When it comes to planning for retirement, a dose of reality can be helpful in spurring you into action. The latest shock therapy came from the Office of National Statistics, which last week published annual data on household income.

Headlines focused on the fact that, since the Great Financial Crisis of 2007/08, pensioners have on average done better than non-pensioners. While the average non-retired household has seen income drop 1.2%, or £300, retired households have seen income rocket by 13%, or £2,500.

The power of the “triple-lock”

The surge in retired people’s income is in no small part due to the state pension ‘triple-lock’, a policy introduced in 2010 which guarantees the payment increases in line with the highest of earnings, prices or 2.5%. There has also been a significant rise in the amount of money households receive from private pensions.

Despite the recent surge in average retired household income, the headline number of £21,800 is hardly a King’s ransom (bearing in mind this is per household rather than per person).

Furthermore, the burden of retirement responsibility has shifted from the state to the individual. In 1977, just 45.7% of household retirement income came from private pensions – by 2015/16 the figure had rocketed to 78.8%.

For many of those retiring in the next 10 or 15 years this won’t be a problem because they can draw on substantial defined benefit (DB) pension pots where the employer bears the retirement risk.

Future retirees will, in the main, save in defined contribution (DC) schemes such as SIPPs. These vehicles benefit from much greater flexibility and choice than DB following the introduction of the pension freedoms, but the weight of responsibility is almost entirely on the individual.

This might seem intimidating but, with a bit of planning, you can still enjoy the retirement you want.

Three ways to boost your pension pot

• Pay in early. The magic of ‘compound growth’ – described by Albert Einstein as the eighth wonder of the world – means that contributions in your early career can have a huge impact on your final pot value.

• Don’t turn down free money! Automatic enrolment, once fully introduced, will require your employer to match at least your first 3% of pension contributions. Don’t opt-out unless absolutely necessary.

• Claim your tax relief. If you’re a higher-rate taxpayer paying into a personal pension, such as a SIPP, you will need to fill in a self-assessment tax return to claim all the tax relief owed to you. Make sure you do it as it could be worth thousands of pounds.

TOM SELBY

Senior analyst, AJ Bell

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