Don't delay and avoid retirement bombshell

Research by MGM Assurance shows that this level is a dramatic drop from 39 per cent in just two years; 46 per cent of all adults working say they are "not at all prepared" for retirement.

In planning for retirement, only 15 per cent have sought financial advice from a professional. Rather worryingly, six per cent or 2.7 million rely on friends for money advice.

Only 31 per cent have built up a savings pot. This might explain why, according to Baring Asset Management, one in 10 adults – equivalent to some 3.5 million – has no plans to retire at all – a huge rise from 2008 when the rate was one in 100.

Marino Valensise, chief investment officer at Barings, said: "A combination of increased longevity, a rise in the cost of living, and people not saving enough means that more people are being forced to work beyond the age of 65."

Preparation is key and the earlier money is put aside the longer time it has to grow. A pension can even be started for a baby with annual contributions of 3,600.

Annual retirement income at 65 years, excluding the state contribution, is projected by Aon Consulting to be only 18,800 for a 30-year-old, 10,518 for a 60-year-old and just 7,727 for a 65-year-old.

Currently, the maximum basic state pension for a single person is 97.65 and the minimum income guarantee under pension credit which is means tested is 132.60 which shows the importance of building up other savings, particularly pensions, property and tax-free ISAs.

A friendly society tax-exempt endowment should be a priority. The Yorkshire-based providers are paying excellent returns. For recently maturing policies, Druids Sheffield paid 11 per cent on annual premiums of 270 and 9.7 per cent on monthly 25 contributions, in both cases over 10 years. This includes its discretionary bonuses.

This is also a useful way to diversify since the money is mainly invested in property with 75 per cent in residential for Druids Sheffield and similarly high rates with commercial property for Sheffield Mutual and Wakefield-based Kingston Unity.

A series of ISAs should next be built up but not in cash where the rates do not even keep up with inflation, even with the best: Halifax four years fixed at 4.25 per cent and Nationwide three years fixed at 3.75 per cent.

Instead opt for a stocks and shares ISA. Over five years, shares are up 23.2 per cent with dividends but house prices only 1.3 per cent. Currently 10,200 each can be contributed annually.

Depending on your attitude to risk and when you expect to draw on the money, emerging markets should be a priority sector for those eight or more years from retirement and then gradually move into income funds.

Investment bonds are useful, particularly if you are a higher rate taxpayer when you invest and a basic rate one when you take the benefit.

Diversity is important but pensions should be at the heart of retirement planning, particularly if there is the chance to join an employer's pension scheme where your contributions will be matched.

There is still a generous tax incentive to boost a pension with 800 topped up to 1,000 even for a non-taxpayer.

Your choice of pension provider is important. According to KPMG, a pension scheme that followed a typical investment strategy from 2000-2009 would have seen its investments grow just 2.25 per cent a year before taking costs into account. Yet simply leaving money in the average bank deposit account would have returned over twice as much at 4.7 per cent.

Examining past performance based on 1,000 premium, Moneyfacts reveal that over 20 years to July, pension pots reached:

best with-profits 48,520 (LV=, formerly Liverpool Victoria);

best unit-linked 38,609 (Eagle Star, now Zurich Assurance);

average with-profits 37,705;

average unit-linked 32,592;

worst with-profits 31,104 (Scottish Widows);

lowest unit-linked 28,045 (MGM Advantage).

With-profits means that a smoothing effect is made to remove performance volatility. Yet some major insurers like Aviva (formerly Norwich Union) and Scottish Provident continue to declare no annual bonus unless required by a guarantee. The former spent millions on rebranding that could have boosted pension funds.

If an insurer is under-performing, take care before either surrendering (cashing-in) or transferring. Often policy holders think they are protected by the minimum guaranteed benefit but this applies on a specified date or event, typically on maturity or death. Usually these comparative values are set out on the annual statement.

Following her divorce, Sheffield-based Sue Pickett chose Aviva for her pension lump sum last August. Taking advice from the financial specialist at the British Tinnitus Association where she is an administration officer, Mrs Pickett opted for the Cautious Managed Fund.

Aged 46, Mrs Pickett plans to retire at 55. "It's very important that you build up a pension and I'm worried for friends of a similar age who intend to rely on the state," she said. Recently remarried, Mrs Pickett has three children and one grandchild.

If deciding on an annuity, shop around to find the best option and provider. Do not assume that the insurer used to build up your pension will provide the best rate. Up to 40 per cent more income can be secured by searching the market, says MGM Assurance. This can amount to a difference of tens of thousands of pounds.

Enhanced rates are available for those who smoke or have poor health. The range of conditions is wide and so it is always worth having this assessed by an experienced independent financial adviser on your behalf. They can then request an 'impaired life' annuity quote.

Annuity rates have nearly halved in 15 years, according to the Pensions Advisory Service. For 100,000 pension, a 65-year-old now should expect to annually receive about 6,500 (male) or 6,200 (female) but reduced to 5,600 for a couple (male 65, female 60 with two-thirds widow's pension). These are guaranteed rates for five years and vary with postcode.

FINANCIAL ADVICE THAT PROVED INVALUABLE

When Les Colbourne (pictured), 60, from Royston near Barnsley, had to sell his pub and take early retire-ment on health grounds, he decided to take independent financial advice from Yorkshire-based financial planners, Thomas Heald.

He is currently drawing monthly on an investment bond with Clerical Medical but wanted to know what action, if any, he should take with his private pensions: three with NPI and one with Scottish Life.

In financial jargon, Les's overall attitude to risk is 'low moderate' with five on a 1-10 scale where one is the least risky. He wanted to increase his death benefits but only take out cash in a tax-efficient way.

Chris Holland, a chartered financial planner at Thomas Heald, recommended transferring Les's NPI plans to a SIPP (self-invested personal pension) and access the tax-free cash as required to supplement his income.

Chris suggested that the retirement fund should be invested in a broad spread of assets and the death benefit payable to Les's wife, Susan, more than doubled on the largest of the NPI plans because this was an old-style pension, paying only return of premiums plus interest on death compared to the full fund value payable from a SIPP.

Contact: Thomas Heald 0113 2390922.