At retirement, savers can take 25 per cent of a pension as a tax-free, cash lump sum.

“It is crucial we plan for our old age and that our investments are diversified among a number of different asset clas­ses,” says Marino Valensise at investment firm Baring Asset Management. “Your pension should be invested in diversified assets that are in line with your age, lifestyle commitments and number of years to retirement.

“The longer you have before retirement, the more you should be placing in assets which will be able to generate a higher level of return.”

For those who are fortunate to have a company pension scheme, where the employer pays in money, contributions are boosted considerably.

Those approaching retirement in the next year or so may be unnerved by the plummeting stock market.

Some pension funds are designed so that, in the later years as you approach retirement and the need to convert your savings into an income, the risk is reduced.

This means your money will be switched out of the riskier equity investments and placed in safer quarters, such as gilts and cash deposits. This is done specifically to avoid any large losses if the market falls close to retirement, and is known as “lifestyling”.

“Lifestyling is a valuable notion but many schemes do not include this feature,” warns Nick Bladen at pensions provider Skandia. “This is why it is so important that people seize control of their pension savings.

“Investors may want to check they have selected lifestyling for their pension, whether it is an employer scheme or a personal pension.”

Self-invested personal pensions (Sipps) do not come with a lifestyling option. Savers might be put off pensions because they are uncomfortable with not being able to access money until their retirement.

This has boosted the popularity of stocks and shares Isas. Although the amount you can invest is limited to £7,200 a year, you can invest your money in a choice of thousands of funds, and get your hands on your cash at any time without having to wait for a pension-qualifying age.

Older people who are facing hard times but do not want to take an income from their pension can still use it to
help relieve the burden of the credit crunch.

“Savers can take the drawdown option, which allows them to take their 25 per cent tax-free lump sum and leave the rest invested,” Bladen says. “This could be the lifeline many need to see them through the crunch, which is hitting older people hard.”

Compound growth is another vital part of saving for retirement. People can save more by contributing to a pension when they are in their twenties, rather than trying to play catch-up in their forties and fifties. “Our research shows young people are putting off decisions surrounding their pension portfolios until they are older,” Valensise says.

 “Now that the onus is so clearly on the individual, we have to start encouraging people to take a greater responsibility for their investments so their pension fund will grow to a sufficient level by the time they come to rely on it.”

Cash
Deposit accounts are good for rainy-day funds that you can use should the ­boiler pack up or the car need a new set of tyres.

People may understandably be temp­ted to hide away their savings in a high-interest account, given that many guarantee rates of more than 7 per cent. However, as a long-term investment, even the highest-paying accounts may not prevent your money being eroded by inflation.

“This is why only a proportion of your money should be in cash,” says Geoff Penrice at Bates Investment Services. “These rates will not be so high forever and you will lose some of the income to tax anyway.”