Pension savings are different things to different people, but they go in and out of fashion as ways of saving for your retirement. Here are a few pension alternatives.
1. Save in an ISA
If used properly, an ISA is a good alternative to a pension.
ISA’s are ‘tax free savings vehicles, just like pensions. This means that the Government only taxes you on your savings once, ths is in the form of an income tax on your earnings.
With Isas you’ve already paid your tax and can rest assured that the rules won’t change and the returns in the pot should remain tax free.
You can put your money in either a cash Isa, which is basically a savings account, or into a stocks and shares Isa – which is a fund that will pick shares, property or bonds on your behalf.
Think of Isas as long-term savings account – a growing fund that shouldn’t be touched unless it’s absolutely necessary, and even then, replaced when possible.
An ISA is probably the most obvious alternative to a pension. Although the tax man doesn’t offer tax relief on the investment as he does with pensions, growth is generally tax free and you can have access to your fund at any time. With a pension you are restricted to taking benefits from age 55 at the earliest and only 25% in cash, the remainder as a taxed income.
Like most pensions, investors need to ensure that they are comfortable with the level of risk they are taking as all the tax efficiency could be wiped out if the wrong funds are chosen and fund values fall significantly. However over the long term, Isas have proved to be an excellent and highly tax efficient way of saving for retirement.
2. Your employer’s Save As You Earn scheme
Many large employers offer their employees share option schemes, which are increasing in popularity as a way of providing staff with an opportunity to have a stake in the company that they work for.
These SAYE or ‘Sharesave’ schemes, allow employees to save between £5 and £250 per month for three, five or seven years. Employees get a tax-free bonus if they complete the savings plan, on top of the money they have saved. Employers usually provide employees with the option to in SAYE schemes which can give the employee a discount of up to 20% of the share price at the launch date.
‘Employers grant employees an option at outset and can give a discount of up to 20% of the share price at launch. At the end of the period, employees choose either to use the money saved, plus the bonus to buy shares, if buying the shares would generate a profit, or have their contributions and bonus returned, if this would give the higher return.’ The only real downside is that employees don’t receive a bonus on thier share valuation at the end of the SAYE period.
3. Using the equity in your home
‘If, for example, you buy a large house, property prices rise, and then you downsize, you’ll be left with more pound notes in retirement. It can be a good way of escaping capital gains tax. However, as with most things this option may only be viable if house prices rise just before your retirement, watch out for a housing crash.
Another plus is the emergence of a genuine option in equity release. The market has improved significantly in recent years and now offers a genuine retirement funding solution for older people, according to experts. But you will essentially be borrowing the equity and watch unpaid interest on it roll up over time against its value.