Alternative Ways To Save For Retirement
Pensions aren’t for everybody. They offer the perfect retirement solution for some people; particularly those who are employed. But, there’s a reason that 2/5 self-employed people don’t have pensions.
Private pensions often offer little in the way of return. My Virgin private pension acted more as a glorified piggy bank than anything else. People now change jobs as much as five times in their lifetimes (this is now the average). Putting money into your company’s pension over the course of a 50 year period is practically unheard of.
To add to this, millions of over 50s are now faced with the realisation that they’ll have to live on as little as £8,000 per year post-retirement. This is because they have failed to save enough during their working years.
If your job doesn’t allow for a big pension payout at the end of your working life or you’re self-employed and looking for alternative ways to save for retirement, here are some ideas:
Look At Your ISA Options
Similar to pensions, ISAs offer a tax-free way of saving money. The word ‘tax-free’ isn’t strictly true for either pension or ISA, though. You are taxed in the form of income tax by HMRC (either via your employer or when you fill in a self-assessment) when you put money in an ISA. You are taxed when you draw your income in retirement if you choose to have a pension.
If you’re making loads of money at a young age, it’s often recommended that you take out a pension. This is because it’s likely that you’re paying more than the standard 20% income tax. So, if you were to take out an ISA, you’d have to pay a higher tax percentage on the money you put into your ISA. Whereas when you’re retired (and therefore earning less money) you’ll probably only have to pay the standard 20% tax on your pension money.
But, and this is a big but, the government changes the rules on pensions all the time. So, the rules around your pension now may well be completely different by the time you come to draw it out.
In this unstable economy, an ISA allows you to pay the tax upfront.
Which ISA Suits Me?
Lifestime ISA
If an ISA is something you’d like to explore, there are a few different structures available. There’s a LISA (Lifetime ISA). This style of ISA adds 25% to your savings every time you save £4k in a year (which incidentally is the limit for a LISA). This type of ISA is great for people saving to buy a house because as well as being accessed post-60, it can also be accessed to put a deposit down on a house.
If you saved with an ISA for 32 years from age 18, you could gain a total of £32k from bonuses over your work-life span. If you cash in a LISA before 60 (not including using it to buy a house), you have to pay a 25% penalty.
I think a LISA is a great option for self-employed people who don’t have the benefits of a company’s contribution to their pension. I would also recommend looking into a help-to-buy ISA over a LISA if you’re buyin a house.
Stocks & Shares ISA
With a stocks & shares ISA you can invest up to £20k (this information is valid for the 2018/19 tax year) and work with a fund manager who will invest your contributions into different areas depending on your goals and how much risk you’re willing to take.
This method has the ability to make you a lot of money. However, it may also leave you in a position where you have less money than originally invested. Ultimately, your attitude towards risk is important to note here. Whilst you can guarantee the return of a normal ISA, the returns are often modest. You can save a lot more money in a stocks & shares ISA, but you could also lose it.
A Property Portfolio
A popular alternative to a pension is to buy homes to rent out on short & long-term lets. This was a really popular option not so long ago. With the housing market slowing and changes to tax legislation, though, it is a slightly riskier now.
Buying a second property or building a property portfolio isn’t a valid option for many people. It requires a significant outlay plus a number of ongoing costs. Of course, if the option is there, this might be something to explore. Something I’ve always been interested in is buying a property, doing it up & selling it on. This is something mentioned in Rich Dad, Poor Dad (it’s just £5.99 and it will completely change your thoughts towards money). If you are going to acquire assets (like a house), buying and selling with a profit is preferred so your asset doesn’t turn into a liability further down the road.
Investing in properties will almost certainly outperform pensions. Regardless of what the economy does. However, if you don’t have the initial outlay and are going to get yourself into significant debt just to buy the house in the first place, it’s probably not a good move.
Investment Funds Or Trusts
Whilst pension contributions are declining, there is a marked increase in people investing in funds or trusts. This type of investment allows you to pool your money together with other investors. You’re then able to gain access and exposure to stocks and shares. This access wouldn’t be attainable with a single investment.
There are two types of funds; open-ended & closed-ended. If you’re thinking of going down this path, I would highly advice seeking out some advice. I’m no expert. I am, however, exploring this route over the other ones available to me. I think for where I am in my life, this is the most suitable.
The difference between funds and trusts (as I see it) is that you can hold back some of your profits with a trust so that you can smooth over any negative performances when the market falls.
Conclusion
I think that there are pros and con to all of the options I’ve listed above. I’d recommend looking at your individual circumstances and taking steps from there. It is different for everybody and your preferred methods will be unique. The purpose of this blog post is really to give you an understanding of the other ways you can save towards retirement.
I think there was a large lack of emphasis on self-employment in school, which in turn has lead people to financial uncertainty. This uncertainty is particularly prevalent in the millennial generation. With more people freelancing or self-employed than ever before. It is ok to shun the more traditional methods of saving for retirement, but it’s not ok to completely disregard a buffer for your future.
