As the coronavirus pandemic swept the globe the UK stock market has become increasingly volatile, highlighting the risk of depending solely on investments in the stock market to secure a pension.
Consumers concerned about the volatility of the stock market and the impact this can have on their pensions should consider looking at alternative ways to save alongside a traditional pension pot. As Rachel Springall, finance expert at Moneyfacts.co.uk, explained: “At this moment in time consumers could well be worried about their financial health or indeed how stock market volatility could wreak havoc on their pension fund, where its value can go up as well as down. If they have some disposable income gained from the lockdown, then they might be looking at more ways to build provisions for the future. As well as increasing their investment into their pension, they perhaps may wish to consider opening a savings account. However, if they are a homeowner who is soon to retire and are facing a retirement shortfall, then equity release may be worth careful consideration.”
Here we’ve looked at a number of ways consumers can diversify their retirement savings.
Lifetime ISAs (LISAs) were set up by the Government to help consumers save for a deposit for their first home or for retirement. Although LISAs have the benefit of offering a Government bonus they are highly restrictive savings accounts, as Springall explained: “Savers can put in £4,000 each year until they turn 50 and the Government will add a 25% bonus, up to a maximum of £1,000 per year. A LISA is available to savers aged between 18 and 39. The downside to a LISA is that there is a penalty to pay for access to the funds for any reason other than to purchase a first home or retirement, however the access penalty of 25% has been brought down to 20% in response to the Coronavirus pandemic. Accessing funds from a LISA should be a last resort though, plus while HMRC has backdated the reduced charge to 6 March, savers may need to wait until June to get their money back as providers adjust to the change. The best cash LISA rate today is 1.25% gross, on offer from both Moneybox and Nottingham Building Society.”
Easy access savings accounts offer a simple way to save, making them popular with consumers, although Springall warns that there are some that restrict withdrawals. She said: “If consumers are using an easy access account to save for their retirement though, they are unlikely to want to access their pot unless it’s for emergencies. Savers who want a haven for their cash may then turn to this type of account as their first port of call at a time when the stock market is volatile. Opening an account can be quick and easy to do and just by paying in a bit each month can help boost a retirement fund. Saving just £100 a month for the next 25 years can amass a pot of £30,000 without interest. The best rate on the market today is 1.20% gross from RCI Bank, a challenger bank and if savers want to get the best possible return in this arena, they do need to consider the more unfamiliar brands.”
Notice accounts often offer more attractive rates than easy access savings accounts, but in return they require a pre-determined notice period to be given before money can be withdrawn. Springall explained: “Savers may choose a notice account if they are looking for a higher return than can be achieved on an easy access account, but do not wish to lock their money into a fixed rate bond. So long as savers give the required notice period, they can access their cash without penalty. However, if this vehicle is chosen to boost a retirement fund, then savers are unlikely to dip into this pot in haste. ICICI Bank UK currently pays 1.60% gross on its 95-day notice account, a rate 0.40% higher than the top easy access account. Once again, challenger banks reign supreme in the top rate tables in this sector and should not be overlooked.”
Savers wanting to earn the highest interest rate available in the savings chart usually turn to fixed rate bonds, which are often a good option for those with a lump sum they wish to invest for a set period of time. “Unlike easy access and notice accounts that allow savers to put in regular sums and gain access to their funds in the short-term, fixed rate bonds are much more restrictive,” Springall explained. “However, to compensate for locking cash away without access, savers will be rewarded with a higher rate of interest. Interest rates offered on fixed bonds are falling, so if savers are sitting on the fence, they may not want to wait too long. It is worth pointing out that there is only now a small margin of 0.15% between the top two-year fixed bond and the top five-year fixed bond due to the fall in interest rates. The top two-year fixed bond pays 1.70% as an expected profit rate from Bank of London and The Middle East (BLME). The top five-year fixed bonds today pay 1.85% gross as expected profit rates from BLME and Gatehouse Bank.”
Although some savers turned away from cash ISAs when the Personal Savings Allowance (PSA) was introduced, Springall warns that they should not be overlooked: “If interest rates were to rise in future, the tax-free threshold savers currently have could be breached (£1,000 of savings interest for basic rate taxpayers, £500 for higher rate taxpayers) or the PSA could be withdrawn by the Government entirely. ISAs remain a worthy option due to their tax-free wrapper and could be a great choice to boost a retirement fund. Cash ISAs come in many forms, including easy access ISAs, notice ISAs and fixed ISAs, however the latter pay rates lower than their taxable counterparts. The top easy access ISA comes from Penrith Building Society, which pays 1.25% gross, and the top notice ISA from Monmouthshire Building Society and Bank and Clients also pay 1.25% on their 30 and 90-day notice options respectively. On fixed ISAs, there is no difference between the top rate over a two or five-year fixed period, as Al Rayan Bank on its two-year deal and Gatehouse Bank on its five-year deal pay 1.40% gross.”
Homeowners nearing retirement and who are looking to boost their pension pot could consider equity release. “These should be investigated carefully as while they can indeed provide funds to borrowers, unlocking wealth from the home also has consequences on inheritance planning,” Springall said. “These can provide some flexibility though – in fact, borrowers could choose a drawdown option to take what they need at different times and this can minimise interest charges unlike where a lump sum was taken on outset. It is important to point out that the best for consumers will depend on the amount they can borrow, a plan’s flexibility, an applicant’s age, fees and not just on the interest charged. Therefore, seeking independent financial advice is a must.”
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