Pensions: How to get started

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Media captionIt is better to start saving for a pension as early as possible

Parents are twice as likely to talk to their children about the birds and the bees than they are about pensions, according to a government survey.

A lack of awareness about saving for retirement is among the reasons for millions of people not saving enough to pay for the lifestyle their expect when they grow old.

Experts suggest that debt pressures and confusion about pension provision also lead to fewer than 40% of workers aged 22 to 29 putting money away for their old age.

So what should be considered when starting to save for a pension?

What is the basic state pension?

This is the income which the state provides to people who have reached pension age.

At the moment, it is up to £97.65 a week for men aged 65 and above and women aged 60 and above.

But, as we are all living for longer, the pension age is starting to rise and is likely to reach at least 68 for all men and women just setting out on their working life now.

To get a full state pension you need to have paid National Insurance contributions - usually deducted from your pay packet - for 30 years. A state pension profiler will explain how much you have built up, and the date when you can claim the state pension.

That does not sound like much to live on?

Correct. Pensioners do get more from the benefits system but this still means money can be tight for many years, even if you have worked for your whole life.

The latest figures from the Office for National Statistics show that 53% of single UK pensioners had an income of less than £10,000 in 2008-9.

So does it pay to start saving early?

It certainly does, especially because compound interest means if you save regularly from a young age, you will be better off than if you save more later in life.

You can use a pensions calculator to work out how much to save.

Pensions experts say that you should top-up the pension provision from the state with a workplace pension or a private pension.

How do they work?

In a final-salary scheme, the investment risk is taken by the employer and you are guaranteed a retirement income based on pay and length of service.

But generally a pension is a long-term investment. Remember investments, unlike savings, can go down or up in value depending on the success of the investment - such as shares on the stock market.

You will not be able to spend the money you put in now until you retire. However you do not have to pay much tax on this investment.

When you retire, the pot of money that you have built up can be used to buy a regular income in retirement, called an annuity.

If you join a workplace pension scheme, money comes out of your pay packet and into a pension pot. Your employer also puts money in, and there is tax relief on all this from the government.

The alternative private, or personal pension, is offered by a provider such as an insurance company, High Street bank, building society or most typically, a pension company. You do not get any contribution into this from your employer, but it may offer more flexibility over how and where the money is invested.

The success of the investment and the fees charged by the provider will determine how much you get on retirement.

So, do I have to sort all this out myself?

Yes, at the moment you have to do most of the legwork.

But from 2012, the government wants all firms to offer a pension to their workers and the employees will be enrolled automatically unless they opt out.

If employers do not currently offer membership of a pension scheme, they will have to enrol their staff into an alternative, such as the new National Employment Savings Trust (Nest) set up by the government.

To be enrolled, staff must be aged 22 or above, and earn more than £8,105 a year.

Pensions experts have suggested that contributions into this scheme will not be enough for people to have a comfortable old age, but the Pensions Minister Steve Webb says it will get youngsters into the habit of saving for retirement.

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