Boosting your retirement fund: Alternatives to pensions
By Kate Saines
If you are reading this, and also happen to be in possession of a healthy pension plan then you are a very fortunate person indeed.
If the statistics are to be believed, a growing number of us are just not saving for our retirement any more.
Gone (almost) are the days of the final salary pension when we were guaranteed a healthy income from our retirement pot when we gave up work.
Instead we live in world where we have an overwhelming collective debt and goods cost so much that paying off loans and keeping our heads above water has had to take precedence over paying into a pension pot.
To give you an idea of the scale of our antipathy to pensions, independent research company, Defaqto, found that while most people think pensions are important only 40 per cent are saving for later in life and 20 per cent are not saving at all.
But, while you might be tempted to think it's just the young and those new to the workplace who are not saving for retirement, this is not the case.
Surprisingly, the older generations are also looking set to have a financially tough retirement, according to M&S Money.
It has undertaken research and found 47 per cent of over 45s are not saving for their retirement.
And this, say the experts, is the time of life we really should be stepping up a few gears when it comes to retirement planning.
Colin Kersley, chief executive of M&S Money, said: "It is of utmost importance that people of all ages are saving and planning for retirement, but even more so for those who are approaching this stage in life."
It's a dire situation. But whether you are a young person with a dislike for pensions, an older person nearing pensionable age who fears they have not saved enough for their retirement, or a retiree having difficulty stretching funds – there are options and alternatives out there.
And here are some of them.
Equity Release
Releasing money which is tied up in your home is becoming an increasingly popular way of funding retirement.
There are different kinds of equity release schemes available, but pretty much all them – in essence - will be providing you with a loan against the value of your home.
The equity release provider will give you the loan in the form of cash payments – you can receive these monthly or in a lump sum – and you will repay it after your death, or if you sell the property.
Ros Altmann, director general of Saga, said they have seen interest in equity release double and that it was no wonder since half of retirees were already struggling to stretch their finances to cover the rising cost of living.
She added: "Many people have no idea what their pension is likely to provide until shortly before retirement, at which point it is often too late.
"If they have not saved and cannot continue working, they need other sources of finance.
"So, it's no surprise that people are increasingly relying on their house to help fund their retirement. Downsizing and releasing equity from homes is a trend we predict is likely to continue for many years to come."
There are naturally pros and cons to this route. On the plus side, it's a great way for the 'asset rich, cash poor' amongst us to benefit from the money tied up in our home.
On the downside, whoever eventually benefits from the sale of your home will receive less than the home's value.
Many people choose to downsize and buy a smaller, cheaper property. This way you release some of the cash for yourself without having to worry about any interest payments on the equity release plan.
Read more: Government rejects early access to pension funds
Develop or rent a property
Staying on the subject of bricks and mortar – using a home to help fund retirement is not just for those who have retired and can release some equity.
Younger people, particularly those for whom retirement is several decades away, can use property investment as a way of accumulating some wealth.
There are several options. If you are keen on the idea of property developing, buying a property, sprucing it up and selling it on for a profit can be a great way of making money for your retirement.
Alternatively, there is always the option of renting out a house and living off the income this provides.
When compared to simply putting money into a pension pot, this might sound like a lot of work. What's more you'll need money in the first place, or a mortgage, to buy the properties.
However, if you start these schemes early on in your working life you'll reap more benefits and there will be more time to make money.
If you are particularly clever, you'll find a bargain-priced property – at auction for example – and provided the location and your skill at improving it are up to scratch you could see some good returns on your investment.
If you are going down the buy-to-let route, it's important to remember that being a landlord comes with responsibilities.
Ian Potter, operations manager of the Association of Residential Letting Agents (ARLA) said: "Buy-to-let properties can prove to be a sensible, long-term investment, but consumers must do their research first in order to achieve success.
"Becoming a buy-to-let landlord is a decision which must not be taken lightly. Landlords must be aware of the legal responsibilities to their tenants and ensure that they use an ARLA Licensed agent so that their money is protected."
ISAs
In terms of pension alternatives, ISAs will probably be the top contender. This is because they do a similar job to a pension scheme but are also tax efficient.
M&S Money calculated someone investing the maximum allowance into a cash ISA since the 1999/2000 year (when ISAs were launched) would by now have a total of £47,231 in savings – including interest.
Meanwhile, according to M&S, those saving into a stocks and shares ISA, using their maximum allowance, could have saved £87,600 to date – and that's not including interest.
According to Defaqto, one of the factors which would encourage people to save for their retirement would be better tax incentives. In fact, 40 per cent of respondents to a survey by Defaqto said this would help them engage more with pensions.
With this in mind, it's hardly surprising ISAs are a strong alternative.
The same survey found that more flexibility over how people could take the benefits of a pension would provide an incentive as would simpler products.
Unlike pensions, an ISA does not require you to buy an annuity when you want to withdraw your cash.
While pensions require you to take a set amount of income – an ISA allows you to be as flexible as you like in terms of how much you withdraw and when.
The problem is, despite having alternatives to the traditional pension, people are still not really saving in general.
Matt Ward, Defaqto's wealth management consultant, said: "Over half of people see pensions as key to financing their retirement.
"However, it is clear that people are not following this through in terms of actively saving for later life.
"The importance of planning for retirement is paramount, but people appear to be turned off by the idea of saving for their future."
What it all really comes down to, it would seem, is that whatever your method of saving for retirement it is crucial to start thinking about it and then implementing it as soon as possible.
Ros Altmann of Saga said: "The most important thing is to plan ahead and identify how you will be able to fund the lifestyle you want as you get older."
Use the Myfinances.co.uk comparison tools to find a better deal on a pension or an annuity
Comments
Newsletter sign up