How to defuse the pension time bomb

The study, carried out by insurer Aviva and accountants Deloitte, estimates UK workers are collectively saving £317.5 billion a year too little into pensions which is storing up massive problems for the future.

It is estimated those aged 50 need to boost their pension saving by an average of £6,200 a year to receive a pension income of 70% of their current pay, which the study judges to be a comfortable sum for most (see the Pensions guide).

Meanwhile, 40-year-olds need to increase contributions by £3,100 a year on average to achieve a similar income, the research says.

Those in their 20s and 30s have longer to save before they reach retirement, but the study says even a 20-year-old should set aside an extra £1,300 a year and a 30-year-old £1,800 a year.

The worrying figures should not concern the 7.5 million people with a gold-plated final salary pension who get a retirement income based on their salary and years of service.

Here's how to help boost your retirement income.

Start a pension early

The earlier you start paying into a pension the less you need to save as a percentage of your salary.

Financial adviser firm Hargreaves Lansdown (HL) estimates those starting should save half their age as a percentage of their salary to end up with a pension (comprising a private and state pension) of between half and two thirds of their income.

So someone who starts at 20 should save 10% of their salary, while at 30 it's 15%, according to HL.

From April 2012, every employee will be auto-enrolled into a company pension with 1% of their salary going in (rising to 3% by 2017), with employers also forced to contribute.

A spokeswoman for the Department for Work and Pensions says: "We know people aren't saving enough for retirement and that's exactly why we are committed to bringing in reforms that will result in up to nine million people saving for the first time."

Remember pension tax perks

You may have other plans for retirement income such as cashing in on a property or investments, so you won't necessarily be relying solely on a pension, meaning HL's figures don't add up for everyone.

Yet saving in a pension comes with significant tax perks as virtually everyone gets full tax relief on the amount deposited.

A basic rate taxpayer who saves £80 a month from their take-home pay will see £100 go into their pension, as an additional 20% tax relief is added.

If you wonder why it's 20% of £100, not 20% of £80, it's because to get £80 of after-tax pay you'd need to have earned £100 before tax.

A higher rate taxpayer who saves £80 will also get £100 paid into their pot, but at the end of the tax year they can claim a further 20%.

If your employer operates a salary sacrifice scheme you could be even better off because contributions are taken from your pre-tax pay, meaning not only do you get the tax relief but you do not pay national insurance on your contributions.

Salary sacrifice is not beneficial for everyone, however (see the Salary sacrifice MSE News story for details).

Take free cash

Some employers also contribute to a company pension which is effectively a pay rise. In some cases, you don't even need to set money aside yourself for your employer to contribute

It is estimated 750,000 people are offered a company pension where their employer contributes even if they don't, but 75,000 fail to take the free cash.

Save, save, save

Ensure you keep saving throughout your lifetime if you are worried about a low retirement income. Most importantly, use up all your tax-free savings allowances.

Every adult can save up to £10,200 a year in a tax-efficient Isa.

You can put the full £10,200 in an investment Isa, where most of your returns are not taxed. Of that allowance, a maximum £5,100 can go into a separate cash Isa, which is a normal savings account where the interest is not taxed (see the Top New Cash Isa guide).

Further reading/Key links

Boost income: Benefits Check-Up, Pension Credit, State Pension Boosting More on pensions: Pensions Guide, Free Annuity Guide