'How much will I need to retire?'

Metro, 30th July 2008, by Jayne Atherton.

'Retirement is one of the most important reasons we put our money away but few of us are saving enough to be financially comfortable when our working days are over.

The average cost of retirement for a typical British household is £413,000, thanks to the rising cost of living and longer life expectancy. Someone who lives alone will need to build up a pension pot worth £326,700 if they want to retire comfortably, according to the 2008 Cost of Retirement report from Life Trust Insurance.

Andy Briscoe, the CEO of Life Trust Insurance, says: 'People are living longer and healthier lives, which is great news - but only if they have the finances in place to enjoy their post-career lives.'

'The combination of rising life expectancy and the impact of inflation over time has huge financial implications for pensions.'

We're living longer

The report reveals that a man can expect to live to 85 and a woman to 89 but longevity is expected to rise further in the future. A 55-year old today has a one in four chance of seeing the age of 95 and a one in ten chance of reaching 100. The chances are even better for someone who is only 35, who can look forward to 35 or more retirement years.

However, the above calculations are based on a yearly inflation level of 2.3 per cent but if inflation was to remain at today's levels, the average cost of retirement would rise to £1 million.

It means that pensioners who are in the top 20 per cent of earners will need £1.55 million to fund their retirement, while those in the lowest 20 per cent will need £448,500.

The sooner the better

It's a lot of money but the earlier we start saving, the better. A key advantage of saving into a pension rather than a standard savings account is the tax relief savers get up front.

A £100 contribution will cost a higher rate tax payer £60 and a lower rate tax payer £78. The best place to start is with a company pension scheme because employers make contributions that boost your own monthly deductions. The charges are usually lower than those for personal pensions and they are covered by your employer.

Final salary schemes

Final salary schemes are the gold standard but because they are expensive for companies to run, they are disappearing fast, especially to new recruits.

These schemes work by giving employees a pension based on their salary levels when they finish working and the number of years they have saved. Money purchase schemes built up a pot of cash that can be used to buy an annuity on the open market. How much you get depends on how well the funds you have invested in have performed over the years and the price of annuities, which fluctuate.

If a man wants to retire at 55, for example, £100,000 now will buy him a sum of £6,610 per year from Norwich Union or £7,150 per year from the same provider at the age of 60.

Personal pensions

Then there are personal pensions and stakeholders that invest only your own contributions, although you can run a personal and company pension at the same time, if you can afford it.

Personal pensions usually offer a wider range of investments than stakeholders. Popular personal pension providers include Scottish Widows, Friends Provident, Axa and Zurich.

Stakeholder pensions have the advantage of charge caps and you can buy them from high street names such as Marks & Spencer and Virgin.

For the best investment choice, a self-invested personal pension (Sipp) allows you to choose your funds depending on your interest and attitude to risk. There are various low-cost versions on the market.

The alternatives to pension saving include Isas, which provide no tax relief up front but they do allow you to withdraw the proceeds as a lump sum without capital gains tax.'