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Yes, I know, I know. Pensions are boring. And confusing. And a little bit scary. Most people find the whole business of planning for retirement about as enticing as a bowl of cold porridge, with a stale mince pie for afters.
But with the current state pension a mere £90.70 for a single person, it is time to give the matter a little serious thought. After all, you may feel hard up now, but eating baked beans for supper each night while worrying about the gas bill is not going to be any more enjoyable when you're 78.
Whether you already save into a scheme or not, you should find out if your employer offers a pension. If it does, join it. "Many people work for a private company and don't join their employers' pension scheme," says Malcolm McLean, chief executive of the Pensions Advisory Service. This, says McLean, is "effectively turning away wages". You wouldn't turn away a £1,500 pay rise, but if you earn £30,000 and are not taking advantage of an employer's offer to contribute 5% of your salary to a pension, you are missing out on a similar sum.
The first step is to ask your line manager if a scheme exists. If it does, they will be able to tell you if you are entitled to join. Some companies make employees wait before they can join a scheme; others let you sign up on day one. There are two types of occupational scheme - final salary schemes, also known as defined benefit schemes, and defined contribution schemes.
Unfortunately, opportunities to join final-salary schemes are about as common as sightings of Amy Winehouse sober, because they are increasingly expensive to run. This is because they offer a guaranteed payout linked to your earnings at the time you leave the company, and as people live longer the cost of providing these guaranteed payments gets bigger. If an employer is offering to let you join such a scheme, you should probably bite its hand off.
More usually you will be offered a defined contribution pension, where an employer tells you how much it will pay in each month, but the amount you get out will depend on the performance of the funds in which your cash is invested. This may not be quite so attractive, but there is still the prospect of free money on the table, from both your employer and the government. "An occupational pension scheme offers government tax relief," points out McLean. "That's not appreciated by a lot of people. Putting away £1,000 only costs £600 if you're a higher-rate taxpayer."
Of course your employer may not have a scheme, or you may not be entitled to join it. But if you are one of at least five employees it is obliged to tell you about stakeholder pensions. These are a type of personal pension which your employer does not have to pay into.
McLean offers a "rough and ready" way to work out how much you will need to pay in to build up a decent pension: halve your age when you start paying into a pension, he says, turn that figure into a percentage and keep contributions at that rate until you retire.
To stop people simply not bothering with pension planning (and thereby guaranteeing themselves a pretty impoverished retirement) the government is introducing the new Personal Accounts pension scheme in 2012. Enrolment will be automatic and apply to earnings between roughly £5,000 and £33,000.
"If you work for an employer who doesn't provide a pension, you'll be enrolled on a government scheme and have to contribute 4% of your earnings, matched by 3% from your employer and 1% from government," explains McLean.
But it's probably not wise to relax and wait for 2012. According to McLean's "rough and ready" calculation, 8% of your income will only provide for a comfortable retirement if you start saving when you're sweet 16.
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