With strikes over pensions and warnings young people face a retirement in poverty, we help one Confused.com reader who wonders if she’s left it too late to start putting money away for her old age.
Claire Rees, 29, lives in Cardiff. She is a journalist taking home around £1,600 a month after tax.
But she is worried about her lack of pension provision. Claire has nothing put aside for her retirement apart from what the state will provide her with. The basic state pension currently stands at just £102.15 week.
Indeed, this predicament is faced by many people Claire’s age. Government figures show that 43 per cent of those aged 25 to 34 are not saving for their retirement and Lord McFall, who is heading a review into private sector pensions, has warned that many young people are facing a "long retirement spent in poverty".
Claire is determined to get herself sorted. She says: “Most people of my age that I know have been paying into a pension for years and with me nearing the big 3-0, it has really been worrying me that I’m years behind everyone.”
We spoke to Gareth Shears, an independent financial adviser (IFA) with Niche Chartered Financial Planners in Newport, south Wales, to see how he would advise Claire to handle her current financial situation.
Credit card debt
Claire has approximately £500 a month disposable income which she wants to put towards a pension and saving for a house but she has £3,450 on various credit cards paying high interest rates of more than 17 per cent.
Firstly, Gareth says Claire should shop around for a 0 per cent interest credit card and transfer the balance which will allow her to clear this debt quicker.
Gareth says: “I would always advise reducing debt before saving, although a focused plan of both overpaying and saving could work well in this instance.
“Overpaying the cards by £250 per month means the debt could be paid off in about 14 months and the remaining £250 can be put towards savings and retirement planning.
The benefit of company pensions
Gareth explains that there are two basic styles of pension: defined contribution and defined benefit.
In a defined contribution pension, the level of contributions made by the employer is set but the amount of income received on retirement is not.
The contributions are usually set as a percentage of salary.
In a defined benefit pension, also known as a final salary pension, the amount of income an employee receives on retirement is decided in advance, based on the number of years they have worked for an employer and the level of their salary when they retire.
Gareth says: “As an employee, the first thing you should find out is if it has a pension scheme and what are the conditions of joining.
“In Claire’s case her company has a defined contribution scheme.
“They require a minimum input of 3 per cent of the salary by the employee and the employer will contribute 4 per cent of your salary. The employee will also receive tax relief on their contribution.
“I would always advise joining a scheme like this due to the employer’s contribution. This, in my opinion, is a good incentive to save for retirement as your contributions are effectively being doubled.”
Compulsory pension saving
For those who do not have a work pension scheme, in October 2012 the government will launch National Employment Savings Trust (NEST).
This means that companies without a qualifying work pension scheme in place will have to use the NEST scheme.
This scheme has a minimum contribution of 4 per cent by the employee and 3 per cent by the employer, which works out as 8 per cent taking into account tax relief.
Gareth says: “In brief, if you are employed always explore what options are available through your company and if you are self employed one of the options is to set up a personal pension and make your own contributions.”
Planning for the future
He also says as part of ongoing pensions planning it is worth obtaining a state pension forecast.
Claire says: “Gareth assured me I wasn't an unusual case and that it was definitely worth starting now, even after a year I will still have accumulated a healthy sum thanks to my employer's contribution.
“I'm going to put in the minimum amount - 3 per cent - so I that way I can save a bit on the side, too. It feels good to have a plan for my future.”
