Frank O'Donnell

The market has encountered two stock market collapses in the last 10 years, creating havoc on many people’s pension plans. Young people have time to repair their pension savings, but what can be done for those now coming up to retirement or already retired? It is now possible to defer retirement and carry on working past the normal retirement age in the hope to build up your pension funds.

Working on

It may be possible for those who are carrying on working to continue to save and make good the losses in the value of pension savings. An estimated 1.4 million pensioners are still working after retirement age to supplement their incomes, according to figures from the Department for Work and Pensions, and the numbers are rising. The average pensioner earnings are £36 a week, and if this was saved in a pension it would be worth £45 a week invested for a basic rate taxpayer, taking into account the tax relief.

The average pensioner earnings are £36 a week, and if this was saved in a pension it would be worth £45 a week invested for a basic rate taxpayer, taking into account the tax relief.

Those who carry on working full or part time can continue to save – either within existing pension schemes such as a Self Invested Personal Pension (Sipp), a packaged personal pension or may be eligible to join an employer’s scheme to which the employer makes contributions.

Retired

If you are already retired and no longer have earned income, you are not eligible to save in a pension anyway. Even those just coming up to retirement who believe they have made adequate pension provision could be caught out by inflation.

Annuity or draw-down

The big decision for those retiring is whether to buy an annuity now or operate draw-down in an attempt to maintain the buying power of their pension pot. The alternative is to buy an index-linked annuity but this means a big drop in initial income.

To provide a pension equal to the average wage of around £23,000 a year for a 60 year-old single male at an annuity rate of around 7%, you would need a retirement fund of £328,000.

If you index-link the pension to the RPI to cope with potential inflation, you will need a fund at retirement of £522,000. The average retirement fund for those who buy an annuity is around £80,000 so there is clearly going to be a massive shortfall for a large proportion of the population.