step three: should I think about saving more, or starting to save?

Experts agree that most people are not saving enough for their pension. The state pension is not guaranteed to keep up with living standards. The number of people covered by good occupational schemes is falling. Large numbers of people at work today are therefore likely to suffer big falls in their living standards when they retire. They will be either dependent on means tested benefits or be only just above the threshold.

Of course it’s easy for experts to say that people should save more, but that can be hard when you’re faced with housing costs, student loans, the costs of child care, commuting and all the other expense of modern life.

But the experts are right to say that the longer you leave it the harder it is to build up a decent pension, and the longer you may have to work before you can afford to retire.

You can look at the workSMART pensions calculator to see this in practice. Try putting in what you might save today and see what pension you will get. Now try again, but put your age as ten years older. There will be a big difference.

But don’t forget any money you tie up in a pension is precisely that - tied up. You should only put extra money into a pension if you have some ‘rainy day’ emergency savings already. There are ways of saving with similar tax advantages to saving through a pension, and you may be better off making at least some of your savings for retirement this way.

The hardest issue for those thinking about saving for a pension is the effect it will have on means tested benefits - like pensions credit - in retirement.

A small personal pension may simply reduce the means tested benefits you get. Governments often change means tested benefits so even if you look at what is available today, there is no guarantee - or even much likelihood - that the same benefits will be available when you retire, particularly if you are relatively young today.

This is a difficult policy issue. On the one hand it makes sense to many to devote any additional spending by the government on pensions to those who most need it. But on the other hand this can have the effect of putting people off making their own savings.

This is why many people support increasing the state retirement pension and then uprating it in line with earnings each year. If this does not happen, then a bigger and bigger proportion of the workforce - as many as one in two - will depend on means tested benefits.

It is very hard to say how much better off some small extra pensions savings will make you without more clarity about the future of pensions. (There is a big current debate about pensions and thisd may help).

Clearly if you can afford to save a lot this will lift you well above means testing. If you can only afford to save a very small amount and think it unlikely that you will ever be able to afford more, then it will probably make more sense for you to save in ways other than a pension.

But for the vast majority that are not at these extremes, particularly those below average earnings but not on the poverty line, this is a difficult issue.

The arguments for saving are that:

• it gives you your own pension that is not dependent on the generosity of future governments
• you will be better off, as it is unlikely that you will lose all your extra personal pension through a cut in your means tested benefits
• some people are uncomfortable claiming means tested benefits (though we don't think they should be!)
• even if you can only afford to save a little today, that could grow if well invested by the time you retire and you may be able to save more when you are older and perhaps have a better paid job.

The arguments against saving are:

• unless you can save enough to lift you above any possible future means test limit, your additional private pension could significantly reduce your means tested benefits.
• This makes it more expensive for those who might be able to claim means tested benefits to build up extra pension. Every extra pound of pension will cost them more than it will for well off people who know they will be above means testing.

If you decide you do want to make extra pension savings then there are various ways of doing it:

• A personal pension that you arrange yourself, or with the help of an Independent Financial Adviser.
• A stakeholder pension - which is a special kind of low cost and user-friendly personal pension. You can arrange one yourself, or through an adviser. There may well be one available through your work, and if you are lucky your employer may contribute as well.
• An AVC - which stands for additional voluntary contribution. This is a way for those with an occupational scheme to save more in addition to the contributions they and/or their employer are already making, set up by their employer. This is generally a low cost way of saving extra.

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The Pensions Service website has a useful section on personal pensions.

If you now want more details about all these pensions options, you should check out the Planning your pension section of workSMART.