How to save

There are many ways to save for retirement, and how you do it comes down to personal choice. Some people are investing in property, in the expectation that the value will go up over time, and rents or the proceeds of sale will pay them an income in retirement. Buy-to-let has been a popular investment strategy in recent years, although it should be noted that hoping for appreciation in the value of your own home is a risky strategy. You will still need somewhere to live in retirement, and the costs associated with moving and “downsizing” may make a substantial dent in the amount of money you are hoping to bank from the deal.

Investing in tax-free vehicles, such as individual savings accounts (ISA) is another popular means of saving. The disadvantage is that the saving has to be made out of post-tax earnings, and the investment allowance on which tax on interest does not have to be paid – currently £7,000 per year – may not be enough for many people. The advantage is that the proceeds are yours to spend as you like, and you can leave any excess funds that you have not spent to your heirs after you are gone.

The most popular and way to save, however, is via a pension scheme. This could be a company scheme offered by your employer, which is usually the best sort to join, because your employer will probably make contributions into it – effectively giving you a pay rise, but one that can only be spent once you are retired.

Or you may take out a pension plan with an insurance company, either via your employer, with or without contributions made by the firm, or one you start privately yourself.

The big advantage of a pension plan is that contributions can be offset against income tax, and this makes them a particularly efficient way to save. For every £1 you pay, HM Revenue & Customs (HMRC) will pay an extra 25p, if you are a basic-rate taxpayer, speeding up the rate at which your fund increases (2008-9 figures). Put another way, a £1,000 contribution into your pension fund will actually cost you just £800. If you pay income tax at the higher rate (40%) your £1,000 contribution will cost you just £600.

Start early

The key to saving for a pension is that the earlier you start the more you achieve, because your fund has longer to grow.