Only a quarter of fiftysomethings are financially prepared for retirement, but there are steps you can take to catch up.
7:01AM GMT 13 Nov 2010
Millions of baby boomers now have just a 10-year period in which they can either make or break their retirement plans.
According to new research, seen exclusively by The Sunday Telegraph, only one in four fiftysomethings is financially prepared for retirement and one third have no retirement savings at all. But it is the steps you take in the final countdown to retirement that can have the most significant effect on the size of your eventual pension.
Pension planning has always been particularly important for those in their fifties, but today's fiftysomethings face a series of challenges that no other generation has faced. The research, by US-based insurer MetLife, points out that those in this group have benefited from huge improvements in health and longevity: men retiring at 65 can now expect to live to 82, while women of the same age can expect to celebrate their 85th birthday.
Less positively though, many have seen their pensions and savings squeezed from all sides: company pension schemes have cut back while the value of the state pension has fallen.
But it is private savings that have been hardest hit: those in this age group have suffered a toxic mix of poor investment returns, rock-bottom interest rates and ever-declining annuity rates, so even those who manage to build a decent pension fund find that it secures a smaller income in retirement. MetLife's survey showed that those in their fifties were on average hoping to retire on an income of £18,100 a year.
But six out of 10 of those surveyed said their pension plans had been affected by the recent financial crisis. This problem was particularly acute for those on middle incomes (of between £50,000 and £70,000) and the nearer you were to retirement the more detrimental the effect on a person's retirement plans. Women were also particularly ill prepared for retirement, having on average half the pension savings of men.
Despite these financial problems the majority of those surveyed (60pc) said they had taken no action to change their investment strategy, alter their retirement plans or protect their pension funds.
But there are steps that people can take to improve their pension prospects. Ignoring the problem completely is likely to make it significantly worse.
Peter Carter of MetLife said: "Sadly, the experience of the last two years shows that even those who have done all the right things have still been left struggling. Planning for retirement is one of the biggest financial challenges people face, and the one you can least afford to get wrong."
Below is our countdown to retirement, which, whether you are 10 years or five years away, should help you get your pension planning back on track.
10 YEARS TO GO
– Find out what you are worth
Before you can draw up financial plans for the future, you need a clear view of your current position. Ian Price of St James's Place, the fund manager, said that as a starting point people should establish what their likely state pension entitlement would be. This can be done by completing a form BR19, available at www.direct.gov.uk You should also contact the pension trustees of your current and previous employers, who will be able to provide pension forecasts, as will the companies managing any private pension plans.
– How much money will you need?
Gavin Haynes of Whitechurch Securities said you needed to look at how much income you would need in retirement. Be realistic – you may spend less if you are not commuting to work, for example – but don't forget to factor in holidays, travel and any debts you may still have.
– Seek advice on how to bridge the gap
The chances are that what you are currently on target to receive is less than you'd ideally like. Seek advice about how you can bridge this gap. You need to maximise savings during this 10-year period – not only into pensions but into other investments such as Isas. You will need to consider whether options such as retiring later or working part-time beyond your retirement date may be a more realistic way of meeting your retirement goals.
– Review your investment strategy
It is not only how much you save but where it is invested that can make a difference.
A spokesman for Origen, the pensions specialist, said: "Use this opportunity to carry out an audit of existing pension plans; look at where they are invested, how they have performed and what charges are levied on them. Don't forget to ask whether there are guarantees on any plans."
Get advice about whether it makes sense to consolidate existing pension plans – perhaps via a Sipp (self-invested personal pension) – or take steps to protect capital values. There are a number of guaranteed products that can help you achieve this, but seek advice as many come with higher charges.
As part of your review, look at the diversification of your assets, as this can help protect against sudden market movements. With a 10-year time frame investors need to weigh up the risks of equity investments against safer cash-based products.
Generally, the nearer to drawing your pension you are, the less investment risk you should take. But over this period it is reasonable to include equities within a mixed portfolio, particularly given the very low returns currently available on cash.
Bonds, gilts and some structured products may provide a halfway house between cash and equities – but seek advice about costs and risks.
FIVE YEARS TO GO
– Review retirement goals
Get up-to-date pension forecasts and review your retirement plans. Is retiring at the age you planned still realistic and achievable?
– Take the safer option
Consider moving stock market-based investments into safer options such as cash, bonds or gilts. If there is a sudden market correction now, you may have insufficient time to make good any losses.
– Trace 'lost' pensions and other investments
If you've lost details of a pension scheme and need help contacting the provider, the Pension Tracing Service (0845 6002 537) may be able to help. It has access to information on over 200,000 schemes.
The tracing service will use this database, free of charge, to search for your scheme and may be able to provide you with current contact details. Use this information to contact the pension provider and find out if you have any pension entitlement.
– Maximise savings
You now have just 60 pay packets left until you retire. Save what you can via pensions, Isas and other investments. This, with your current pension pot, will have to produce enough for you to live off for 20 years.
Mr Price said: "Don't forget to consider a spouse's pension. If you have maximised your pension contributions it is also possible to contribute into a partner's pension plan."
He pointed out that higher earners and those in final salary schemes should ensure any additional pension savings didn't breach the lifetime allowance (£1.5m from April 2012) as this could land them with a tax bill. Those with outstanding debts, such as a mortgage or credit cards, should use spare cash to reduce them.
– Consider your retirement options
Don't leave it until the last minute to decide what you will do with your pension plan. Many people fail to consider their options properly and simply buy the annuity offered by their pension provider. This can significantly reduce their income in retirement and there is no second chance to make a better decision.
There are now many more retirement alternatives, from investment-linked and flexible annuities to phased retirement options, as well as the conventional annuities and income drawdown plans. It is worth investigating which is most likely to suit your circumstances.
SIX MONTHS TO GO
– Seek annuity advice
Talk to an adviser about your options; if you are buying an annuity, make sure you shop around for the best rate. Remember that those who smoke or have health problems, even minor ones, should inform the annuity provider as they are likely to get a better rate to reflect their reduced life expectancy.
– Consider deferring retirement
You may qualify for a bigger pension if you defer taking it. If you opt to do this you need to contact the Pensions Service. Those who work beyond their retirement age do not have to make National Insurance contributions. Any additional money earned can still be saved in a pension plan.
– Contact pension providers
Ask how your pension will be paid – and how much it is worth. If you are deferring retirement they will need to be informed.