Stories have been raging in the media for years now about the pensions crisis, ageing work forces and the skills gap. So much so, that you might think that workers are at panic stations, worried about how they are going to save enough money to support themselves in their old age. With increased life spans, people are regularly living into their 80s and 90s and will have to support themselves through a retirement that could last 30 years.

But research has shown that the UK is a nation of financial ostriches, prepared to hide their heads in the sand rather than face up to their monetary problems. Many are still living in blissful ignorance. Take retirement ages many people still think they will retire before the age of 60, despite many UK companies hiking the retirement age to 65+ and even the government planning on raising retirement age for both men and women from 65 to 68 between 2024 and 2046.

It’s time that the bubble burst and reality was faced – pie in the sky about how well off you think you are is all well and good, but if it won’t buy you a house or put food on the table when you are a pensioner, you’ll be in trouble.

The fact is that to maintain an income of £25,000 per year throughout your retirement (not taking future inflation into account), you will need to save half a million pounds. The full state pension is currently £4,953 a year (£95.25 a week) for a single person and £7,919.60 (£153.30 a week) for a couple.

So, what should the British public be doing to build their resources and see them though, what could be, a very long retirement? Of course what you should be doing depends on your age, current financial status etc. but there are some fundamental guidelines that everyone should follow:

- this is where most people go wrong in their financial planning. It is amazing how purchasing cheaper brands of the same food or choosing a cheaper restaurant to eat in can make a big difference in the long run. The key is to write down all your expenditure. From here, you’ll be able to work out where you can cut back spending and shop around for cheaper versions of the same thing.

- putting aside a small sum each month into a high interest savings account is recommended. Just £50 a month can turn into over £3,000 in 5 years and in over 10 years, could be worth over £8,000. Admittedly these are hard to come by these days but even with what’s on offer right now is better than leaving it where it is, and things will improve. (This is especially if that’s under a mattress! Tempting as this may be following banking failures and bailouts the fact is that your money is even safer now with these government guarantees in place – more on this in a future article.)

- the mission to save half a million pounds for a comfortable retirement should start as soon as it is financially feasible. That £50 a month savings, if put in a pension plan, could turn into over £75,000!

- everyone finds it hard to save when they have debt hanging over their head but this shouldn’t stop people from taking control of it. If you have a credit card and don’t pay off the balance every month, think about switching to one with 0% APR – some now offer this for the life of the balance which could save you around £150 a year on a balance on £1000 on an average APR. If possible, try to stick to cash or debit card purchases, rather than credit cards, to avoid repeating and increasing your debt

- insuring against loss of income should always be considered. For as little as £5-10 a month, you can secure a proportion of your income. Life insurance should also be considered, particularly for those with children.

Practising good financial management now is key to a financially secure future. No matter how bad a situation you’re in, it is never too late to start thinking about improving your financial well-being. Don’t put your heads in the sand – any problems will only come back and hit you harder in years to come.

As we concluded in Part One, the biggest threat to personal financial independence, is Inheritance Tax. The tax exempt limit of £325,000 (2009-10) is woefully short of the sum needed to provide a comfortable pension, let alone full financial freedom from dependency on the State. Until the government comes to its senses and recognises the inconsistency of its current policies, everyone should be asking themselves what they can do to avoid the impact of this wealth tax on the goal of individuals and their families to achieve personal financial independence?

It is often said that Inheritance Tax is a “voluntary” tax, with the implication that it can be easily avoided by anyone who takes the trouble to ask the right adviser. In practice, everyone should be aware of the way this wealth tax works, and an informed discussion with a suitably qualified adviser is the best way to understand how the tax will impact. It may be voluntary in that there are ways to preserve the value of the estate for inheritors, but none of the accepted ways is without its costs, and it is important to understand how the process works before deciding whether to take steps and which steps to take.

A new industry has grown up to relieve worried clients of their money by selling them insurance policies or trust schemes which they only partly understand, to provide a larger inheritance for their dependants. In every case the Treasury’s policies are resulting in some kind of reduction in their current net worth, but the alternative to following this advice is the likelihood of a much bigger hit later.

Furthermore, governments are wont to moving the goal posts, so schemes which were perfectly acceptable once suddenly become tax avoidance or worse, evasion, and exemption is reduced or removed. This not only provides a double hit to scheme holders but makes it very difficult to plan long term finances, since politicians only ever think about the next election.

The best thing you can do is ensure you have a basic knowledge of personal finance and life planning. Financial literacy is still woefully low and a major factor leading to the credit crunch as so people were unaware how much they could afford and what would happen if their personal circumstances – or those of the wider economy – hit change.

For over 10 years, FinanCity has been dedicated to improving financial literacy and education, including liaising with the FSA, PFEG (the Personal Finance Education Group) and industry. Through this new information-focussed site we hope to carry on this vital task and contribute to some extent in avoiding future problems and improving the outlook for all.

For the past thirty years the UK Treasury has been working to limit the State’s exposure to the liability for providing for the old age of a rapidly ageing population. To this end, state pension entitlements were quickly decoupled from average earnings and linked instead to the cost of living. This long term strategy successfully reduced the State’s financial commitment, but at a cost to the citizens? relative standard of living if they were dependent on the State for their retirement income.

The justification for State withdrawal was the desire to encourage individuals to make their own provision for retirement and for other welfare benefits, exemplified by the support given to private pension schemes, personal savings schemes such as ISAs, and tax relief in the area of private health insurance, an idea recently picked up and extended by the Conservative Party. The underlying purpose must have been to encourage as big a proportion of the population as possible to plan their lives to achieve financial independence.

Financial independence implies the building of a sufficiency of wealth to cater for all the typical needs. This starts with achieving a surplus of income over regular expenses, and extends to cover major additional outgoings, such as house purchase, retirement pension, purchase of larger assets such as a car, and major expense such as education. It also demands provision of comprehensive insurance cover against the risks that cannot be planned, such as ill-health, theft, fire loss etc.. The result will be the creation of a portfolio of assets, offset by various liabilities, which will have a large enough net value to enable an individual to manage the normal requirements of life without turning to the State for help.

Two points should be made here: desirable as the goal is, it is not easy for most people to build total financial independence, and it is nearly impossible to manage this on a whole life basis so that all the capital is exhausted at the moment of death. Common sense would suggest that families ought to be encouraged to accumulate wealth at least to the level where financial independence is available to all their members. To take capital away from individuals and families long before they have reached the goal of financial independence, and hence rob them of any chance of achieving it, would seem to fly in the face of the Treasury’s express purpose.

This, however, is what has been allowed to happen in recent years, progressively, and without regard for the consequences to the earlier goal to wean people off State support. The two major constituents of most people’s personal wealth have been attacked and the threat is increasing. The Treasury has removed colossal sums from the pension funds which manage personal pensions, and fiscal drag has been allowed to bring inheritance tax down to the level where most house-owners in the south east of England are now threatened by its 40% tax grab. The big fall in house prices in the current recession is only a blip and anyway creates more immediate obstacles financial independence. Increases in Stamp Duty and erosion of Capital Gains Tax allowances on selling your home have further impacted this goal and hit retirees particularly hard.

The biggest threat to personal financial independence, however, is Inheritance Tax. This is the subject of Part Two of our article on financial independence here on FinanCity.