Pensions can be confusing but, when it comes to saving for later life, it pays to start as early as possible.
Nearly one in two Britons will have kicked off the New Year with a resolution to get their finances in shape.
But while it is important to check you're getting the best returns on your savings and are not paying over the odds for your mortgage, many people are neglecting to make adequate provisions for when they stop work.
The problem with saving for retirement is that it's often a long way off and this can make it seem hard to justify setting aside money that won't be used for decades.
But where pensions are concerned, it really does pay to start saving as early as possible.
Tom McPhail, head of pensions research at Hargreaves Lansdown, stresses the point by saying that ideally people should start saving into a pension when they are children.
In reality, hardly anyone is likely to do this, but the amount you need to set aside in order to have a comfortable retirement does increase steeply the older you get.
How it works
It used to be claimed that workers who weren't part of a final salary pension scheme, who hoped to retire on a pension worth 50% of their final pay and increased each year in line with inflation, needed to set aside a percentage of their salary that corresponded to half their age when they first started paying into a pension.
For example, someone who was 20 when they started saving for retirement would have to set aside 10% of their pay throughout their working life.
Those who put off saving into a pension until they were 30 would need to contribute at least 15%, while those who waited until they were 40 would have to set aside 20% of their pay each year until they retired.
However Mr McPhail warns low investment returns in recent years, combined with increased life expectancy, which has reduced the rates paid on annuities when people convert their pension pot into a retirement income, means someone who started saving at 25 would have to set aside 23% of their salary, while someone who put it off until they were 40 would need to set aside 41%, if they were to retire on 50% of their final salary.
Mind over matter
These sums may sound mind-boggling, but for many people help is at hand in the form of an occupational pension scheme.
These schemes are often described as being 'gold-plated' as the employer guarantees what a member's retirement income will be, based on their pay immediately before they stop work and the number of years they have belonged to the scheme.
Unfortunately, the vast majority of these schemes are now closed to new entrants, with companies instead replacing them with less generous defined contribution pensions.
Under these, it's the individual rather than the company who has to bear the risk of investment volatility and increased life expectancy, with the employer only guaranteeing how much they will contribute each month and not what the pension will be worth on retirement.
But even if you only have access to a defined contribution scheme, providing your employer is contributing something, it's definitely worth signing up. And while these are not as generous as final salary schemes, the average employer contribution of 6.5% of a member's pay is certainly not to be sniffed at.
Tricky issues
For those who do not have access to a pension into which their employer contributes, the choice is less straightforward. From 2012 new legislation will make it compulsory for all employers to pay at least 4% of a worker's pay into a pension scheme, so it may be worth considering joining an occupational scheme in anticipation of this rule change.
Alternatively, insurers and investment groups offer a wide range of personal pensions, ranging from low-cost stakeholders which have charges capped at 1.5%, falling to 1% after 10 years, to Self-Invested Personal Pensions (SIPPs), which give the individual complete investment freedom to decide how their money is invested.
But while it's worth adding savings into a pension as soon as possible, there does come a time when it may be too late.
It's difficult to offer hard and fast guidance on this due to the complexity of the UK's benefits system, but often for people who put off starting retirement saving until they are in their 50s, any money they save will simply reduce the level of benefits they would have qualified for.
As with all things financial, if you're unsure, it pays to broaden your knowledge. Log on to http://www.confused.com/savings for further help and information on savings.
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