FOOL'S EYE VIEW
How You Can Solve The Pension Crisis

By Stuart Watson (TMFTiger)
June 17, 2004

There is little doubt many of us are storing up problems in our finances for our later years. Warnings about pension 'timebombs' are now almost as prevalent as those regarding a house price crash!

The latest scary figures have been published by the TUC. Last week, they highlighted the fact that less half of those under 30 are currently saving for a pension. By way of comparison, 73% of those born in the 1960s had a pension before they turned 30. No doubt the scandals of recent years have put people off pensions and, of course, increased levels of student debts are unlikely to help matters either.

This week, the TUC issued another warning about the consequences of raising the retirement age to 70, saying that it would increase the proportion of people who would die before reaching state pension age from 17% to 24%, with higher rates than that amongst men and in poorer areas of the country. Cheery stuff indeed! In case you're wondering why the TUC's PR machine has gone into overdrive, it's all in aid of its 'Pay Up For Pensions' rally, which takes place this weekend.

While the TUC is well intentioned, I suspect I'm not alone in thinking that relying on someone else, whether it's an employer or the government, to cough up for the majority of my pension contributions is wishful thinking. I regard my retirement income as my responsibility and I'm fortunate in that I'm able to do something about it. And here's how you can too.

Before you start, get the right mindset

It's important to be realistic. Building a pension pot takes a long time. There aren't any short cuts (well, none that are legal anyway). So, if you want to retire at 55, then it's going to mean saving a lot, lot more than you would do if you wanted to retire at 65.

It's also going to mean investing in the stock market. That's pretty much the only sort of investment that's going to give you the growth you need (although property is also an option and it's likely that many people saving now will use part of the equity in their home). Despite the falls of a few years ago, in my opinion, the long-term record of the stock market still makes it the best home for regular savers, provided you appreciate that there'll be bumps along the way.

Get some help

Despite my earlier reservations about the government, the State Pension and the Second State Pension (which used to be called SERPS) will cover a reasonable chunk of your expenditure, depending on how extravagant a retiree you plan to be. So, get a State Pension Forecast, and see just how much you can expect to get.

Company schemes, assuming the employer makes a contribution, are almost always worth joining. Of course, some people who worked for smaller companies have seen their pensions disappear in recent years. Although there are plans to solve this problem, I'd still regard relying entirely on a company pension as a risky approach (see the next section).

Spread yourself thinly

At the moment, my retirement savings are with four separate companies. I've got a stakeholder pension here with the Fool as well as pension from my previous employer. I've got some ISAs with one stockbroker and some PEPs with another.

Should the unthinkable happen and disaster strike, and all these are big companies by the way, I'll only lose part of my retirement savings. It'll hurt but it shouldn't be fatal.

Get a game plan

There are two things to concentrate on here. The first is where to put your money. The second is how much you need to put in.

As I said above, my retirement money is split between pension schemes and ISAs/PEPs. I'm fairly relaxed about taking out an annuity. Although there's been plenty of bad press focusing on not getting your money's worth if you die early, I'm more concerned that my money runs out before I do, so to speak. Having some of my retirement income from an annuity alleviates that particular concern.

I also want flexibility though. ISAs give me that and although they aren't quite as tax-efficient as pensions they're the next best option. It looks like we'll have more flexibility in how we can take our pension income after April 6 2006, known as A-day, which is when the new spangled pension rules come into effect. But just much more flexibility is unclear, so I'm going to continue with the dual ISA/pension route for now.

As for the choice of what to put into your pension or ISA, you probably won't be surprised to see me favour a low-cost index tracker. Other low-cost investments like one of the large, generalist investment trusts also suit the bill.

Finally, how much to invest. The simple answer is as much as possible. If you use ISAs as part of your retirement plan then, in the happy event that you've saved too much, you'll still be able to get at the money. Most of us need to save more though. There's a good calculator here that will help get a handle on what size pension you can currently expect. You can alter your contribution level and your retirement age and see what difference that makes.

Good luck and have a prosperous retirement!

Check the Fool's information centres for ISAs/Trackers and Pensions.