The old-age pension is 100 years old this year. But can anyone afford to celebrate?

When introduced by Herbert Asquith’s Liberal Government in 1908, a pension was five shillings a week – equivalent to about a quarter of average earnings and was regarded as shamefully low by progressives in his party. But if that figure had kept pace with the growth in Britain’s GDP, the state pension should now be £161 a week. The actual figure is £90.70, less than a fifth of average earnings today.

It underlines why private pension provision has never been more important. Yet recent figures from the Office for National Statistics show that less than two fifths of adults are paying into a private pension – the lowest figure since records began 12 years ago.

Furthermore about one third of Britain’s 3.6 million self-employed people are saving into a pension, according to research by independent broker Hargreaves Lansdown at the beginning of this year. The average self-employed person is likely to be £6,600 a year worse off in retirement than the average retired employee whose income from private and state pensions is expected to be worth around £20,453.

The number of men who were members of any private pension scheme fell from 49 to 43 per cent between 1999 and 2006, which represents a reduction from 8 million to 7.6 million working age men.

For working age women, the figures changed little over the same period; the proportion that contributed to private pensions was just 37 per cent (representing 6.2 million women) in 2006, down from 38 per cent in 1999.

And just 34% of the self employed are saving into a pension compared to 56% of employees.

“These figures highlight the urgent need for pensions to be given a higher priority in financial planning,” says Tom McPhail, Head of Pensions Research at Hargreaves Lansdown. “With the decline in state pension benefits, and as more and more employers close final salary schemes and reduce contributions, the challenge is becoming one of taking individual responsibility for retirement saving.”

Pensions Advice: Get the Information You Need

You can use this pension calculator to get an estimate of how much you will need to have at retirement to fund your required income. For instance, a 65-year-old man currently needs £200,000 to buy an inflation-linked annual retirement income of £10,000. A 40-year-old could achieve a pension pot of this size by starting to save £440 a month.

“Saving for retirement does require commitment; a decent retirement income doesn’t happen by accident,” says McPhail. “I think one of the key considerations is that the earlier you start, the less it will cost you, and even if you can’t start with a high contribution, you can always build it up over a number of years.”

To fully understand your position you can also get a State pension forecast from the Department of Work and Pensions to make sure you are on course to get the full basic state pension and what entitlement you have to any State second pension. However this service is currently only available to those who will reach state pension age before 6th April 2010. The full service is due to resume by Autumn 2008.

Self-employed people contributing to a pension need to ensure that they increase their contributions each year. In fact, so do employees unless they are a member of an occupational pension where this is taken care of automatically through their pay packet.

The reason for needing to pay more annually is that the value of contributions becomes eroded over time. Assuming inflation of 2.5%, a £300 monthly contribution would be worth the equivalent of only £183 after 20 years. Keeping pace with the inflation over the same period could buy a pension worth an extra £5,200 a year.

Comment provided by Hargreaves Lansdown, an independent broker aiming to provide the best information, best service and best discounts on ISAs, SIPPs, funds and share dealing.