Pensions are still the most popular way of providing an income in retirement, and whilst they have many advantages, tax relief, possible employer contributions and tax efficient grow, to name three; the very word pension has become toxic to many over the past few years.
Whilst we still believe that the advantages, especially if an employer contribution is available, mean a pension should be the cornerstone of retirement planning for most people, we recognise that many would like to consider alternatives, and of course pensions do still have their disadvantages.
At some point most of us will want to stop work and retire, so what are the alternatives to a pension? What investments can be used to supplement existing pensions? Read on to find out.
1. Buy to let
Buying a property to rent out is still one of the most popular ways of providing an income in retirement.
In our experience, buy to let investment works most effectively when investors make sure that any mortgage is repaid before retirement, thereby releasing the rental income to be used in retirement.
There are of course downsides, despite the obsession in this country with bricks and mortar property prices don’t always rise, in fact they have fallen by around 20% since 2007. Furthermore, when the property is not let you will have to meet mortgage payments yourself, tenants can cause issues and of course there is always the need to diversify your investments.
Despite the potential pitfalls, buy to let can certainly be a very effective way of supplementing other ways of planning for retirement.
2. Individual Savings Accounts (ISAs)
One of the problems that many people have with pensions is their perceived lack of flexibility, only 25% of the fund can be accessed as a tax free lump sum, and then only from the age of 55. Furthermore, although tax relief is available when contributions are made, the income in retirement is taxable.
For many ISAs offer an alternative to pensions.
They can invest in a similar way to a Personal Pension, and whilst you don’t get tax relief when you make contributions, there are no limits on when and how you withdraw money and if you decide to take an income from the capital you have built up no tax is payable.
For many people ISAs are a key part of their retirement income strategy. With many paying sufficiently into pensions so that their personal allowance is fully used in retirement and then taking additional income from ISAs, which is of course, tax free.
3. Selling a business
Many people see their business as a source of income in retirement.
There are a number of ways this can be achieved, for example, the business could be sold and the proceeds invested to provide an income, or a management team could be put in place with the business paying an ongoing income to you as a major shareholder.
This route clearly is not for everyone; after all, not all of us are in business. It is also not without significant risk, especially during such tough economic times, but for people who run a successful business, which can be sold, or they can take a step back from whilst still taking an income, it can be a very effective way of creating an income in retirement.
If the sale of shares in a business qualifies for Entrepreneurs Relief this route can also be extremely tax efficient.
4. Commercial property
We’ve often talked about the benefits of buying a commercial property in a SIPP, but this isn’t always possible, whilst many business owners prefer to own their premises personally and rent them to their business.
If handled well a commercial property can provide an excellent source of income in retirement, either from the new owners of the business if they stay in the property, or a new tenant.
Again, all the usual caveats apply to owning property, the property may lie empty for significant periods, tenants could default on the rent and there will be expenditure on upkeep, insurance etc.
However we’ve seen a number of clients supplement their other retirement income very successfully with rent from a commercial property.
Whilst it’s never nice to think about the death of loved ones, at some stage many of us will inherit money, often from parents.
Future capital injections from an inheritance can help to provide younger generations with means of providing a retirement income. Again though this is not guaranteed, the inheritance might not be available until after you retire and Inheritance Tax, plus possibly the cost of long term care, could eat into any lump sum received.
Everyone’s circumstances are different, but if there is the possibility of you inheriting money then it should be factored into your future planning.
Remember though, pensions aren’t toxic
Despite the alternatives, pensions are not toxic, many people have been disappointed by the returns from their pensions, but this is usually down to high charges, poor performance and low Annuity rates, all of which can be mitigated to some degree through careful planning.
Pensions clearly have significant benefits, employer contributions is effectively free money, tax relief can be valuable as can the tax efficient growth which pensions benefit from.
In our opinion the people who have the most successful financial retirement are those who understand the benefits of having a diverse range of assets, using a pension where appropriate, taking advantage of the tax efficiency offered by ISAs, and perhaps supplementing these with savings accounts or property.
Our team of Independent Financial Advisers are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email email@example.com