Nearly 12 million UK adults are failing to set aside enough for retirement, new government figures show, but what's the best way to save for retirement?

Company Pension Scheme: Getting a Headstart

If you're a member of a company pension scheme, the good news is you have a headstart. Most employers will contribute between 3% and 5% of your salary, provided you also pay into the pension. This can turbo-charge your retirement savings, so take full advantage. The new government-backed auto-enrolment pension scheme is giving millions of low-paid workers a company pension for the first time, again, with employer contributions. Resist the temptation to opt out, you'll regret it later.

Even if you have a company pension, you should also save under your own steam.

Personal Pension Options

One option is to invest in a personal pension, such as a flexible, low-cost stakeholder, sold by insurers Aviva, Friends Life, Legal & General, Standard Life and others. You can invest up to £3,600 a year and claim tax relief at 20%, 40% or 45%, depending on your tax bracket. Even non-taxpayers can claim tax relief. So if your spouse or partner doesn't work, you can contribute up to £2,880 a year to their pension and claim 20% tax relief, which tops up that contribution to £3,600.

Tax Free, Fuss Free, Pensions Free

You get another valuable pensions tax benefit when you retire, as you can take 25% of your pot as a tax-free lump sum (any further withdrawals are subject to income tax). Better still, Chancellor George Osborne recently announced that from next April you will finally be free to spend your pension pot on whatever you want. You are no longer obliged to buy an annuity.

He gave savers another boost by increasing the tax-free ISA allowance to £15,000 a year. You don't get tax relief on your ISA contributions, but your money does grow free of income tax and capital gains tax. You can save the full £15,000 allowance in a low-risk cash ISA, but be warned, the returns are dismal right now. At time of writing, the best easy access cash ISA pays just 1.5%.

Over the longer term, you'll get a better return from investing in a stocks and shares ISA, although with plenty of short-term volatility along the way. If you had invested £15,000 into the average UK savings account 10 years ago, your money would now be worth just £16,583, fund manager Fidelity calculates. If you had invested the money in the FTSE All Share instead, you would have £35,219, almost £20,000 more.

You can choose from thousands of stocks and shares ISAs, so do your research carefully or take independent financial advice.

Given the different tax benefits, dividing your contributions between pensions and ISAs makes sense. There are other ways of saving for retirement, such as investing in a property through the buy-to-let scheme. The longer you leave it, the harder it will be to save enough. The best time to start saving for retirement is today.

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