Retirement used to be that you went into work on a Friday evening and that was it, and you packed up your bags and you left, and then Monday morning that was it, you weren’t doing anything else, you were at home for the rest of your life. Now it’s completely different, retirement isn’t an event, it’s a transition, so you will move from having a full-time job to maybe working part-time with the same company and then maybe working as a consultant or maybe working in a completely different job, and it’s an adventure, it’s trying new things, and that’s part of the – one of the plus sides of longevity and the fact that we’re all in better health when we’re coming up to retirement. So I think it’s more part of building this into your retirement plans, is the fact that you might have a second job or a third career or something like that, and that has to be built in, but you have to remember that you have to have the good health to do that, so maybe you shouldn’t really completely bank on that happening and try to insure against it

H: Tom, what other information or advice if you like, part advice, on people who are freelance, the freelance market – you know the self-employed builder, the self-employed plumber, whoever – what sort of products should they be looking for? Should they be looking for a couple of – as I said earlier I had myself a couple of individual pension schemes, should they just be looking at one big pension scheme? What’s the process there?

T: I think there’s not much argument these days, as Rachel touched on earlier on for having lots of different pensions because it’s about the investment inside your pension, if you get one good pension now that will serve your purposes. I think for people who’ve got fluctuating incomes, a good strategy is to have an ongoing fairly low level of savings going into their pension so they’ve got that discipline and they’re eliminating some of the investment risk of dumping big lump sums into the market, could be at the wrong moment. By dripping money in, you’re smoothing out your investment buying and then once or twice a year, as you can, try and put a lump sum in to top it up. I think that kind of control can work well, everyone’s looking at their tax returns this month, if you’re self-employed there’s nothing to stop you making a pension contribution now and then you can actually reduce the tax payment you’re making for the next tax year, the on account payment you have to make at the end of this month. So you can work the tax system to your advantage. So I think having an underlying level of regular savings is good too, if you can do both

H: Ok final question here from Tony, Tony thanks for getting in touch with us. “I put 76% of my £45,000 salary into my company pension, the company adds another 7% and this means I pay very little tax, about £100 a month plus £60 national insurance – are there any negative repercussions to this long term? A lower state pension perhaps?”

T: Did he say he’s putting 76%?

H: 76% of my £45,000 salary. That’s a lot of money

T: That’s a lot of money. Interesting. I think as far as the state pension question is concerned if you save very low levels – if you end up with a very, very small pension pot there is a risk that you can end up replacing state benefits that you would have got anyway, because some state benefits are means tested, so the margins for people with very low levels of savings, that is a risk. For him I don’t think that’s going to be a problem, I think if anything he’s more likely to bump up against is the ceiling that lifetime limit of saving too much – the only thing to watch for there is that over the longer term you don’t end up building up too much savings, currently its £1.6 million is the lifetime limit

R: Yes

T: And then if you go above that then you start getting taxed on it

H: Producer’s just told me it could be 7.6% - that’s more realistic actually

T: Which is fine, but I think the question of the state pension probably isn’t going to be an issue for him, certainly based on today’s rules

H: Ok well time has beaten us, thanks very much Rachel Vahey and also Tom McPhail whose an independent financial advisor. If you’ve got any questions, any queries then do check out that website that Rachel mentioned a little earlier, the website once again Rachel is?

R: unbiased.co.uk

H: unbiased all one word of course

R: Absolutely

H: unbiased.co.uk. That’s the website to check out. Thank you very much for your company we’ll see you again very soon. Bye bye for now

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