The auto-enrolment workplace pension scheme is credited with encouraging the vast majority of workers to save towards their retirement. Data released by the Department for Work and Pensions in June found that 88% of eligible employees saved into a workplace pension in 2019, up from 87% the previous year.
Indeed, auto-enrolment, which was phased in from 2012, offers eligible employees an attractive way to save towards their retirement as employers have to contribute towards the pension savings along with the employee. But for employees who are not eligible for auto-enrolment or those who are self-employed, together with those who have either opted out of auto-enrolment or who want to have additional retirement savings, alternative ways to save towards retirement are available.
For those not in a workplace pension scheme, a private pension is often the most popular choice. Two of the most common types of personal pensions are stakeholder pensions and self-invested personal pensions (SIPPs).
A stakeholder pension has the benefit of offering low minimum contributions, which is often popular with those on low incomes or who are self-employed, as well as limited charges, charge-free transfers, flexible contributions, and a default investment fund. As with pension savings, money contributed to a stakeholder pension is normally invested in stocks and shares and savers can often choose from a range of funds in which to invest. Currently, money from a stakeholder pension can be accessed from the age of 55, however savers should be aware that this will increase to age 57 from 2028.
SIPPs work in a similar way to stakeholder pensions and other personal pensions but have the difference of giving the saver more flexibility with the investments they choose. SIPPs are becoming more popular with pension savers, but those considering a SIPP should be aware that they require a more hands-on approach and some knowledge about investments is likely to be needed. In addition to this, SIPPs often have higher charges than other types of personal pensions and stakeholder pensions, and as such they tend to be more suitable for those looking to invest larger funds. As with other types of pensions, money from SIPPs can currently be accessed from the age of 55.
Ideally, those looking to save towards retirement should choose a pension, whether a personal or workplace pension, as they will benefit from pension tax allowances. But for those looking to start additional retirement savings, a stocks and shares ISA could be a good option. Stocks and shares ISAs allow a tax-free limit of £20,000 to be invested for the 2020/21 tax year. Savers should be aware that stocks and shares ISAs come with the same risks as standard stocks and shares investments and could result in savers losing their initial capital. As stock markets can fluctuate, investing in stocks and shares ISAs should only be considered by those looking for a long-term investment. Investing in stocks and shares is easier now with the growth of DIY and robo advice investment platforms, but those with little to no experience should consider taking financial advice particularly where larger sums are involved. As stocks and shares ISAs are not a pension product, investors can withdraw their funds at any time they wish, meaning that they do not have to wait until they reach the age of 55 to withdraw their funds.
Again, normally having a pension fund is the best option, but a buy-to-let property can be a good way to boost additional retirement savings. Those considering investing in a buy-to-let property should be aware that although it can yield good returns, there are additional costs involved, such as day-to-day property management and maintenance costs, as well as the cost of covering mortgage repayments during times when the property is not being rented.
Pension savers looking for a more secure way to save for their retirement alongside a pension can consider a Lifetime ISA (LISA). Although LISAs are more well-known for being aimed at first-time buyers looking to save towards buying a property, LISAs can also be used to save towards retirement. A LISA can be opened by anyone aged 18-39, but savings can be added up until the age of 50. Up to £4,000 per year can be saved into a LISA, which benefits from a 25% Government bonus – as a result, if the maximum £4,000 is saved into a LISA, an extra £1,000 is added via the Government’s bonus. Money can continue to be saved into a LISA after the age of 50 but the Government bonus will no longer be added. If the money saved is not used to purchase a first home, it can only be withdrawn after the age of 60 for retirement, and money withdrawn for any other reason incurs a 25% interest penalty (currently reduced to 20% but returning to 25% on 6 April 2021. All the current LISA deals can be found on our LISA chart.
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