Here's a statistic for you. One in six people in the UK today will live to 100*, according to the Department for Work and Pensions (DWP). If they stop working at 65, this means they'll be spending 35 years in retirement.

Few people may complain about living longer, but our increasing longevity and the failure of many people to properly save for the future is placing phenomenal pressure on the state pension system.

Research released by Barings Asset Management in August 2011 showed there are an estimated two million people approaching retirement without a pension. Therefore an urgent need to change peoples' apathy when it comes to investing for the long-term is required.

Auto-enrolment

Starting in October 2012 with the very biggest companies, and ending with the smallest companies in 2015 and 2016, all employers will be required, by law, to enrol eligible workers into workplace pension schemes or one provided by the Government: NEST (National Employment Savings Trust). If employers choose to make contributions, the minimum amount by 2017 will be 3% towards a defined contribution scheme, based on qualifying pensionable earnings.

From RPI to CPI

While the issue within the private sector is encouraging people to save for their retirement, the public sector has issues of its own. In his first Budget, George Osborne confirmed that public sector pensions would henceforth rise with inflation measured by the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). CPI is in the region of 0.5%–0.75% below RPI. So, like their private sector counterparts, public sector employees also have to ensure they have a suitable pension pot in place for retirement.

Saving levels

The clear message is that people need to start saving. Indeed, statistics from Scottish Widows** show that to provide a £20,000 pension income at the age of 65, a 25-year old man would need to start saving around £200 per month. By 35 this has increased to £375 per month, by 45 to £790 per month and by 55 to around £2,100 per month.

Which savings vehicles are best?

Ultimately, this will depend on your situation, needs and attitude to risk but generally speaking when it comes to investing for retirement, pensions are still an attractive way to save due to their exceptional tax benefits.

With pensions, basic rate taxpayers receive 20% relief on their contributions, while higher and additional rate taxpayers can claim tax relief at 40% or 50% via their tax returns or adjusting their tax code.

However, these days pensions are increasingly considered to be just part of a retirement savings strategy and not the sole element.

The other key element is deemed to be the Individual Savings Account (ISA), which, like the pension, is a 'taxefficient' saving vehicle. It's possible to invest up to £10,680 per tax year in an ISA, of which £5,340 can be invested in a Cash ISA. The whole amount, however, can be invested in a Stocks and Shares ISA.

It's worth pointing out that an ISA isn't an investment in itself, but merely a tax wrapper around an underlying product such as a savings account or funds such as a unit trust or OEIC.

Stockmarket vagaries

What makes pensions attractive is that by making regular monthly payments, savers actually benefit from volatile markets, thanks to something called 'pound cost averaging'. Pound cost averaging is a way of reducing the effect of stock market fluctuations. Because savers invest the same amount of money every month, they simply buy more units when share prices are low and fewer when share prices are high. This results in a lower average unit price paid than if you invested lump sums.

In short, unless they are very close to retirement, volatile markets can therefore actually work in their favour.

A balanced retirement plan

There are many other investment vehicles that can be used to save for retirement, and if you are investing for your retirement through a Self-Invested Personal Pension, it can be tailored to reflect your own desires. You can access specialist investments such as buying a commercial property and funds that invest in alternative assets such as commodities or ethical investments. But in all cases, when it comes to planning for your future, your investments must be balanced and fully reflective of your goals and attitude to risk.

Richard Brand
Financial Adviser, Eos Wealth Management

E rbrand@eoswealth.com

Source:
*DWP Newsletter February 2011
**Scottish Widows, 2007

Eos Wealth Management Limited is an appointed representative of Dentons Investment Services Limited, which is authorised and regulated by the Financial Services Authority.

You should be aware that past performance is no guarantee of future performance. The price of investments and the income from them can fall as well as rise. An investor may not get back the original amount invested, unlike savings accounts in a bank or building society, where the capital is guaranteed. Any tax reliefs or legislation mentioned are those currently available or in force and are subject to change.