The road to a financially secure future is different for everyone, and there are now many options for savers to choose from.
For most people, saving for retirement means contributing as much as possible to a pension. A pension you build from earnings has a number of very important advantages that could make your savings grow more rapidly than might otherwise be the case.
With the average retirement now set to last at least two decades, savers need to make full use of all the tax allowances and exemptions available to help them create a sufficient pot.
- Individual Savings Accounts (ISAs)
The annual ISA limit of £20,000 is a valuable complement to your pension in several respects: not only is it an obvious alternative for pension savers approaching their annual or lifetime allowance limits, but it can provide a flexible, tax-efficient income in retirement. That is particularly useful for anyone at risk of tipping into a higher Income Tax bracket.
When it comes to long-term investing, Stocks and Shares ISAs can be a better option than Cash ISAs. Despite this, Cash ISAs have typically accounted for 80% of ISA subscriptions every tax year, suggesting that most savers may not be making the most of the long-term opportunities on offer.
- Lifetime ISA (LISA)
The LISA, which adds a 25% bonus to everything you save up to £4,000 a year, was introduced in April last year to help address the challenges facing younger generations. People aged 18-39 can open a LISA and save into it until they are 50. The savings must be used for either a deposit on a first home or a retirement pot accessible only after age 60. Withdrawals for other reasons are subject to a 25% penalty.
The LISA may be a good choice for those looking to buy their first home, but most people will still be better off saving for retirement via their workplace pension. This is because contributions not only attract tax relief, but also benefit from the all-important employer top up.
- Save As You Earn (SAYE)
SAYE offers you the opportunity to take a direct stake in the company you work for. Money is deducted from your salary each month and at the end of the term, you can exercise an option to buy company shares at a price that was fixed at the outset – usually at a 20% discount on their original value. If the share price has fallen, you get your money back – plus a tax-free bonus.
- Venture capital trusts (VCTs) and enterprise investment schemes (EISs)
If you have made full use of your pension allowances and are keen to stick to investments that offer some form of Income Tax relief, you could consider VCTs and EISs. These provide investors with an easy way to access the enormous growth potential of brand-new start-ups and other companies that are not typically traded on the stock exchange.
EIS and VCT investments are typically only suitable for experienced, sophisticated or high-net-worth investors who have a significant tax liability to offset and are willing to take a high level of investment risk. The companies that qualify for investment through an EIS or VCT are at greater risk of failure and investors must be prepared to weather considerable levels of volatility. With something as important as your retirement savings, you may feel the risks are too great.
If you are a property owner, including rental property, another possible solution is to sell up or downsize, using the proceeds to fund retirement. An equity release plan, which allows you to access the value in your house without having to sell it, is a further possibility. However, you should be mindful that tax and welfare benefits may be affected and you must check that the chosen plan will meet your needs should you wish to move in the future, or if you want your family to inherit the property.
The key is to balance the benefits of a pension with the flexibility of other investments as part of a portfolio to meet long-term growth and income requirements. To do this effectively, you should always take expert financial advice.
Please contact Rob at email@example.com, if you wish to discuss your retirement options.