Pensions – start early or pay the price in the long run

But the grim fact is that most workers, outside final salary company pension schemes and or public sector pension schemes underwritten by taxpayers, have lost a big chunk of the income they might have expected when they stop work.

Brian Wood, co-author of the book Beat The Pensions Crisis, says there has been a fundamental shift in the cost of pensions in the last generation.

“Many savers face a gap between what they thought they would get, and what they will get,” he says.

Tom McPhail, head of pensions research at financial advisor Hargreaves Lansdown, welcomes the Tory plans.

“Existing Government plans to raise the state pension age are already widely seen as too little, too late,” he says.

Labour aims to raise the state pension age to 66 in 2026, to 67 in 2036 and to 68 in 2046 – only affecting people in their mid-40s and below.

Women’s state pension age, currently 60, starts rising by six months a year from 2010, reaching 65 in 2020.

Mr Osborne thinks 2020 is the earliest possible date to make women wait until 66 for their state pension, four years after the new limit is imposed on men.

Intended to save £13bn, his plan does not mean we must all forget the joys of retirement.

According to the Government Actuary’s Department, a man reaching 66 in 2016 can expect to live a further 18.9 years, while a woman could expect another 20.9 years of life. Both retirements will be much longer than those enjoyed by previous generations.

How should older workers cope with Mr Osborne’s plan?

“If we assume people still stop work at 65, a 58-year-old today set to retire in 2016 needs to save an additional £55 per month for the next seven years to produce a lump sum which covers the lost year’s basic state pension which he might not get until 2017,” says McPhail.

“A 49-year-old needs to save an additional £23 per month for the next 16 years to ensure he can stop work at 65.”

But these measures hardly solve the so-called pensions crisis.

On a basic state pension of £95.25 a week, rising with the Retail Price Index, millions face their later years on fairly low incomes.

The irony is that some with no savings, and thus eligible for pension credit, may be better off than those who saved.

Entitlement to pension credit, introduced by Gordon Brown in 2003, is affected by any savings over £6,000. An application form, with notes, running to 63 pages, might explain why two million pensioners who might qualify never bother to apply.

“Those who have not bothered to save and do not keep working may be paid more by the State than those who have paid contributions for decades,” says Mr Altmann.

Paul Goodwin, head of pensions at Aviva, the UK’s largest insurer, urges major changes to the pension system as the only way to restore “confidence and trust” in it.

The average payment into an Aviva pension is £220 per month, plus the employer’s contribution, in many cases.

But the average pension pot at retirement – only £30,000 to £40,000 – means annual income of only £2,000 to £2,500, About 47 per cent of pensioners say, in the first year of retirement, that they wished they had put more into their pension pot, says Mr Goodwin.

But by then it is too late.

Mr Goodwin says that many people can’t see the point of a pension when it is more than 40 years away.

So Aviva wants employers to provide shorter–term workplace savings schemes for under-25s as an alternative to pensions, possibly Individual Savings Accounts to provide tax breaks.

Mr Goodwin also believes savers should have the power to withdraw part of the pension earlier in their lives, if they face hardship or want to give money to children to avoid huge student debts.

“It can be difficult to explain to people that they cannot access £30,000 in a pension fund to escape trouble,” he says.

Aviva urges the abolition of pension credit, to give everybody a flat £130 per week instead.

And it suggests scrapping higher-rate tax relief on pension savings by higher earners, to encourage the majority (85 per cent) who are basic rate taxpayers, who might see 14 per cent added to the value of their fund at retirement.

Mr Goodwin says our pension system was built for another age.

“People try to save in a pension system with rigid rules geared to doing two or three jobs through an entire lifetime.

Now jobs typically last four or five years, before career breaks or maternity leave.”

For today’s 20 to 50-yearolds, the future of pensions is horribly uncertain. For too many, the old system no longer delivers.

Mr McPhail says it is vital to start saving as early as possible – the difference between starting a pension at 20 and 25 could mean an extra 28 per cent of income at age 68.

The fact is that pensions are attractive only to those who can build sizeable, six-figure pots.

For many on lower incomes, the attractions are less obvious, which may be why Aviva wants a radical rethink.