Three ways to save for retirement outside of a workplace pension
While workplace pensions are a key part of saving for retirement, they’re not the only option. In fact, two-thirds of people with a workplace pension are also making further retirement provisions to support their lifestyle once they give up work.
Workplace pensions are an effective way to save for your retirement as they benefit from employer contributions and tax relief. However, they can be an inflexible option in some ways. For example, if you want to save to retire earlier than the age your pension becomes accessible (usually at 55). Or, perhaps you want to save more into a pension but are worried that you may need to access the savings in an emergency. This is where alternative savings can help.
Our research looked at the way people are already saving for retirement outside of a pension:
- Savings (46%)
- Cash in a bank account (33%)
- Cash ISA (Individual Savings Account) (32%)
- Private pension (29%)
- Stocks and shares ISA (25%)
But what is the best way to save for retirement outside of a workplace pension? We believe there are a few key options to explore, each with pros and cons.
You don’t have to be eligible for a workplace pension to reap some of the benefits of having one. A personal pension is an excellent option for those that are self-employed or don’t meet the criteria to be auto-enrolled. You might not benefit from employer contributions, but you’ll still receive tax relief and the money can be invested to generate returns.
Even if you have a workplace pension, a personal pension is still an option. However, you should weigh up the pros and cons before going ahead.
A personal pension does give you an opportunity to save extra money for later in life and there are some reasons why it’s a good idea to have more than one pension. For example, you may plan to access pots at different points throughout your retirement, leaving the others invested. Alternatively, you may want to invest in different risk profiles, for instance, taking a relatively cautious approach with one and a riskier route with another.
But, on the other hand, it may be sensible to keep pension contributions in one place. First, keeping track of multiple pension pots can be time-consuming. You can add to your workplace pension by speaking to your employer or provider to either increase regular contributions or make one-off deposits. Secondly, the compounding effect means that over the long term, even small additional deposits can lead to big gains when added together. Contributing further to your workplace pension could mean the returns have an opportunity to grow faster.
Our research suggests that many retirement savers are taking this route. A third state they have cash in a bank account earmarked for retirement, while 32% are also using a Cash ISA. But is it the right option for you?
A top reason for choosing cash savings for retirement is the protection it offers. Assuming you stay within the limits of the Financial Services Compensation Scheme (FSCS), currently £85,000 per person per authorised bank or building society, your savings are protected.
The key drawback is the amount of growth you can expect. Interest rates are currently low, and many accounts aren’t keeping pace with inflation. In real terms, this means your cash retirement savings could actually be decreasing in value. If you’re planning to retire in the next five years, cash savings may be the most prudent option for you. But if the milestone is still some way off, it may be worthwhile exploring investment options.
If you are using a cash ISA, one way to boost your savings is to opt for a lifetime ISA (LISA). If you’re aged between 18 and 40, a LISA can help you save for retirement. You’ll benefit from interest and receive a 25% bonus on deposits from the Government. Each year you can contribute up to £4,000 into a LISA until the age of 50. If you took advantage of the account from the age of 18, this means bonuses totalling £33,000. However, withdrawals from a LISA will face a penalty if made before the age of 60 for a purpose other than buying your first home.
Only a quarter of our survey respondents are using a stocks and shares ISA to save for retirement and 24% stated they were building an investment portfolio. However, investing can be an effective way to grow your retirement provisions.
Historically, investments have delivered greater returns than cash accounts, allowing your money to grow in value, even when inflation is factored in. When you’re looking at a long timeframe, as the majority are when it comes to retirement, maintaining spending power is important. Over time, even small inflation increases can eat into your savings.
Of course, there are drawbacks to consider here too. Investment markets can be volatile, and investments can fall in value. As a result, it is possible for you to receive less than you pay in. The key thing here is to make sure you take an appropriate level of risk. There are a huge variety of funds with differing risk profiles, allowing you to pick investments that match your goals and your attitude towards taking investment risk.
As a general rule of thumb, you should invest with a minimum five-year timeframe in mind. This should give you an opportunity to ride out any dips in the investment market.
Again, a LISA is an option for those using a stocks and shares ISA. It will have the same bonus, limits and penalties as a cash LISA but rather than benefitting from interest, the money will be invested to hopefully deliver a return.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which is subject to change in the future.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.
Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority
All statistics quoted have been taken from our whitepaper, ‘Planning for a brighter tomorrow: the state of the nation’s retirement finances.’
To download our whitepaper, click here.