Avoiding a pension black hole

MONEY TALK
By Julian Crooks
Independent Financial Adviser

A financial expert gives some tips to people who are worried about retirement.

So here you are in your fifties staring at a pension black hole.

Perhaps your investments have fallen in line with the stock market or maybe you have not invested at all.

You could even be in the unfortunate position of having had your company pension scheme close.

Whatever the reason the simple truth is that you are going to get less than you would probably like to live on in retirement.

How to escape from this impending financial disaster?

First of all you need to assess where you are, as far as paying for your retirement is concerned.

If you have a private or company pension find out how much it is going to be worth to you.

But be aware that current pension projections are being scaled down as insurers try to prevent investors moving their money out.

In time, as long as the stock market recovers, pension fund projections will return to truly reflecting the underlying value of the funds assets.

Once you have identified your shortfall it is a relatively easy job to calculate the extra savings you need to make.

Mind the gap

ISAs, individual savings accounts, are a tax efficient way of saving as investment gain remains out of the clutches of the taxman.

For higher tax rate payers paying into a pension, even relatively close to retirement age, is still attractive due to their tax efficiency.

All in all, if you have five or more years before retirement and you don't mind the risk then go for a stock market investment.

As a rule of thumb, over the longer term, shares and stock market based funds have outperformed other types of investment.

Generally, stock market funds such as unit trusts and investment trusts are a safer bet as they invest in a basket of shares rather than ploughing money into the shares of a single company.

Delaying tactics

In the final analysis you may decide to delay your retirement - this is an option which is being increasingly encouraged by the government.

Put simply, by retiring later the pot of money you have to live off in your retirement will go further.

As more Briton's live longer many will have to face up to the fact that the days of moving straight from the world of work into retirement are over.

From 2006 legislation courtesy of the EU will ban employers from enforcing fixed retirement dates so you should have no problem working on if you wish beyond age 65.

Oh. and if you do work after 65 you'll receive a little bonus from the Government courtesy of the increased personal allowance.

This is worth a £438 saving in income tax per year for a basic rate tax payer.

Home front

An Englishman's home is his castle, it is also fast becoming one of the main ways of paying for retirement.

As house prices have soared, equity release schemes - where you receive the loan as cash, usually on a monthly basis, but sometimes as a lump sum, and continue to live in your home - are becoming increasingly popular.

There is nothing wrong with releasing equity from your property if it means avoiding pensioner poverty.

But beware there is growing concern about some of the charges and clauses associated with such contracts. It maybe a sound idea to seek independent financial advice.

The opinions expressed are Mr Crooks, not the BBC's. The advice is not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.