Guide to pension options
The government pays Basic State Pension to people over their normal retirement age and with the required number National Insurance contribution years. This is rarely enough for most people to continue living at the same standard, so they need to find a way to top up their income.
The most common way of doing this is with another pension; a personal or workplace pension. As saving into a pension is free of tax (although benefits taken upon retirement can then be subject to tax), the money will accumulate faster than if held in a standard savings account. However, there is always a risk that the fund won't perform as well as expected.
As the name suggests, a workplace pension is offered by the employer. Changes to the law mean that all employers will have to automatically enrol their staff into a workplace pension by 2017. Many larger employers will have to do this sooner.
Employees will have the opportunity to opt out of the scheme. If so, they may want to open their own personal pension fund. However, they are able to open a personal pension, even if they have a workplace pension.
One of the potential benefits of a workplace pension is that the employer may offer to pay into the fund as well as the employee, resulting in a bigger pot of money.
Either way, the end result is the same. At retirement, you will have a pot of money in your pension fund, which you can use to buy an annuity to provide a guaranteed income, or take advantage of more flexible options, such as pension drawdown.
To make the most of a pension fund, it is best to get professional advice from an independent financial adviser.
While a pension may be the most traditional and common way to save for retirement, it isn't the only way. More people are now opting to prepare for their later life by going down a different route.
This guide will explain what your options are and discuss both the advantages and disadvantages to each one.
An endowment is a type of insurance policy that is designed to pay out a lump sum when it matures, usually after around 25 years.
The idea of an endowment is to that it will have performed well enough over the term to provide you with a cash lump sum big enough to repay your mortgage, and in some cases, even have some left over.
These days, endowments have a bad reputation due to a mis-selling scandal which saw many homeowners take them out alongside interest-only mortgages, but without knowledge of the risks and high charges.
ISA & NISA
Like pensions, ISA (Individual Savings Accounts) are tax-free. This means that for basic rate tax payers, with every 80 pence deposited, the government tops it up by 20p to make £1. The benefits are even better for higher rate tax payers, as the government contribution is higher.
The government introduced the New ISA (NISA) in July 2014. This account offered improved tax benefits, as the personal allowance increased to £15,000 a year for cash, investments, or a mixture of the two. Previously, savers were restricted to a £11,880 limit, only half of which could be in cash.
ISAs work as an alternative to a pension, as over the years they have proved to be a reliable and tax efficient way to save for retirement. There is also increased flexibility, as with a pension you're unable to access the fund until you reach at least the age of 55. Even then, although changes will permit larger withdrawals than the previous limit of 25% of the account in cash, there can be complex and costly tax implications.
There is a growing trend in the UK; becoming a buy-to-let investor. At £1.25 trillion, there is almost the same amount of cash invested in buy-to-let property as in workplace pension schemes.
This is only likely to increase further if the property market continues to boom. Rising house prices, rising rents, and cheap mortgages is a combination that has meant more savers are seeing property as a good alternative to a pension.
Landlords are often just breaking even with the rental income, once they have paid the mortgage, insurance, and any other commitments, but once the mortgage debt has been cleared, they plan to live off the rental income. Meanwhile, house prices have potentially been increasing over the years, building up the equity in the property.
While property can work out in some people's favour, it is a risky business. There are so many external factors, such as variable house prices, bad tenants, and periods of no rent, high service charges or maintenance fees, that it is most definitely not a risk-free strategy.