Start your pension today
However, the complexity of these plans - not to mention the money that needs to be paid into them - can make starting yours a chore that is always being pushed to the bottom of your to do list.
However, putting off starting a pension can be an expensive mistake – indeed a survey from Standard Life found that UK savers' biggest financial regret was not saving enough for a pension. Second in line was frittering money away and running up debts on credit and store cards, all factors that will come between you and a comfortable retirement.
Not least among the reasons why you should start a pension as soon as you can is that pension savers benefit from compound interest where interest being paid upon interest effectively means the longer you have to save the less you have to put away. So, the sooner you can start saving the better.
The cost of delay
"Delaying starting a pension from age 25 until age 30 will slice between a quarter and third off your retirement income," warns Tom McPhail, head of pensions research at Hargreaves Lansdown. "If that feels a bit abstract, think of it in terms of your pay being cut by that much right now; how much impact would that have on your standard of living today? That's what you'll be faced with if you delay starting your pension."
Of course if you are already over 30 and haven't yet started to save, the important message is it's not too late - you'll just have to put a bit more money away to achieve the same goal.
Don't pensions have a lot of bad press?
Pensions haven't had a great press in recent years. "Much of the public has a negative perception of pensions," says Patrick Connolly, IFA at Chase De Vere. "This is often based on little more than sentiment, comment from friends and family and press articles they have read which might not be particularly relevant to them."
He adds: "This perception isn't helped by the constant meddling from politicians meaning that pensions legislation seems to be constantly changing, which doesn't exactly create confidence in the pensions industry."
However, while savings vehicles such as Isas and buy-to-let property can be used to help you save for retirement, for the vast majority of people they are rarely as effective as a pension, which is specifically designed for the purpose.
Don't say 'no' to free money
They key advantage that pensions have over other savings vehicles is that to incentivise you to save, other parties will pay into them on your behalf.
People who save in a pension get the benefit of tax relief at their marginal rate. So in plain English that means it only costs basic rate taxpayers 80p to invest £1 while higher rate taxpayers only have to pay 60p. Put another way if a basic rate taxpayer invests £80, or a higher rate taxpayer invests £60, the government will top up that contribution to £100. Howevever tax relief on pensions contributions is currently under review by the government and it is widely expected that a new flat rate of tax relief will be introduced.
Are Isas an alternative to pensions?
Isas have tax advantages too - all money held within an Isa wrapper grows free of income tax and when you cash it in you won't be liable for any capital gains tax. They are more flexible than pensions too - you can access your money at any time you like, while pension savers can only get their hands on theirs from age 55.
However that tax relief up front - which really benefits from compound growth over the years - generally gives pensions the edge. And because your money is locked away for the long term you won't be tempted to blow the savings you've set aside for your retirement.
Tax-relief isn't the only reason to pay into a pension. If you are a member of a workplace pension there is a very good chance your employer will pay in too.
So by failing to join your employer's pension scheme, you are effectively turning down free money.
Which pension should I choose?
If you have access to a workplace pension into which your employer contributes - very often matching what you pay in - then this will be the best option for you. Some schemes will invariably be better than others but if your employer is paying in money on your behalf going it alone is tantamount to turning down a payrise.
If you don't have access to a workplace pension - for example you are self-employed or don't work, there are other options in the shape of personal pensions. This might be a low-cost stakeholder or an all singing all dancing Sipp (self-invested personal pension). These are also options if you want to make savings over and above what you pay into a work pension.
Although you don't get the benefit of employer contributions, the money you pay in will still be topped up by tax relief at the rate of 20% if you pay basic rate, 40% if you are a higher rate taxpayer, or 45% if you pay the additional rate.
So don't put off saving any longer: join your employer's scheme or look into personal pensions and get your retirement savings underway.
There will be plenty of decisions to make along the way, but Moneywise can guide you to make all the right choices.
Find out everything you need to know about the new pension rules and how to plan ahead for the retirement you deserve with our new magazine, How to Retire in Style. The magazine is available to buy now from all leading newsagents, or can be ordered online at moneywise.co.uk/retire
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.