Save more for old age

Worried about inflation? Spare a thought for the nation's pensioners. Their estimated rate of inflation is more like 4.1% than the Government's number of 3% (this reflects the high percentage of their income spent on necessities, which are going up in price) and that means their purchasing power is falling fast.

A report from Ernst & Young this week pointed out that with inflation running at 2%, the spending power of a fixed pension would fall by 40% over 25 years (the amount of time most of us can expect to live post-retirement these days). Move the inflation number up to 5% and spending power falls by 70%. It's enough to shock you into thinking about saving a little more for your old age, isn't it?

If it doesn't, it should, says Scotland on Sunday. As a rough rule of thumb, you should imagine the amount you need in pension savings to be roughly equivalent to the value of your house. And given how much trouble people seem to have paying their mortgages these days, it is clear that saving this amount is no easy task.

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So what first? Figure out when you are going to retire, says The Sunday Times (after 2010, the retirement age for women goes up to 65 and then the pension age for both women and men will rise to 68 sometime between 2024 and 2046). Then get a pension forecast. At Thepensionservice.gov.uk you can find out what you should get from the state (assuming the UK isn't entirely bankrupt by the time you're 65).

Now turn to the private pensions you think you have. Can't remember? Call the DWP's Tracing Service on 0845-600 2537 and they'll give you a hand finding them.Once you have a predicted income from all these sources, consider whether it would still be enough if it was cut by 70%. Then you start saving more. To figure out how much more, use the calculator at Moneymadeclear.fsa.gov.uk.

However, don't feel you need to save everything in a formal pension scheme. Sure, you need one of these for safety's sake (the great thing about pension savings is that you can't raid them), and sure they come with good tax benefits. But once your money is inside a pension it's at the mercy of the state. Tax regimes, as more of us are learning to our cost, can change at the drop of a hat, and it is hard to see how most of the annuities we are forced to buy by current regulations offer much value. Instead, go for a mix of formal pension savings, Isas and paying into your mortgage.

Finally, note that there are ways to up your pension income without saving any more. You can defer getting your state pension: you get an extra 10.4% a year for every year you delay being paid. And even more importantly, you can shop around for your annuity: the difference between the best and the worst can be up to 60%, says Hargreaves Lansdown.